[130]
The going concern basis in financial
statements
(Issued November 1994)
Contents
Paragraphs
Introduction
The applicability and scope of this SAS
1–2
3–16
Definitions
17–20
Audit evidence
21–35
Assessing disclosures in the financial statements
36–39
Reporting on the financial statements
40–50
Application to groups
51–52
Preliminary announcements
Financial statements not prepared on the going concern basis
53
54–55
Compliance with International Standards on Auditing
56
Effective date
57
Withdrawal of material in other guidance
58
Appendix 1 – Preparation of the financial statements: note on legal and
professional requirements
Appendix 2 – Illustrative examples of audit procedures and auditors’
reports
Appendix 3 – Illustrative examples of the auditors’ assessment of whether
evidence provided to them by the directors, concerning the attention
they have paid to the period one year from the date of approval
of the financial statements, is sufficient
Appendix 4 – Going concern and reporting on the financial statements
59
The going concern basis in financial statements
Statements of Auditing Standards (‘SASs’) are to be read in the light of ‘The scope and
authority of APB pronouncements’. In particular, they contain basic principles and
essential procedures (‘Auditing Standards’), indicated by paragraphs in bold type,
with which auditors are required to comply in the conduct of any audit. SASs also
include explanatory and other material which is designed to assist auditors in
interpreting and applying Auditing Standards. The definitions in the Glossary of terms
are to be applied in the interpretation of SASs.
Introduction
The purpose of this SAS is to establish standards and provide guidance for auditors
in respect of their consideration of the going concern basis in financial statements
prepared by directors.
1
When forming an opinion as to whether financial statements give a true and fair
view, the auditors should consider the entity’s ability to continue as a going concern,
and any relevant disclosures in the financial statements. (SAS 130.1)
2
The applicability and scope of this SAS
This SAS contains standards and guidance for auditors in relation to the going
concern basis that is generally presumed in financial statements which are required
to be properly prepared in accordance with the Act, and to give a true and fair view.
In the absence of specific legal or other provisions to the contrary, the principles and
procedures embodied in the SAS apply also to the audit of the financial statements
of other entities, including those within the public sector.
3
This SAS does not establish standards nor provide guidance about going concern in
any other context, such as that of an engagement to report on an entity’s future
viability. In particular, Bulletin 1994/1 ‘Disclosures relating to corporate governance’ (Revised) gives advice to auditors in connection with any statement regarding
going concern made by the directors in compliance with the Code of Best Practice
published by the Committee on The Financial Aspects of Corporate Governance
(‘The Cadbury Report’). Guidance for directors in relation to such a statement is
contained in ‘Going Concern and Financial Reporting: Guidance for directors of
listed companies’.
4
Going concern as an accounting concept
Appendix 1 to this SAS summarises, in relation to going concern, the legal and
professional accounting requirements with which directors comply in preparing
financial statements. Under these accounting requirements (and consequently for
the purposes of this SAS) the going concern basis is considered as an accounting
concept in accordance with which financial statements are generally prepared on a
presumption that ‘the entity will continue in operational existence for the foreseeable future’. Accordingly, in financial statements:
61
5
APB Statements of Auditing Standards
(a) assets are recognised and measured on the basis that the entity expects to
recover (through use or realisation) the recorded amounts in the normal course
of business; and
(b) liabilities are recognised and measured on the basis that they will be discharged
in the normal course of business.
Where the directors are unable to accept the going concern presumption on the basis
of their own information and judgments, the entity may not be able to recover
(through use or realisation) the amounts recorded in the financial statements in
respect of its assets. There may also be changes in the amounts and dates of
maturities of liabilities. In these circumstances, the amounts and classification of
assets and liabilities in the financial statements would need to be adjusted by the
directors if the effects were material.
6
An important consequence of the legal and professional accounting requirements is
that, when preparing financial statements, the directors should satisfy themselves as
to whether the going concern basis is appropriate. Even if it is appropriate, it may
still be necessary for the financial statements to contain additional disclosures, for
instance relating to the adoption of that basis, in order to give a true and fair view.
7
Accordingly, the auditors’ procedures in complying with this SAS are intended to
provide them with assurance that:
(a) the going concern basis used in the preparation of the financial statements as a
whole is appropriate; and
(b) there are adequate disclosures regarding that basis in the financial statements in
order that they give a true and fair view.
8
The auditors’ procedures necessarily involve a consideration of the entity’s ability to
continue in operational existence for the foreseeable future. In turn, that necessitates consideration both of the current and the possible future circumstances of the
business and the environment in which it operates.
Foreseeable future: guidance and inherent limitations in application
9
In defining the going concern accounting concept, Statement of Standard Accounting Practice Number 2 (‘SSAP 2’) uses the term ‘foreseeable future’ without further
elaboration. Neither the Act nor accounting standards expand on that term in the
context of going concern.
10
Any consideration involving the foreseeable future involves making a judgment, at
a particular point in time, about future events which are inherently uncertain. The
following factors are relevant.
(a) In general terms, the degree of uncertainty increases significantly the further
into the future the consideration is taken. The manner in which the uncertainty
increases with time depends on the circumstances of each particular entity.
(b) Any judgment about the future is based on information available at the time at
which it is made. Subsequent events can overturn a judgment which was
reasonable at the time it was made.
11
Accordingly, the foreseeable future depends on the specific circumstances at a point
in time, including the nature of the entity’s business, its associated risks and external
influences.
62
Going concern SAS 130
As a consequence, it is not possible to give any certainty in relation to going concern.
Any judgment made, whether by directors or auditors, although reasonable at the
time, can be valid only at that time and can be overturned by subsequent events.
12
Consideration of going concern by the directors and auditors
In assessing going concern, directors take account of all relevant information of
which they are aware at the time. The nature of the exercise entails that the directors
look forward, and there will be some future period to which they will pay particular
attention in assessing going concern. It is not possible to specify a minimum length
for this period: it is recognised in any case that any such period would be artificial and
arbitrary since in reality there is no ‘cut off point’ after which there should be a
sudden change in the approach adopted by the directors. The length of the period is
likely to depend upon such factors as:
●
●
13
the entity’s reporting and budgeting systems; and
the nature of the entity, including its size or complexity.
Where the period considered by the directors has been limited, for example, to a
period of less than one year from the date of approval of the financial statements, the
directors will have determined whether, in their opinion, the financial statements
require any additional disclosure to explain adequately the assumptions that underlie the adoption of the going concern basis.
The basis for the auditors’ procedures is the information upon which the directors
have based their assessment and the directors’ reasoning. The auditors assess
whether this constitutes sufficient appropriate audit evidence for their purpose and
whether they concur with the directors’ judgment about the need for additional
disclosures.
14
The following factors in particular may affect the information available to auditors,
and whether the auditors consider this information constitutes sufficient audit
evidence for the purposes of their audit.
15
(a) The nature of the entity (its size and the complexity of its circumstances, for
instance). This SAS applies to the audits of the financial statements of all sizes
of entity. The larger or more complex the entity the more sophisticated is likely
to be the information available and needed to support the assessment of
whether it is appropriate to adopt the going concern basis.
(b) Whether the information relates to future events, and if so how far into the future
those events lie. The information relating to the period falling after one year
from the balance sheet date is often prepared in far less detail and subject to a
greater degree of estimation than the information relating to periods ending on
or before one year from the balance sheet date.
