AUDITOR RESPONSIBILITY ON GOING CONCERN - REPORTING

May 21, 2025

SA 570 is a Standard on Auditing issued by the Institute of Chartered Accountants of India (ICAI), which provides guidance to auditors on the responsibility of assessing an entity's ability to continue as a going concern.

Key Concepts

1. Going Concern Assumption:The assumption that the entity will continue its operations for the foreseeable future, generally at least 12 months from the balance sheet date, without the intention or necessity to liquidate or significantly reduce its operations.

2. Material Uncertainty:Conditions or events that may cast significant doubt on the entity’s ability to continue as a going concern.

3.Management's Responsibility:Management is responsible for:

• Assessing the entity’s ability to continue as a going concern.

• Preparing financial statements on a going concern basis unless liquidation or cessation of operations is intended or unavoidable.

• Disclosing any material uncertainties related to going concern.

4. Auditor's Responsibility:The auditor is responsible for obtaining sufficient appropriate audit evidence to conclude whether the going concern assumption is appropriate and whether material uncertainties exist

Indicators of Going Concern Issues

Auditors should be alert to indicators that may suggest a going concern problem, which can broadly be categorized into:

1. Financial Indicators:

• Net liabilities or negative net worth.

• Recurring operating losses.

• Negative operating cash flows.

• Inability to meet debt obligations or secure financing.

2. Operating Indicators:

• Loss of key markets, customers, or suppliers.

• Labor difficulties or high employee turnover.

• Operational inefficiencies.

3. Other Indicators:

• Pending legal or regulatory proceedings with adverse financial impacts.

• Natural disasters or external shocks affecting operations.

Audit Procedures for Going Concern

To evaluate management’s assessment and the appropriateness of the going concern assumption, the auditor performs the following:

1. Risk Assessment Procedures:

• Evaluate whether there are events or conditions that cast doubt on going concern.

• Understand management's process for identifying and assessing these risks.

2. Evaluating Management’s Assessment:

• Review management’s plans to mitigate going concern risks, such as cost reductions, asset sales, or obtaining financing.

• Analyze cash flow forecasts, budgets, and other financial projections.

• Check assumptions underlying the projections for reasonableness and consistency.

3. Testing Audit Evidence:

• Examine subsequent events for additional evidence of going concern risks.

• Obtain written representations from management regarding their plans and assessments.

4. Evaluating Disclosures:

• Verify that adequate disclosures are made in the financial statements about material uncertainties and management’s plans.

Material Uncertainty and Its Implications

1. When Material Uncertainty Exists:

• If adequate disclosure is provided in the financial statements, the auditor includes an Emphasis of Matter paragraph in the audit report.

• If disclosure is inadequate, the auditor modifies the opinion (e.g., qualified or adverse opinion).

2. When Material Uncertainty Does Not Exist:

• If no significant doubt arises, and the going concern assumption is appropriate, the auditor issues an unmodified opinion.

Reporting Requirements

1. Unmodified Opinion:Issued if the going concern assumption is appropriate, and no material uncertainties exist, or if material uncertainties exist but are adequately disclosed.

2. Modified Opinion:

• Qualified or Adverse Opinion: Issued if disclosures regarding going concern are inadequate.

• Disclaimer of Opinion: Issued if the auditor is unable to obtain sufficient evidence to determine whether a material uncertainty exists.

3. Emphasis of Matter Paragraph: Added to highlight material uncertainties about going concern that are adequately disclosed in the financial statements.

Communication

1. With Management:

• Discuss identified events or conditions that may impact going concern.

• Share the auditor’s evaluation of management’s plans to mitigate risks.

2. With Those Charged with Governance:

• Communicate findings related to going concern, including material uncertainties or inadequate disclosures.

Key Challenges for Auditors

1. Judgment: Assessing going concern involves significant judgment, particularly in uncertain economic or business environments.

2. Projection Reliability: Evaluating the accuracy of management’s forecasts can be complex due to inherent uncertainties.

3. Documentation: Auditors must adequately document the risk assessment, procedures performed, and their conclusions.

Consequences of Non-Compliance

Failure to comply with SA 570 can result in:

• Misleading financial reporting.

• Auditor liability for failing to identify material uncertainties.

• Reputational damage to the auditor and the entity.