Implementation Guide to
Standard on Auditing (SA) 570(Revised)
Going Concern
The Institute of Chartered Accountants of India
(Set up by an Act of Parliament)
New Delhi
© The Institute of Chartered Accountants of India.
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form, or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without prior permission, in writing, from the publisher.
First Edition : January 2013
Revised Edition : August 2019
Committee : Auditing and Assurance Standards Board
Email : aasb@icai.in
Website : www.icai.org
Price : Rs. 100/-
ISBN : 978-81-8441-580-3
Published by : The Publication Department on behalf of the
Institute of Chartered Accountants of India,
ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi 110002
Printed by : Sahitya Bhawan Publications, Hospital
Road, Agra 282003
August/2019
Foreword
Implementation Guides to Standards on Auditing (SA) are an
important resource for the members to appropriately
understand the requirements of these Standards and help
them to implement these Standards in an appropriate
manner in their audit engagements.
The first edition of the "Implementation Guide to SA 570,
Going Concern" was brought out by Auditing and Assurance
Standards Board of ICAI in the year 2013. Pursuant to
revision of SA 570, there emerged the need to revise the
Implementation Guide issued earlier.
I congratulate the Auditing and Assurance Standards Board
in taking this initiative of revising the Implementation Guide
as per SA 570(Revised), Going Concern. The
Implementation Guide has been written in easy to
understand lucid language. I am sure the Implementation
Guide would be able to address the practical difficulties, if
any, being faced by the members in implementing this
Standard.
I extend my sincere appreciation to the entire Board and
specially appreciate the efforts put in by CA. G. Sekar,
Chairman and CA. Debashis Mitra, Vice-Chairman for
bringing out this Implementation Guide for benefit of the
members.
August 14, 2019 CA Prafulla P. Chhajed
New Delhi President, ICAI
Preface
In 2013, the Auditing and Assurance Standards Board of
ICAI issued the "Implementation Guide to SA 570, Going
Concern" to provide practical implementation guidance to the
members on this Standard. ICAI issued SA 570(Revised),
Going Concern in 2016 which is applicable for the audits of
financial statements on or after April 1, 2017. The revised
Standard has strengthened the audit requirements and has
made certain changes in auditor's reporting requirements of
going concern aspect. These changes necessitated revision
of the Implementation Guide earlier issued.
I am happy to place in hands of the members, this revised
Implementation Guide to SA 570(Revised), Going Concern
brought out by the Auditing and Assurance Standards Board.
The Implementation Guide provides a very practical and
easy to follow approach to going concern assessment in the
forms of questionnaire, checklists, templates and case
studies, etc.
I wish to place on record high appreciation of CA. Debashis
Mitra, Vice-Chairman of the Board for his whole-hearted
effective co-ordination and contribution in publishing this
material and in various activities of the Board.
I wish to express my sincere thanks to CA. Prafulla
Premsukh Chhajed, Honourable President, ICAI and CA.
Atul Kumar Gupta, Honourable Vice-President, ICAI for their
guidance and support to the activities of the Board.
I am extremely grateful to CA. Pramod Jain, Delhi and his
team comprising CA. Pranav Jain, CA. Sandeep Jain, CA.
Sarika Gosain, CA. Asha Taneja for taking time out of their
professional and personal preoccupations to revise this
Implementation Guide. I also acknowledge the contribution
of CA. Shriniwas Joshi in finalising this Implementation
Guide.
I also wish to place on record my sincere thanks to all the
Board Members and all the Council Members for their
suggestions, support and guidance in finalising this
Implementation Guide as well as other pronouncements of
the Board. I also wish to thank CA. Megha Saxena,
Secretary, AASB and staff of AASB for their dedicated
efforts.
I am confident that the Implementation Guide would be well
received by the members and other interested readers.
August 14, 2019 CA. G. Sekar
Chennai Chairman,
Auditing and Assurance Standards Board
Contents
Foreword
Preface
Page No.
Chapter 1 Introduction and Overview 1-3
Chapter 2 The Implementation Guidance and 4-15
Suggested Questionnaire
Chapter 3 Template for Checklists for 16-24
Evaluating Management's Use of
Going Concern Basis of
Accounting
Chapter 4 Practical Case Studies and 25-41
Illustrative Examples
Annexure I An Illustrative Template for the 42-46
Format of Auditor's Report under
Different Scenarios as Illustrated in
this Implementation Guide
Annexure II Illustrative Format of Support 47
Letter
Chapter 1
Introduction and Overview
1.1 The purpose of this Implementation Guide is to provide
practical guidance on implementation of the principles enunciated
in the Standard on Auditing (SA) 570 (Revised), Going Concern,
issued by the Institute of Chartered Accountants of India. SA 570
(Revised) is effective for audits of financial statements for periods
beginning on or after April 1, 2017.
1.2 Certain fundamental accounting assumptions underlie the
preparation of financial statements and going concern is one of
those fundamental accounting assumptions. They are usually not
specifically stated because their use is accepted and assumed. A
disclosure is necessary if they are not followed. However, when
the use of the going concern basis of accounting is not
appropriate in the circumstances, management may be required,
or may elect, to prepare the financial statements on another basis
(e.g., liquidation basis). The auditor may be able to perform an
audit of those financial statements provided that the auditor
determines that the other basis of accounting is acceptable in the
circumstances. The auditor may be able to express an unmodified
opinion on those financial statements, provided there is adequate
disclosure therein about the basis of accounting on which the
financial statements are prepared but may consider it appropriate
or necessary to include an Emphasis of Matter paragraph in
accordance with SA 706(Revised) in the auditor's report to draw
the user's attention to that alternative basis of accounting and the
reasons for its use. (Refer paragraph A27of SA 570 (Revised)).