Appendix 2 illustrates how the auditors might decide to apply the SAS in certain
circumstances. Example 1 within that Appendix is of particular relevance to entities
with ‘uncomplicated circumstances’, which includes many smaller companies.
16
Definitions
The following definitions apply for the purposes of interpreting the requirements
and the guidance in this SAS.
63
17
APB Statements of Auditing Standards
18
The going concern basis: financial statements prepared under the presumption that
the entity is carrying on business as a going concern are described in this SAS as
being prepared on the going concern basis.
19
The Act: for Great Britain, ‘the Act’ refers to the Companies Act 1985. For Northern
Ireland, the equivalent legislation is provided by the Companies (Northern Ireland)
Order 1986 and for the Republic of Ireland by the Companies Acts 1963 to 1990.
20
Directors: the directors of a company or other body, the partners, proprietors,
committee of management or trustees of other forms of entity, or equivalent persons
responsible for directing the entity’s operations and preparing its financial statements.
Audit evidence
21
The auditors should assess the adequacy of the means by which the directors have
satisfied themselves that:
(a) it is appropriate for them to adopt the going concern basis in preparing the
financial statements; and
(b) the financial statements include such disclosures, if any, relating to going
concern as are necessary for them to give a true and fair view.
For this purpose:
(i) the auditors should make enquiries of the directors and examine appropriate
available financial information; and
(ii) having regard to the future period to which the directors have paid particular
attention in assessing going concern, the auditors should plan and perform
procedures specifically designed to identify any material matters which could
indicate concern about the entity’s ability to continue as a going concern. (SAS
130.2)
22
The examples in Appendix 2 illustrate the importance of planning the audit
approach regarding going concern. The auditors’ approach includes a preliminary
assessment (at the stage at which they are developing an overall audit plan) of the
risk that the entity may be unable to continue as a going concern.
23
The auditors may need to consider some or all of the following matters:
●
●
●
●
●
64
whether the period to which the directors have paid particular attention in
assessing going concern is reasonable in the entity’s circumstances and in the
light of the need for the directors to consider the ability of the entity to continue
in operational existence for the foreseeable future;
the systems, or other means (formal or informal), for timely identification of
warnings of future risks and uncertainties the entity might face;
budget and/or forecast information (cash flow information in particular) produced by the entity, and the quality of the systems (or other means, formal or
informal) in place for producing this information and keeping it up to date;
whether the key assumptions underlying the budgets and/or forecasts appear
appropriate in the circumstances;
the sensitivity of budgets and/or forecasts to variable factors both within the
control of the directors and outside their control;
Going concern SAS 130
●
●
●
any obligations, undertakings or guarantees arranged with other entities (in
particular, lenders, suppliers and group companies) for the giving or receiving
of support;
the existence, adequacy and terms of borrowing facilities, and supplier credit;
and
the directors’ plans for resolving any matters giving rise to the concern (if any)
about the appropriateness of the going concern basis. In particular, the auditors
may need to consider whether the plans are realistic, whether there is a
reasonable expectation that the plans are likely to resolve any problems
foreseen and whether the directors are likely to put the plans into practice
effectively.
In many entities the headroom between the financial resources required in the
foreseeable future and the facilities available is large. In others, it will often be
marginal. The nature and scope of the auditors’ procedures depends on the circumstances. The extent of the procedures is influenced primarily by the excess of the
financial resources available to the entity over the financial resources that it requires.
The entity’s procedures (and the auditors’ procedures) need not always be elaborate
in order to provide sufficient appropriate audit evidence. For example, auditors may
not always need to examine budgets and forecasts for this purpose. This is particularly likely to be the case in respect of entities with uncomplicated circumstances.
Many smaller companies fall into this category. Thus for example:
●
●
24
regarding the systems or other means for timely identification of warnings of
future risks and uncertainties, the directors might consider that it is appropriate
simply to keep abreast of developments within their individual business and
their business sector. In the circumstances, the auditors might concur with the
directors, or
the directors might not, as a matter of course, prepare periodic cash flow and
other budgets, forecasts or other management accounts information apart from
the accounting records required by law and outline plans for the future. In the
directors’ view, this might be acceptable where the business is stable. In the
circumstances the auditors might concur with the directors. Hence the auditors’
procedures regarding budgets, forecasts and related issues might comprise
discussion of the directors’ outline plans in the light of other information
available to the auditors.
The auditors’ examination of borrowing facilities
In examining borrowing facilities the auditors could decide, for example, that it is
necessary:
(a) to obtain confirmations of the existence and terms of bank facilities; and
(b) to make their own assessment of the intentions of the bankers relating
thereto.
The latter assessment could involve the auditors examining written evidence or
making notes of meetings which they would hold with the directors and, occasionally, with the directors and the entity’s bankers. In making their assessment of the
bankers’ intentions the auditors ascertain, normally through enquiries of the directors, whether the bankers are aware of the matters that are causing the auditors to
decide that such an assessment is necessary. It is also important that the relationships
between the auditors, the directors and the bankers are clarified and understood.
65
25
APB Statements of Auditing Standards
26
The auditors might be more likely to decide that it is necessary to obtain confirmations of the existence and terms of bank facilities, and to make their own assessment
of the intentions of the bankers relating thereto, in cases where, for example:
●
●
●
●
●
●
27
In accordance with SAS 600 ‘Auditors’ report on financial statements’ the auditors
consider whether any inability to satisfy themselves regarding the existence and
terms of borrowing facilities and the intentions of the lender relating thereto, and/or
the factors giving rise to this inability, need to be:
●
●
28
there is a low margin of financial resources available to the entity;
the entity is dependent on borrowing facilities shortly due for renewal;
correspondence between the bankers and the entity reveals that the last
renewal of facilities was agreed with difficulty, or that, since the last review of
facilities, the bankers have imposed additional conditions as a prerequisite for
continued lending;
a significant deterioration in cash flow is projected;
the value of assets granted as security for the borrowings is declining; or
the entity has breached the terms of borrowing covenants, or there are indications of potential breaches.
disclosed in the financial statements in order that they give a true and fair view;
and/or
referred to (by way of an explanatory paragraph or a qualified opinion) in the
auditors’ report.
The British Bankers’ Association has assisted in drafting the guidance above and in
Appendix 2, regarding the auditors’ examination of the entity’s banking facilities.
The guidance aims to improve communications between directors, auditors and
bankers, whilst stressing the importance of each party’s clear understanding of their
relationships to each other. The guidance does not alter existing practice regarding
confirmation letters from bankers about their intentions concerning facilities.
Determining and documenting the auditors’ concerns
29
The auditors should determine and document the extent of their concern (if any)
about the entity’s ability to continue as a going concern. In determining the extent of
their concern, the auditors should take account of all relevant information of which
they have become aware during their audit. (SAS 130.3)
30
In addition to information obtained having regard to the future period to which the
directors have paid particular attention, the information of which the auditors are
aware includes:
(a) any information of which they have become aware relating to the period
thereafter; and
(b) their other audit evidence (such as their knowledge of the entity, its industry
and possible developments therein).
