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Is going concern an issue addressed by auditors in an interim review?

  • Auditing
  • Review

photo of Misha Pieters

Misha Pieters of the XRB Assurance Standards team has put together this useful summary to highlight the issues and the options.


 

Preparers of financial statements are responsible for assessing their entity’s ability to continue as a going concern. So, what is the auditors’ responsibility to evaluate the appropriate use of the going concern basis of accounting?

The NZAuASB is now exploring the best way to describe the auditors’ responsibilities in relation to going concern in the interim review report. 

The interim review report issued by auditors will be changing. We are interested in your views about the proposed changes. 

Bear in mind that an interim review is not the same as an audit. During a review, the procedures performed by an auditor are much less than those performed during an audit.

Secondly, the auditor is not guaranteeing that the entity is a going concern.  Future events or conditions may cause an entity to cease to be one.

The NZAuASB now proposes to require a description of the auditors’ responsibilities in the interim review report and is interested in your understanding of two possible options for wording to include within the review report.

One of these two options will follow the words in the review report as illustrated below:

Extract from review report

The auditor performs procedures, primarily consisting of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.  The procedures performed in a review are substantially less than those performed in an audit conducted in accordance with International Standards on Auditing (New Zealand) and consequently does not enable us to obtain assurance that we might identify in an audit.  Accordingly, we do not express an audit opinion on those financial statements.

 

Option 1

Based on the review procedures performed, we conclude on whether anything has come to our attention that causes us to believe that the use of the going concern basis of accounting by those charged with governance is not appropriate and whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern.  If a matter comes to our attention that causes us to believe that a material uncertainty related to going concern exists, we are required to draw attention in our review report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our conclusion.  However, future events or conditions may cause the entity to cease to continue as a going concern.

Option 2

We make enquiries whether those charged with governance have changed their assessment of the entity’s ability to continue as a going concern.  When as a result of this enquiry or other review procedures, the auditor becomes aware of events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern, the auditor shall:

  • enquire of those charged with governance as to their plans for future actions based on their going concern assessment, the feasibility of these plans, and whether they believe that the outcome of these plans will improve the situation; and

  • consider the adequacy of the disclosure about such matters in the financial statements.


And so we need your feedback.

road sign posts showing option 1 and option 2 pointing in directions 

What do you understand by these two options and how do they compare with your understanding of a review engagement? 

Let us know in our short one-minute survey

You can also post your comments below (note these will viewable to all page visitors) or send us your comments directly via the consultation page.

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The consultation closes on 14 October 2019.

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Comments

  • Tom Scott 19/08/2019 12:20pm (2 months ago)

    My knowledge of this topic is driven by my working paper that examines going concern conclusions in the interim financial statements of ASX500 companies (co-author with Dr Matthew Grosse). We find such events are viewed to be significant by the market, and there is no difference in the market reaction to going concern conclusions and going concern opinions. Furthermore, we found that the interim review can provide an early warning as it can follow an annual report which did not receive a going concern opinion (112 of the 259 going concerns conclusions). We interpret our result as although the conclusion is offered at a lower level of assurance, users value knowledge of the auditor’s going concern judgement at whatever level it is offered. However, we noted large range in the way the conclusion is presented. Thus I view our research as supportive of the overall changes suggested with a small preference for option 1.