Appropriateness of managements use of the going concern là gì năm 2024

The going concern assumption is a fundamental principle in accounting that states that an entity is expected to continue its operations for the foreseeable future. However, there may be events or conditions that cast significant doubt on the entity’s ability to continue as a going concern. In such cases, auditors face difficulties in obtaining sufficient appropriate audit evidence and forming an audit conclusion on the appropriateness of management’s use of the going concern basis of accounting.

In this article, we will illustrate some of these difficulties by using a real-life case of a property developer that continues its business but faces financial difficulties. We will also discuss what is the questioning mindset that auditors should maintain when assessing the going concern assumption.

Case Study: A Property Developer

A property developer disclosed in its annual report published in March 2023 that as at 31 December 2022, it had:

• Unused loan facilities of approximately RMB266 billion
• Cash and cash equivalents of RMB128 billion
• Net debt of RMB123.7 billion

The directors believed that the group would be able to renew or extend its existing loan facilities, to draw down these unused loan facilities, and to issue medium-term notes or corporate bonds as and when needed.

The annual report also included a confirmation note that the group had sufficient working capital to meet its financial obligations as and when they fell due within twelve months from 31 December 2022.

However, in mid-August 2023, the group announced that it suspended trading of several bonds it issued. The share price decreased even deeper on a declining stock market performance.

The purpose of this article is to provide some thought-provoking ideas for auditors to apply a questioning mindset when assessing the going concern assumption. No attempt is given to comment on the financial statement quality and auditor’s work, this article only offers some suggestions for how to apply professional skepticism and judgement.

Questioning Mindset for Auditors

According to ISA 570, Going Concern, the auditor’s responsibility is to obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements, and to conclude, based on the audit evidence obtained, whether a material uncertainty exists about the entity’s ability to continue as a going concern.

A questioning mindset is an essential component of professional skepticism, which is defined as an attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence. Professional skepticism is necessary throughout the audit process, especially in areas involving significant management judgement or transactions outside the normal course of business.

In assessing the going concern assumption, the auditor should apply a questioning mindset by:

• Performing risk assessment procedures and related activities to identify events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. These may include external factors (such as economic, legal, political, environmental, or technological changes), internal factors (such as financial performance, liquidity, solvency, debt covenants, or operational issues), or other indicators (such as negative operating cash flows, adverse key financial ratios, or substantial doubt expressed by third parties).
• Evaluating management’s assessment of the entity’s ability to continue as a going concern by considering whether it covers all relevant information and whether it is based on reasonable assumptions and methods. The auditor should also consider whether management has identified all material uncertainties related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern.
• Performing additional audit procedures when events or conditions are identified that may cast significant doubt on the entity’s ability to continue as a going concern. These may include obtaining evidence about management’s plans to mitigate the events or conditions, evaluating the feasibility and effectiveness of such plans, requesting written representations from management and those charged with governance regarding their plans and assumptions, or seeking external confirmation from relevant parties (such as lenders, creditors, customers, suppliers, or regulators).
• Forming an audit conclusion and reporting based on the audit evidence obtained. The auditor should determine whether the use of the going concern basis of accounting is appropriate in the circumstances and whether adequate disclosures are made in the financial statements. If not, the auditor should express a qualified or adverse opinion. If the use of the going concern basis of accounting is appropriate but a material uncertainty exists, the auditor should express an unqualified opinion with an emphasis of matter paragraph.

In applying a questioning mindset to the case of the property developer, some examples of questions (the questions are generated by my AI bot and Bing AI with minor modifications) that the auditors may ask are:

Liquidity and cash flow

• How reliable are management’s estimates of future sales of property? What are the sources of data and assumptions used? How sensitive are they to changes in market conditions or customer demand?
• How realistic are management’s expectations of renewing or extending its existing loan facilities? What are the terms and conditions of such facilities? How likely are they to be breached or renegotiated? Are there additional terms imposed by the banks after reviewing the current property market situation which may affect the ability to renew or withdraw the loan?
• How well the management has matched the cash flow generated from sales and the collection of the accounts receivable with the payment to the accounts payable, of the interest expenses, and the principals?

Accounting considerations

• Is there any change in the revenue recognition policy?
• How to account for the default interest?
• Are there breaches of debt covenants that affect the debt classification, ie the current or long-term liabilities?
• Is there loan payment restructuring that may need to reconsider how to account for it according to the financial instrument accounting standard?

External factors

• How feasible are management’s plans to draw down unused loan facilities and issue medium-term notes or corporate bonds? What are the costs and risks involved? How dependent are they on external factors such as credit ratings, interest rates, investor confidence, or regulatory approvals?

Debt obligations

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• What are the group’s current debt obligations, including the maturity dates and terms of the loans? Second, what is the group’s ability to repay or refinance its debt, and what are the potential impacts of any default on the company’s financial position?

Disclosure and financial transparency

• How adequate are management’s disclosures of material uncertainties affecting its ability to continue as a going concern? Do they reflect all relevant information and events known at the date of approval of the financial statements? Do they comply with applicable financial reporting standards?
• Did the group’s financial statements disclose accurate and complete information, given the recent concerns about financial transparency in the property development sector? Did the group disclose proper and relevant information regarding its off-balance-sheet arrangements or contingent liabilities?

Future fundraising ability and going concern

• How significant is the impact of the suspension of trading of several bonds issued by the group on its liquidity and solvency? What are the reasons and implications of such suspension? How does it affect management’s assessment of going concern?
• How relevant is the decrease in share price on a declining stock market performance to the entity’s ability to continue as a going concern? Does it indicate a loss of confidence or trust from investors or other stakeholders? Does it affect management’s access to capital markets or other sources of funding?

These are just some illustrative examples of questions that the auditors may ask in applying a questioning mindset to the audit of going concern. Certainly, with a large company audit, the audit firm will normally form a penal to assess the audit risk and before issuing an audit report, the experienced auditors will sit down and debate what kind of auditors’ report should be issued. With a due process within a firm culture, it will help to consider issuing an appropriate audit report after maintaining the questioning mindset.

Conclusion

The audit of going concern is a complex and challenging topic that requires careful judgement and professional skepticism from the auditors. By using a questioning mindset, auditors can identify and evaluate events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern, and form an appropriate audit conclusion and report.

We hope this article has been helpful and informative for you. If you have any feedback or questions and the use of AI to help you, please feel free to contact us. Thank you for reading.

References

International Auditing and Assurance Standards Board (IAASB). (2016). ISA 570 (Revised), Going Concern. Retrieved from [https://www.ifac.org/system/files/publications/files/ISA-570-Revised.pdf]

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