31
The auditors might be more likely to conclude that there is a significant level of
concern about the entity’s ability to continue as a going concern if, for example,
indications such as the following are present:
66
Going concern SAS 130
Financial
●
●
●
●
●
●
●
●
●
●
●
an excess of liabilities over assets;
net current liabilities;
necessary borrowing facilities have not been agreed;
default on terms of loan agreements, and potential breaches of covenant;
significant liquidity or cash flow problems;
major losses or cash flow problems which have arisen since the balance sheet
date and which threaten the entity’s continued existence;
substantial sales of fixed assets not intended to be replaced;
major restructuring of debt;
denial of (or reduction in) normal terms of trade credit by suppliers;
major debt repayment falling due where refinancing is necessary to the entity’s
continued existence;
inability to pay debts as they fall due;
Operational
●
●
●
●
fundamental changes in the market or technology to which the entity is unable
to adapt adequately;
externally forced reductions in operations (for example, as a result of legislation
or regulatory action);
loss of key management or staff, labour difficulties or excessive dependence on
a few product lines where the market is depressed;
loss of key suppliers or customers or technical developments which render a key
product obsolete;
Other
●
●
major litigation in which an adverse judgment would imperil the entity’s
continued existence; and
issues which involve a range of possible outcomes so wide that an unfavourable
result could affect the appropriateness of the going concern basis.
However, in situations such as these the auditors may have obtained sufficient
appropriate evidence causing them to conclude that there is not a significant level of
concern about the entity’s ability to continue as a going concern. Appendix 2,
example 1 contains such a situation.
The auditors could consider that there is a significant level of concern about the
entity’s ability to continue as a going concern, or they could disagree with the
preparation of the financial statements on the going concern basis. In such cases
(whether or not this is because of potential insolvency) the auditors might decide to
write to the directors drawing their attention to the need to consider taking suitable
advice. In particular, the directors of an entity may need to obtain advice from
specialist accountants or lawyers on the appropriateness and implications of continuing to trade while they know, or ought to know, that the entity is insolvent.
32
Written confirmations of representations from the directors
The auditors should consider the need to obtain written confirmations of
representations from the directors regarding:
67
33
APB Statements of Auditing Standards
(a) the directors’ assessment that the company is a going concern; and
(b) any relevant disclosures in the financial statements. (SAS 130.4)
34
Such written confirmations are necessary in respect of matters material to the
financial statements when those representations are critical to obtaining sufficient
appropriate audit evidence. In view of their importance, it is appropriate for such
confirmations to be provided by the directors, rather than other levels of the entity’s
management.
35
If they are unable to obtain such written confirmations of representations as they
consider necessary from the directors, the auditors consider whether:
●
●
in the light of SAS 600 ‘Auditors’ report on financial statements’, there is a
limitation on the scope of their work which requires a qualified opinion in
‘except for’ or ‘disclaimer’ terms; or
the failure of the directors to provide the written confirmations could indicate
that there is concern.
Assessing disclosures in the financial statements
36
The auditors should consider whether the financial statements are required to
include disclosures relating to going concern in order to give a true and fair view.
(SAS 130.5)
37
If the going concern basis is inappropriate at the balance sheet date or significantly
uncertain in the foreseeable future, this affects the manner in which the other
fundamental accounting concepts are applied in the financial statements. It is thus
important, where there is concern as to the entity’s ability to continue as a going
concern, that readers of the financial statements have a proper understanding of the
context in which the directors have satisfied themselves that the financial statements
prepared on the going concern basis show a true and fair view. Therefore, in such
cases, if the financial statements do not include disclosures relating to the entity’s
ability to continue as a going concern, the auditors consider:
●
●
whether the financial statements give a true and fair view; and hence
whether they need to qualify their audit opinion in respect of disagreement with
the disclosure of this matter in the financial statements.
38
In particular, if the future period to which the directors have paid particular
attention is, as described in paragraph 13, not very long, the directors will have
determined whether, in their opinion, the financial statements require any additional
disclosures to explain adequately the assumptions that underlie the adoption of the
going concern basis. The auditors assess whether they concur with the directors’
judgments regarding the need for additional disclosures and their adequacy. Disclosure, however, does not eliminate the need to make appropriate judgments about the
suitability of the future period as an adequate basis for assessing the position.
39
To avoid repetition, the text in the financial statements might refer readers to
specific disclosures located elsewhere in the annual report (for instance in the
Operating and Financial Review). The auditors take account of such specified
disclosures in considering the adequacy of disclosures in the financial statements.
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Going concern SAS 130
Reporting on the financial statements
In relation to going concern Appendix 4 summarises, in flowchart form, how
auditors formulate their opinion as to whether the financial statements give a true
and fair view.
40
When auditors of regulated financial entities consider that they might need to either
qualify their audit opinion or add an explanatory paragraph to their report, they may
have a duty to inform the appropriate regulator at an early stage in the audit. In such
cases the regulator might, if it has not already done so, specify corrective action to be
taken by the entity. At the time at which they formulate their report, the auditors
take account of matters such as:
41
●
●
●
any views expressed by the regulator;
any legal advice obtained by the directors; and
the actual and planned corrective action.
Where the auditors consider that there is a significant level of concern about the
entity’s ability to continue as a going concern, but do not disagree with the
preparation of the financial statements on the going concern basis, they should
include an explanatory paragraph when setting out the basis of their opinion. They
should not qualify their opinion on these grounds alone, provided the disclosures in
the financial statements of the matters giving rise to the concern are adequate for the
financial statements to give a true and fair view. (SAS 130.6)
42
This requirement is consistent with SAS 600, ‘Auditors’ report on financial statements’. The explanatory paragraph describes clearly the nature of the matters giving
rise to the auditors’ concern and refers to the relevant disclosures in the financial
statements. The auditors use their judgment to decide the extent to which it is
necessary for the description in their report to repeat information taken from the
notes to the financial statements. The extent of the auditors’ concern is one factor
affecting the nature and extent of the description in the auditors’ report. The prime
consideration is clarity of communication. The description is normally identified
within the auditors’ report through the use of the sub-heading ‘Going concern’.
43
The auditors might have concluded that there is a significant level of concern about
the entity’s ability to continue as a going concern. In these cases the auditors do not
normally regard the disclosures as adequate unless (in addition to any disclosures
otherwise required, for example by accounting standards) the following matters are
included in the financial statements:
44
●
●
●
●
●
●
a statement that the financial statements have been prepared on the going
concern basis;
a statement of the pertinent facts;
the nature of the concern;
a statement of the assumptions adopted by the directors, which should be
clearly distinguishable from the pertinent facts;
(where appropriate and practicable) a statement regarding the directors’ plans
for resolving the matters giving rise to the concern; and
details of any relevant actions by the directors.
Neither the guidance above, nor the illustrative examples in Appendix 2, regarding
disclosures in the financial statements constitute accounting standards.
69
APB Statements of Auditing Standards
45
If the period to which the directors have paid particular attention in assessing going
concern is less than one year from the date of approval of the financial statements,
and the directors have not disclosed that fact, the auditors should do so within the
section of their report setting out the basis of their opinion, unless the fact is clear
from any other references in their report. They should not qualify their opinion on
the financial statements on these grounds alone. (SAS 130.7)
46
Where, in forming their opinion, the auditors have based their assessment of going
concern on a period to which the directors have paid particular attention which is
less than one year from the date of approval of the financial statements, it is
appropriate for the auditors to disclose that fact within the basis of their opinion,
unless it is disclosed in the financial statements or accompanying information (for
example, the Operating and Financial Review). In deciding whether to disclose the
fact, the auditors assess whether the evidence supplied to them by the directors is
sufficient to demonstrate that the directors have, in assessing going concern, paid
particular attention to a period of one year from the date of approval of the financial
statements.
47
A determination of the sufficiency of the evidence supplied to the auditors by the
directors will depend on the particular circumstances. However, to be sufficient the
evidence may not require formal cash flow forecasts and budgets to have been
prepared for the period ending one year from the date of approval of the financial
statements. Although such forecasts and budgets are likely to provide the most
persuasive evidence alternative sources of evidence may also be acceptable. Often,
the auditors through discussion with the directors of their plans and expectations for
that period may be able to satisfy themselves that the directors have in fact paid
particular attention to a period of one year from the date of approval of the financial
statements. Appendix 3 illustrates circumstances where formal budgets and forecasts have, with justification, not been provided for the entire twelve month period
yet the auditors are able to conclude that the directors have paid particular attention
to the period ending one year from the date of approval of the financial statements.
48
The auditors qualify their opinion if they consider that the directors have not taken
adequate steps to satisfy themselves that it is appropriate for them to adopt the going
concern basis. This might arise, for example, when the auditors do not consider that
the future period to which the directors have paid particular attention in assessing
going concern is reasonable in the entity’s circumstances. This is a limitation on the
scope of the auditor’s work, as they are unable to obtain all the information and
explanations which they consider necessary for the purpose of their audit.
49
Where the auditors disagree with the preparation of the financial statements on the
going concern basis, they should issue an adverse audit opinion. (SAS 130.8)
50
Where the going concern presumption is inappropriate:
●
●
even disclosure in the financial statements of the matters giving rise to this
conclusion is not sufficient for them to give a true and fair view, and
the effect on financial statements prepared on that basis is so material or
pervasive that the financial statements are seriously misleading’.
Accordingly, an adverse opinion is appropriate in such cases.
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Going concern SAS 130
Application to groups
The principles and procedures set out in this SAS apply also to the audit of
consolidated financial statements.
51
It may be appropriate, on the grounds of materiality, for the group financial
statements to be prepared on the going concern basis even though it is inappropriate
for the individual financial statements of one or more members of the group to be
prepared on the going concern basis.
52
Preliminary announcements
The London Stock Exchange does not explicitly require a preliminary announcement to refer to the company’s ability to continue as a going concern. However, the
auditors would be unlikely to agree a preliminary announcement if they have
concluded that there is a significant level of concern about that matter which is not
appropriately disclosed in the announcement.
53
Financial statements not prepared on the going concern basis
In rare circumstances, in order to give a true and fair view, the directors may have
prepared financial statements on a basis other than that of a going concern. If the
auditors consider this other basis to be appropriate in the specific circumstances, and
if the financial statements contain the necessary disclosures, the auditors should not
qualify their audit opinion in this respect. (SAS 130.9)
54
Some enterprises are formed for a specific purpose, such as a joint venture to
undertake a construction project, and are wound up or dissolved when the purpose
is achieved. Under these circumstances the financial statements may be prepared on
a basis that reflects the fact that assets may need to be realised other than in the
ordinary course of operations. In these circumstances the auditors may wish, without
qualifying their opinion, to refer in their report to the basis on which the financial
statements are prepared; the auditors may do this in the introductory paragraph of
their report.
55
Compliance with International Standards on Auditing
Compliance with this SAS ensures compliance in all material respects with International Standard on Auditing 570 ‘Going Concern’.
56
Effective date
Auditors are required to comply with the requirements of this SAS in respect of
audits of financial statements for financial periods ending on or after 30 June 1995.
Adoption of the requirements when reporting on financial statements for financial
periods ending before that date is encouraged.
71
57
APB Statements of Auditing Standards
Withdrawal of material in other guidance
58
This SAS supersedes guidance given to auditors in the Auditing Guideline ‘The
auditor’s consideration in respect of going concern’.
Appendix 1 – Preparation of the financial statements:
note on legal and professional requirements
Company law and accounting standards
1
The Act specifies certain accounting principles which should normally be adopted in
preparing the financial statements of a company. One of these principles is that:
‘the company shall be presumed to be carrying on business as a going concern’
(paragraph 10 of Schedule 4 to the Act).
However such a presumption is not conclusive and may be disregarded if the facts of
the particular situation so require. The term ‘going concern’ is not defined in the Act
but, as discussed below, is defined in SSAP 2.
2
Paragraph 15 of Schedule 4 to the Act states that departures from the Act’s
accounting principles may be made if it appears to the directors that there are
‘special reasons’ for doing so. The financial statements must disclose any such
departure, the reasons for it and its effect. ‘Special reasons’ would include circumstances where the directors conclude, on the basis of the facts as they appear to them,
that it is appropriate to depart from the going concern presumption.
3
Furthermore, in addition to that particular provision of the Act, section 226 of the
Act contains an overriding requirement for directors to prepare financial statements
which give a true and fair view of the state of affairs of the company as at the end of
the financial year and of its profit or loss for the financial year.
4
If compliance with the provisions of the Act would not be sufficient to give a true and
fair view, the Act requires the directors to give the necessary additional information
in the financial statements. If, in ‘special circumstances’, compliance with the
provisions of the Act is inconsistent with the requirement to give a true and fair view,
the Act requires the directors to depart from the particular provision to the extent
necessary to give a true and fair view. The financial statements must disclose the
particulars of any such departure, the reasons for it and its effect.
5
Accordingly, directors cannot assume that preparing the financial statements on the
going concern basis and in accordance with the other provisions of the Act will
necessarily result in the financial statements giving a true and fair view. Whilst, in
general, compliance with accounting standards is also necessary to meet the requirement to prepare financial statements giving a true and fair view, such compliance is
not of itself sufficient to ensure that a true and fair view is given in all cases.
Accounting standards and the definition of ‘going concern’
6
SSAP 2 identifies going concern as one of the fundamental accounting concepts and
defines going concern thus:
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Going concern SAS 130
‘the enterprise will continue in operational existence for the foreseeable future.
This means in particular that the profit and loss account and balance sheet
assume no intention or necessity to liquidate or curtail significantly the scale of
operation’.
SSAP 2 also provides that if financial statements are prepared on the basis of
assumptions which differ materially from those concepts the facts should be
explained in the financial statements. This is similar to the statutory requirement to
disclose departures from accounting principles. However, there are currently no
more detailed accounting standards or guidance dealing specifically with going
concern as an accounting principle.
Appendix 2 – Illustrative examples of audit
procedures and auditors’ reports
The appendix is illustrative only and does not form part of the Auditing Standards.
The purpose of the appendix is to illustrate the application of the Auditing Standards
to assist in clarifying their meaning in a number of commercial situations. The
examples focus on particular aspects of the situations illustrated and are not intended
to be a comprehensive discussion of all the relevant factors that might influence either
the directors’ or auditors’ assessments of the appropriateness of the going concern
basis. As auditors would need to exercise judgment in the circumstances described it is
possible that different auditors may arrive at different conclusions. This does not,
however, detract from the examples which demonstrate thought process and the
implications for an audit report once certain conclusions have been reached by the
auditors. These examples neither modify nor override the Auditing Standards.
Example 1 – A company with uncomplicated circumstances and a significant
bank overdraft
Situation 1
●
●
Auditors consider that the possibility of the overdraft facility not being renewed
is remote.
Unqualified auditors’ report without an added explanatory paragraph.
Situation 2
●
●
●
The possibility of the overdraft facility not being renewed is not remote, but
auditors do not consider there is a significant level of concern about the ability
of the company to continue as a going concern.
Relevant disclosures in the financial statements.
Unqualified auditors’ report without an added explanatory paragraph.
Situation 3
●
As above except that the nature of the business is such that there can be
considerable variation in the timing of cash inflows, and the auditors consider
there is a significant level of concern about the ability of the company to
continue as a going concern.
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APB Statements of Auditing Standards
●
●
Relevant disclosures in the financial statements.
Unqualified auditors’ report with an added explanatory paragraph.
Example 2 – A large processing company
Situation 1
●
●
Directors have plans mitigating exposure to price fluctuations.
Unqualified auditors’ report without an added explanatory paragraph.
Situation 2
●
●
Large contract tender may not be accepted.
Unqualified auditors’ report with an added explanatory paragraph.
Example 3 – Auditors disagree that disclosures are adequate
Example 1 – A company with uncomplicated circumstances and a
significant bank overdraft
Situation 1
1
In this case, in their capacity as accountants and financial advisors, the auditors also
act as agents for the directors in that they:
●
●
●
●
prepare the financial statements to be audited;
extract the extended trial balance upon which the financial statements are
based;
prepare other financial information, such as the outline plans referred to below;
and
assist the directors in financial matters generally,
based on information supplied to them by the directors. The directors take responsibility for the financial information and decisions, and the auditors ensure that they
remain, and are seen to remain, independent. In these circumstances the auditors
consider that the financial information can act as audit evidence.
2
When planning the audit, the auditors become aware of the following matters.
●
●
74
The company does not prepare periodic cash flow and other budgets, forecasts
or other management accounts information apart from the accounting records
required by law. In view of the size, lack of complexity and stability of the
business, the auditors might concur with the directors’ view that such information is not required for the purposes of the directors’ assessment of going
concern in the context of the preparation of the financial statements.
From their knowledge of the company’s circumstances based on previous
experience (including previous audits) and their discussions with the directors
about the financial year (including discussions prompted by a review of the year
end extended trial balance), the company still appears to operate under relatively stable conditions, for example regarding customers, suppliers and
Going concern SAS 130
●
●
competitors. The trial balance shows a net asset position and that the company
continues to be profitable.
Based on discussions, the directors’ outline plans for the future do not appear to
be inconsistent with the other information available to the auditors at this stage
of the audit. The outline plans consist of considering the company’s performance during the financial year, and adjusting for key circumstances, both those
under the directors’ control (such as ‘one-off’ capital expenditure) and those
which the directors estimate will be different (such as planned sales, and price
rises for materials).
As in prior years the company has a significant bank overdraft. The bankers
have in the past always renewed an adequate overdraft facility and the company
has to date been able to operate well within it. The date on which the bankers
are due to consider renewal of overdraft facilities is after the likely date of
approval of the financial statements.
It is emphasised that views reached by the auditors at this stage are preliminary only,
and may be confirmed or otherwise by subsequent audit work.
The auditors’ initial assessment might be that there is not a significant level of
concern about the ability of the company to continue as a going concern. They plan:
●
●
3
to perform their other audit work with an awareness that there may be
nevertheless situations which cause them to consider that there is a significant
level of concern about the ability of the company to continue as a going concern;
and
to obtain evidence as to whether the company has, to the date of their report,
operated well within its overdraft facility.
The auditors consider that this will be sufficient in these circumstances to satisfy the
SAS’s requirements on audit evidence.
Having completed their audit, the auditors consider that:
●
●
●
●
4
the results of their procedures confirm their preliminary assessments, in particular the preliminary decision not to seek a letter from the bankers regarding
maintenance and renewal of the overdraft facility;
the information in the financial statements, and that received during their
preparation and audit, does not suggest that there is a significant level of
concern about the ability of the company to continue as a going concern;
having reconsidered the directors’ outline plans for the future, the plans do not
appear to be inconsistent with the other information of which the auditors are
aware; and
there is no reason to disagree with the directors’ view, based on their discussions
with the bankers, that it likely that the bankers will renew an overdraft facility
which meets the anticipated needs of the company by a reasonable margin.
The directors consider that no special disclosures are required in the financial
statements. The auditors agree, and accordingly, the auditors do not consider it
necessary to qualify their audit opinion or to add an explanatory paragraph to their
audit report.
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Situation 2
1
The circumstances and audit work are as in Situation 1 except as follows.
2
The auditors’ past experience and preliminary planning procedures reveal that the
company has, on several occasions in the past few years, exceeded its agreed bank
facility. In the past the bankers have not withdrawn the facility, but the auditors are
aware that the company’s relationship with the bankers is worsening. In these
circumstances the bankers have for some time requested and received each quarter
management accounts covering the year to date. (As a result, recent financial
information is available. Had the bankers not adopted this practice the auditors
would have decided whether it was appropriate to base their work on other available
sources of information about financial performance and position after the balance
sheet date. For instance, the auditors might have decided to base their work on a
recently updated trial balance.)
3
Towards the end of the audit, the auditors examine the most recent management
accounts. In particular, they consider whether the management accounts and any
assumptions underlying their preparation are inconsistent with other information of
which they are aware. The directors have started to implement a cost reduction
exercise, and this appears to be reasonable and proceeding according to plan. The
management accounts show that the company is so far managing to remain within its
current overdraft facility, and the directors’ outline plans (which take account of the
cost reduction exercise) indicate that the company should be able to continue to do
so.
4
The auditors scrutinise the company’s correspondence and notes of conversations
between the directors and the bankers, who examine the draft financial statements
and the most recent management accounts. The auditors also examine a letter which
they have requested the directors to obtain from the bankers regarding maintenance
and renewal of overdraft facilities. The letter (addressed to the directors with a copy
sent by the bankers directly to the auditors) contains a number of normal banking
caveats. From the comments made in the letter it is evident that:
●
●
●
5
the bankers have not made a decision about the continuance of the facilities;
the bankers will continue to monitor the facilities in the light of information
which becomes available to them; and
(subject to the foregoing) the bankers will consider renewal of the facility on the
agreed review date, which falls after the date on which the directors plan to
approve the financial statements.
On this basis the auditors decide that:
●
●
in the absence of indications that the facility may be exceeded in the 12 month
period to the anniversary of the date of approval of the financial statements
which they are auditing; and
together with the results of other audit work
they consider that there is concern about the ability of the company to continue as a
going concern, but not of such significance as to require to be highlighted in the audit
report.
6
In this particular case, the possibility that adequate overdraft facilities will not be
renewed is not remote. The financial statements thus contain disclosures such as
those shown below.
76
Going concern SAS 130
Extract from notes to the financial statements
Note 12
Creditors: amounts falling due within one year 19X1
£
Current instalments due on debenture loans
Bank overdrafts
Obligations under finance leases
xx
xx
xx
19X0
£
xx
xx
xx
The company meets its day to day working capital requirements through an
overdraft facility which is repayable on demand. The company expects to operate
within the facility currently agreed and within that expected to be agreed on
(date), when the company’s bankers are due to consider its renewal for a further
year. These views are based on the company’s plans and on the successful
outcome of discussions with the company’s bankers.
If the note to the financial statements illustrated above omitted the narrative
paragraph, the auditors might decide that the disclosures in the financial statements
were insufficient to give a true and fair view of the state of the company’s affairs. If
so, they would qualify their audit opinion, for example as follows.
Extract from the auditors’ report
Qualified opinion arising from disagreement as to the adequacy of a disclosure in
the financial statements
In our opinion, the financial statements should disclose the following matters.
The company meets its day to day working capital requirements through an
overdraft facility which, in common with all such facilities, is repayable on
demand. We understand from the directors that they expect that the company
will continue to operate within the facility currently agreed and within that which
they expect will be agreed on (date), when the company’s bankers are due to
consider renewing the facility for a further year. The directors inform us that their
views are based on their plans and on discussions with the company’s bankers but
that, inherently, there can be no certainty in relation to those views.
Except for the absence of the disclosure referred to in the paragraph above, in
our opinion the financial statements give a true and fair view of the company’s
state of affairs as at 31 December 19.. and have been properly prepared in
accordance with the Companies Act 1985. In our opinion the financial statements
give a true and fair view of the company’s profit for the year ended 31 December
19.. .
Registered auditors
Address
Date
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Situation 3
1
The circumstances and audit work are as in Situation 2, except that the nature of the
business is such that there can be considerable unpredictable variation in the timing
of cash inflows. Because of this the company’s bankers have frequently requested
and received a rolling cash flow forecast (supported by a sensitivity analysis)
covering the year ahead.
2
Since the last balance sheet date, the company has operated within its overdraft
facility, and towards the end of the audit, the auditors examine the latest available
cash flow forecast. This covers the year ending 9 months from the date on which the
directors plan to approve the financial statements. The cash flow sensitivity analysis
prepared by the directors takes into account the cost reduction exercise and reveals
the following.
●
The ‘best case’ shows the company can remain within the current overdraft
facility.
The ‘worst case’ shows that the company would exceed its current overdraft
facility throughout the period covered.
The ‘most likely’ case shows the company would remain within the current
overdraft facility, but would be close to it on several occasions during the period
covered.
●
●
3
The auditors scrutinise correspondence and notes of conversations between the
directors and the bankers, who examine the draft financial statements, the cash flow
information and forecast and the sensitivity analysis. The auditors also examine a
letter from the bankers regarding renewal of overdraft facilities. The letter is similar
to that mentioned in Situation 2, and is addressed to the directors with a copy sent by
the bankers directly to the auditors. The renewal is scheduled to be considered by
the bankers at a date which falls after the date on which the directors plan to approve
the financial statements. The auditors consider that the frequent requests by the
bankers for cash flow forecasts indicates considerable concern on the part of the
bankers. Taking into account all the information available to them, the auditors
might decide to request the directors to arrange a tripartite meeting between the
auditors, the directors and the bankers. Following any such meeting the auditors
would make appropriate notes in their working papers.
4
The auditors update their audit work on the cash flow forecast and sensitivity
analysis to cover the period falling after that covered by these documents. They do
this principally through discussion with the directors of the outline plans for this
period.
5
The financial statements contain disclosures such as those shown below.
Extract from notes to the financial statements
Note 1
Basis of preparing the financial statements
The company meets its day to day working capital requirements through an
overdraft facility which is repayable on demand.
The nature of the company’s business is such that there can be considerable
unpredictable variation in the timing of cash inflows. The directors have prepared
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Going concern SAS 130
projected cash flow information for the period ending 9 months from the date of
their approval of these financial statements. On the basis of this cash flow
information and discussions with the company’s bankers, the directors consider
that the company will continue to operate within the facility currently agreed and
within that which they expect will be agreed on (date), when the company’s
bankers are due to consider renewing the facility for a further year. However, the
margin of facilities over requirements is not large and, inherently there can be no
certainty in relation to these matters. On this basis, the directors consider it
appropriate to prepare the financial statements on the going concern basis. The
financial statements do not include any adjustments that would result from a
withdrawal of the overdraft facility by the company’s bankers.
In these circumstances the auditors consider that they are able to form an audit
opinion, but that they have a significant level of concern about the ability of the
company to continue as a going concern. Hence, whilst they do not qualify their
audit opinion, they include a suitable explanatory paragraph when setting out the
basis of their opinion, as set out below.
6
The guidance in paragraph 61 of SAS 600 ‘Auditors’ report on financial statements’
states that the explanatory paragraph describes:
7
‘. . . the matter giving rise to the fundamental uncertainty and its possible effects
on the financial statements, including (where practicable) quantification.’
Extreme circumstances are necessary to support adjustment of financial statements
onto a basis of accounting other than the going concern basis. In this example, the
auditors do not disagree with the preparation of the financial statements on the
going concern basis. The Board considers that it may be misleading for the auditors’
report to refer to the possible effects on the financial statements of the matter giving
rise to the fundamental uncertainty. The example below, therefore, omits such
references.
Extract from the ‘Basis of opinion’ section of the auditors’ report
Going concern
In forming our opinion, we have considered the adequacy of the disclosures made
in note 1 of the financial statements concerning the uncertainty as to the
continuation and renewal of the company’s bank overdraft facility. In view of the
significance of this uncertainty we consider that it should be drawn to your
attention but our opinion is not qualified in this respect.
Example 2 – A large processing company
Situation 1
The company is a large producer of basic foodstuffs. Key features of its business
are
●
turnover comprises a high volume of sales with relatively low individual unit
prices;
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APB Statements of Auditing Standards
●
there is a strong relationship (in terms of quantities) between inputs to and
outputs from the processes;
there are relatively few suppliers (mainly foreign) for the key raw materials;
and
the use of an integrated standard costing system with sophisticated stock
controls.
●
●
2
These features require and permit the company to operate a sophisticated management information system (with rolling budgets and forecasts prepared 12 months
ahead) in order to monitor and control stock levels and raw material prices in
particular.
3
In these circumstances a wealth of detailed records and forecasts is available to the
auditors, and so, regarding going concern, they are careful to focus on the records
and forecasts relevant to identifying material matters which may cause them to have
a significant level of concern about the company’s ability to continue as a going
concern.
4
From their knowledge of the company’s circumstances based on previous experience, the auditors are aware that the company’s cash flow and results are very
sensitive to raw materials prices, including the effects of foreign exchange differences. This initial assessment is confirmed when the auditors finish planning their
audit, when they also become aware that the company’s gearing ratio is increasing.
The auditors’ response is to plan to examine the rolling cash flow forecasts for the
period ending one year from the date of approval of the financial statements in
conjunction with evidence of appropriate forward contracts and options which will
be in place during that period. However, these forward contracts and options are
unlikely to cover the whole of that period and so in addition the auditors plan to
assess how effective the directors have been during the year under audit in mitigating these exposures to fluctuating prices and exchange rate changes. This, together
with the auditors’ experience from previous audits of the directors’ effectiveness in
mitigating exposure, will enable the auditors to establish the directors’ ‘track record’
in this area. The auditors consider that the combined evidence they obtain from
these and their other audit procedures will be sufficient in these circumstances to
satisfy the SAS’s requirements on audit evidence.
5
The auditors’ initial assessment, at the planning stage of the audit, is that there is not
a significant level of concern about the ability of the company to continue as a going
concern. Subsequent work confirms this. Accordingly, the auditors consider it
appropriate neither to qualify their audit opinion, nor to add an explanatory
paragraph to their report.
6
The financial statements contain disclosures such as those shown below.
Extract from notes to the financial statements
Note 20
Financial commitments
In the ordinary course of business the company enters into forward contracts and
options. The aim is to hedge the company’s exposure to the potentially adverse
effects of fluctuating prices for raw materials and foreign exchange rate changes.
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Going concern SAS 130
Situation 2
The circumstances, disclosures in the financial statements and the audit work are as
in Situation 1, except as follows. The auditors have completed their audit work and
consider that the financial statements, which contain the following disclosures, give
a true and fair view.
1
Extract from notes to the financial statements
Note 2
Going concern
The company has placed a tender with a current major customer for a two-year
contract. The customer’s decision is awaited, but if awarded to the company, the
contract would comprise a significant proportion of the company’s forecasted
turnover over the contract period. Until reaching a decision regarding the tender,
the customer is making a monthly decision whether or not to extend the most
recently agreed contract for a further month.
The directors have a number of alternative plans for utilising the company’s
resources and generating income should it not be awarded the contract. However
the company has yet to submit tenders for several of these alternative contracts.
The directors consider that in preparing the financial statements they have taken
into account all information that could reasonably be expected to be available.
On this basis, they consider that it is appropriate to prepare the financial
statements on the going concern basis. This assumes that either the contract is
awarded to the company or that the directors’ alternative plans are successful.
The financial statements do not include any adjustments that would result if the
contract were not awarded to the company and the directors’ alternative plans
were not successful.
The auditors consider that they have obtained all the evidence which may reasonably be expected to be available, but that there is a significant level of concern about
the ability of the company to continue as a going concern. This is reflected in the
wording they decide to use in the explanatory paragraph they include when setting
out the basis of their opinion describing the matters giving rise to their concern in
their unqualified auditors’ report on the financial statements.
Extract from the ‘Basis of opinion’ section of the auditors’ report
Going concern
In forming our opinion, we have considered the adequacy of the disclosures made
in note 2 of the financial statements concerning the uncertainty over the possible
outcome of a tender for a two-year contract placed by the company with a current
81
2
APB Statements of Auditing Standards
major customer. In view of the significance of this uncertainty we consider that it
should be drawn to your attention, but our opinion is not qualified in this respect.
Example 3 – Auditors disagree that disclosures are adequate
1
The auditors consider that there is a significant level of concern about the ability of
the company to continue as a going concern. The financial statements do not disclose
the fact that borrowing covenants have been breached and the related borrowings
have not been reclassified as amounts falling due within one year. The auditors are
not aware of any agreement from the lenders to waive the breach. The auditors thus
do not consider that the disclosures in the financial statements of the matters giving
rise to this concern are adequate to give a true and fair view of the state of affairs of
the company and of the group as at the balance sheet date. The true and fair view
given by the profit and loss account is not affected because the only material result
of the breach is that the related borrowings become repayable on demand. Set out
below is an extract from the financial statements.
Extract from notes to the financial statements
Note 1
Basis of preparing the financial statements
The directors are currently negotiating with lenders to the group for new terms
for amounts borrowed totalling £A. In addition, the directors’ plans for raising
funds of approximately £B from a share issue by the company are at an advanced
stage. Both matters have already been announced publicly.
The financial statements have been prepared on the going concern basis which
assumes that the company and its subsidiaries will continue in operational
existence for the foreseeable future.
The validity of this assumption depends on the successful conclusion of the
negotiations with the group’s lenders and the raising of additional funds by a
share issue. Certain of these arrangements will require the approval of shareholders in a general meeting. The financial statements do not include any
adjustments that would result if negotiations were not concluded successfully.
Whilst the directors are presently uncertain as to the outcome of both the matters
mentioned above, they believe that it is appropriate for the financial statements
to be prepared on the going concern basis.
2
The following is an extract from the auditors’ report.
Extract from the ‘Basis of opinion’ section of the auditor’s report
Going concern
In forming our opinion, we have considered the adequacy of the disclosures
made in note 1 of the financial statements concerning the directors’ efforts to
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Going concern SAS 130
renegotiate loans and raise further capital. In view of the significance of the fact
that the preparation of the financial statements on the going concern basis
assumes the successful conclusion of both these matters, we consider that these
disclosures should be brought to your attention. Our opinion is not qualified in
this respect, but certain aspects of the disclosures give rise to a qualification as
described below.
Qualified opinion arising from disagreement about an accounting treatment
and the adequacy of a disclosure in the financial statements
In our opinion the financial statements should disclose the fact that the company
and certain of its subsidiaries have not complied with covenants relating to
certain of their borrowings included in the financial statements. Under the terms
of these covenants, the publication of these financial statements gives rise to
defaults relating to certain of the group’s borrowings as a consequence of which
the related borrowings become repayable on demand. These related borrowings
should have been reclassified as amounts falling due within one year, which
would have reduced the figures recorded in the financial statements for ‘net
current assets’ and ‘creditors: amounts falling due after more than one year’ by
£C.
Except for the absence of the disclosures, and the failure to reclassify the relevant
borrowings, referred to in the paragraph above, in our opinion the financial
statements give a true and fair view of the state of affairs of the company and the
group as at 31 December 19.. and have been properly prepared in accordance
with the Companies Act 1985. In our opinion the financial statements give a true
and fair view of the profit of the group for the year ended 31 December 19.. .
Appendix 3 – Illustrative examples of the auditors’
assessment of whether evidence provided to them by
the directors, concerning the attention they have paid
to the period one year from the date of approval of
the financial statements, is sufficient
The appendix is illustrative only and does not form part of the Auditing Standards.
The purpose of the appendix is to illustrate the application of the Auditing Standards
to assist in clarifying their meaning in a number of commercial situations. The
examples focus on particular aspects of the situations illustrated and are not intended
to be a comprehensive discussion of all the relevant factors that might influence either
the directors’ or auditors’ assessment of the appropriateness of the going concern
basis. As auditors would need to exercise judgment in the circumstances described it is
possible that different auditors may arrive at different conclusions. This does not,
however, detract from the examples which demonstrate thought process and the
implications for an audit report once certain conclusions have been reached by the
auditors. These examples neither modify nor override the Auditing Standards.
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APB Statements of Auditing Standards
Example 1 – A small company producing specialised computer
application software
Extract from auditors’ risk assessment
This owner managed company employs a few highly trained and highly paid
computer system designers to design application software for use by transportation
enterprises, such as airlines and bus companies, in preparing their timetables and
fare structures. Few companies are engaged in this field and the supply of suitably
trained staff is limited. The system designers, who met at University, have been with
the company since its formation. They all have an equity interest in the company.
Although the company has only been in existence for five years it has established a
reputation for excellence in its field. Its reputation derives from the skill and
expertise of its individual employees rather than from anything attaching to the
company itself.
A significant amount of time is spent by the designers in pure research activities
developing new products. In addition the time needed to develop individual systems
relating to an established product can be considerable. In addition to design of new
systems the company maintains those systems it has installed on a contractual basis
and undertakes training courses in the use of the systems for the employees of its
customers.
The company is thinly capitalised and relies primarily on advances from its customers supplemented by short term bank borrowings for its day to day cash
requirements.
The company employs a part time book-keeper to prepare the financial statements,
cash flow forecasts and maintain the books of account.
The company has usually been in a position to choose which contracts it accepts and
has not had difficulty in recovering its costs. The company is not economically
dependent on any one transportation enterprise.
The company updates each month a rolling cash flow projection with a six month
time horizon. The company does not prepare projections for a longer period as it
perceives its management need is to be able to manage effectively its short term cash
flow. The company has negotiated a line of credit with its bankers which it would be
able to utilise to overcome short term cash shortages.
Assessment by auditors of whether there is sufficient evidence that the directors
have paid particular attention to a period of twelve months
When the auditors assess whether the directors have, in assessing going concern,
paid particular attention to a period of one year from the expected date of approval
of the financial statements they:
(a) review the cash flow forecasts for the six month period from the expected date
of approval of the financial statements; and
(b) then enquire of the directors the steps they have taken to assess the appropriateness of the going concern basis for the subsequent six month period.
84
Going concern SAS 130
The directors inform the auditors that they do not consider there is any need for cash
flow forecasts to be prepared beyond six months because:
●
●
●
●
●
●
●
the cash flow forecasts show a net cash inflow for the period;
they have reviewed in detail the assumptions implicit in the forecast with the
bookkeeper and concur with them;
the company has a significant back-log of orders which will occupy half of the
designers for at least the next year;
the company is actively tendering for both systems design and maintenance
contracts in the United Kingdom and Europe and is considering expanding into
the Americas;
the company has recently renewed its arrangements with its bankers for a
further year;
the design employees seem to be settled and stimulated and there is no reason
to believe that they will leave the company in the foreseeable future; and
in the unlikely event that the company did not win many of the tenders it could
modify its existing expansion plans which have been necessitated by an increase
in maintenance contracts. Rather than employ new staff to undertake this work
existing staff could be reassigned to it.
The auditors conclude that the directors have paid particular attention to the period
ending one year after their approval of the financial statements.
Example 2 – An enterprise in the fashion industry
Extract from auditors’ risk assessment
This company employing 1,000 people designs and manufactures ladies fashionwear.
Its business is seasonal and it presents two major collections per year: one in the
spring and one in the autumn.
The company has attracted established designers and they are regarded as one of the
leading manufacturers.
Almost all of the company’s sales orders are received from the major retailers when
they show their collections. Although some of the garments are manufactured prior
to the showing of the collection the majority of them will be manufactured in the
four months immediately following the showing.
The company’s finance director is a qualified accountant with a staff of 6. Because of
the seasonal nature of the business the company prepares its detailed budgets and
cash flow forecasts until the end of the next season. The company’s year end is 30
June and the directors expect to approve the financial statements during October.
Detailed cash flow forecasts are only available to the end of February in the
following year a period of only four months from the approval of the financial
statements.
The company which has been marginally profitable over the last few years has a
small line of credit with its bank but is financed primarily through the factoring of its
debtors.
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APB Statements of Auditing Standards
Assessment by auditors of whether there is sufficient evidence that the directors
have paid particular attention to a period of twelve months
When the auditors assess whether the directors have, in assessing going concern,
paid particular attention to a period of one year from the expected date of approval
of the financial statements they would:
(a) review the cash flow forecasts for the four month period from the expected date
of approval of the financial statements; and
(b) then enquire of the directors the steps they have taken to assess the appropriateness of the going concern basis for the subsequent eight month period.
The directors inform the auditors that they do not consider there is any need for
additional cash flow forecasts to be prepared beyond the end of February in the
following year because:
●
●
●
●
●
●
●
the cash flow forecasts show a net cash inflow for the period and the present
cash position is strong because of a recent sale of debtors from the present
collection;
the directors have reviewed in detail the assumptions implicit in the forecast
and concur with them;
the designers are working on the next collection and they believe, based on
discussions with some of the retailers, that they have some good general ideas
which will appeal to their customers if translated into imaginative detailed
designs;
discussions with the major retailers indicate that they expect demand to be high
next season;
the company’s relationship with its factor is good and they do not expect any
difficulties in selling their debtors in the future;
the company anticipates no major capital expenditures in the next twelve
months. Most of the machinery is less than five years old and in any event is
financed by lease arrangements rather than by purchase; and
the company has recently renewed its arrangements with its bankers for a
further year.
The auditors conclude that the directors have paid particular attention to the period
ending one year after their approval of the financial statements.
Auditors options when they conclude that the directors have not paid
particular attention to the period ending one year after the approval of
the financial statements
The two examples above illustrate that the auditors may conclude that the directors
have paid particular attention, to the period ending one year after the approval of
the financial statements, even though they have not prepared cash flow forecasts for
that period.
The auditors may conclude in slightly different situations that the directors have not
paid particular attention to the period ending one year after the approval of the
financial statements. If this is the case the auditors need to consider the impact on
their audit report which may be either:
(a) they may conclude that there is a significant level of concern about the entity’s
ability to continue as a going concern (but they do not disagree with the use of
86
Going concern SAS 130
the going concern basis). In which case the directors include a note to the
financial statements and the auditors include an explanatory paragraph when
setting out the basis of their opinion (in accordance with paragraph 42 of the
SAS); or, less probably;
(b) they may conclude that the directors have not paid particular attention to the
period ending one year from the date of approval of the financial statements but
there is no significant level of concern. Then if the directors:
(i) refer to the period paid particular attention to, in the annual report, the
auditors need not refer to the period in their basis of opinion (in accordance with paragraph 46 of the SAS); however
(ii) if the directors do not refer to the period paid particular attention to, the
auditors would do so in the section of their report setting out their basis of
opinion (in accordance with paragraph 45 of the SAS); or
(c) they may conclude that the directors have not taken adequate steps to satisfy
themselves that it is appropriate to adopt the going concern basis. Accordingly,
there is a limitation of scope which gives rise to a qualified audit report (in
accordance with paragraph 48 of the SAS).
87
Appendix 4 – Going concern and reporting on the financial statements
No
Is the possible effect so material or
pervasive to the financial statements
that they could, as a whole, be
misleading?
No
Qualified opinion –
Except for limitation
Yes
Qualified opinion –
Disclaimer
Yes
Are the financial statements prepared
on the going concern basis
Is departure needed to give a true and
fair view?
No
Yes
Yes
Is there a significant level of concern
about the company’s ability to
continue as a going concern?
Do the financial statements, including
note disclosures about the matters
giving rise to the concern, give a true
and fair view?
Yes
No
Yes
Unqualified opinion with explanatory
paragraph2
No
Yes
No
Is the effect of the disagreement so
material or pervasive that the financial
statements as a whole are misleading?
No
If the period to which the directors have paid particular attention in
assessing going concern is less than one year from the date of
approval of the financial statements, is that fact disclosed in the
financial statements or accompanying information?4
Unqualified
opinion1
No
Is disclosure of the departure
adequate?
Yes
Do the financial statements give a
true and fair view?
Yes
No
Qualified opinion –
Except for
disagreement3
Yes
Qualified opinion –
Adverse opinion
No
Unqualified opinion, with
disclosure of the fact within
the section of the auditors’
report setting out the basis
of their opinion, unless the
fact is clear from any other
references in their report
1
2
3
4
See Appendix 2, example 1 (situations 1 and 2) and example 2 (situation 1)
See Appendix 2, example 1 (situation 3) and example 2 (situation 2)
See Appendix 2, example 3
See Appendix 3
APB Statements of Auditing Standards
88
Has all evidence reasonably expected
to be available been obtained and
evaluated?
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