1.3 The enterprise is normally viewed as a going concern, that
is, as continuing in operation for the foreseeable future. An entity's
continuance as a going concern for the foreseeable future is
assumed in the preparation of financial statements in the absence
Implementation Guide to SA 570(Revised)
of significant information to the contrary. Accordingly, assets and
liabilities are recorded on the basis that the entity will be able to
realise its assets and discharge its liabilities in the normal course
of business. If this assumption is unjustified, the amounts and
classification of assets and liabilities in the financial statements
may need to be adjusted. A few examples of situations of going
concern are as under:
(i) An oil and gas firm is stopped by a court from carrying out
operations. The firm is not a going concern, because it has to
shut down operations because of the said directions from the
court.
(ii) A nationalized refinery is in cash flows problems but the
government of the country provided a guarantee to the
refinery to help it out with all payments, the refinery is a going
concern despite poor financial position, since it has a support
of the country's government.
(iii) A bank is in serious financial troubles and the government is
not willing to bail it out. The Board of Directors has passed a
resolution to liquidate the business. The bank is not a going
concern.
(iv) A merchandising company has a current ratio below 0.5. A
creditor of Rs. 5 crores demanded payment which the
company could not make. The creditor requested the court to
liquidate the business and recover his debts and the court
grants the order. The company is no longer a going concern.
(v) A company is having significant cash and bank balances but
does not carry any business activities. The net worth is
positive and there are no borrowings. The company is going
concern as there are no negative indicators.
However, under each of these cases, the auditor needs to review
the underlying facts so as to conclude on the use of going concern
basis of accounting in the preparation of financial statements.
2
Implementation Guide to SA 570(Revised)
1.4 The importance of `going concern' basis of accounting in
the preparation of financial statements can be gauged from the
fact that a number of important laws and regulations impose
specific responsibilities on managements as well as auditors in
relation to going concern. For example, Section 134(5) of the
Companies Act, 2013 inter alia requires the Board of Directors to
make a specific assertion in their Directors' Responsibility
Statement under this Section that the directors have prepared the
annual accounts on a going concern basis. Similarly, regulation
18(3) of the Securities and Exchange Board of India (SEBI)
(Listing Obligations and Disclosure Requirements) Regulations,
2015 envisages the Audit Committee had to review with
management that the annual financial statements and auditor's
report thereon before submission to the board for approval, with
particular reference to matters required to be included in the
director's responsibility statement to be included in the board's
report in terms of clause (c) of sub-section (3) of Section 134 of
the Companies Act, 2013 which requires the directors to make a
specific assertion that the annual accounts have been prepared
on a going concern basis of accounting.
1.5 This Implementation Guide provides a framework to assist
in determining whether the use of going concern basis of
accounting in preparation of the financial statements and the
related disclosures are appropriate and in making balanced,
proportionate and clear disclosures.
3
Chapter 2
The Implementation Guidance and
Suggested Questionnaire
2.1 Under the going concern basis of accounting, the financial
statements are prepared on the assumption that the entity is
viewed as a going concern and will continue its operations for the
foreseeable future. This Implementation Guide provides guidance
in relation to going concern considerations covering broadly the
following areas:
Accounting framework.
Evaluation of management's assessment of the entity's ability
to continue as a going concern.
Events or conditions that may cast significant doubts about
the entity's ability to continue as a going concern.
Determining the implications for the auditor's report when
reporting in accordance with the Standards on Auditing and
possible impact on reporting under section 143(3)(h) of the
Companies Act, 2013.
Consultation within audit team and with the
client/management/audit committee.
Reviewing interim financial information in accordance with the
Standard on Review Engagements.
2.2 Given below are the Responses on key issues
of SA 570(Revised) in a Question-Answer format.
Q.1 Who is responsible to assess the entity's ability to
continue as a going concern?
Ans.1: The assessment of an entity's ability to continue as a going
concern is the responsibility of the entity's management. The
auditor needs to evaluate management's assessment of the
entity's ability to continue as a going concern.
Implementation Guide to SA 570(Revised)
Q.2 Over what period is going concern assessed?
Ans.2: In evaluating management's assessment of the entity's
ability to continue as a going concern, the auditor shall cover the
same period as that used by management to make its assessment
as required by the applicable financial reporting framework, or by
law or regulation if it specifies a longer period. If management's
assessment of the entity's ability to continue as a going concern
covers less than twelve months from the date of the financial
statements as defined in SA 560, Subsequent Events, the auditor
shall request management to extend its assessment period to at
least twelve months from that date.
Q.3 What factors are taken into account by the
management when assessing the entity's ability to continue
as a going concern?
Ans.3: Management's assessment of the entity's ability to
continue as a going concern involves making a judgment, at a
particular point in time, about inherently uncertain future outcomes
of events or conditions. The following factors are relevant to that
judgment:
The degree of uncertainty associated with the outcome of an
event or condition increases significantly the further into the
future an event or condition or the outcome occurs. For that
reason, most financial reporting frameworks that require an
explicit management assessment specify the period for which
management is required to take into account all available
information.
The size and complexity of the entity, the nature and condition
of its business and the degree to which it is affected by
external factors affect the judgment regarding the outcome of
events or conditions.
Any judgment about the future is based on information
available at the time at which the judgment is made.
Subsequent events may result in outcomes that are
inconsistent with judgments that were reasonable at the time
they were made.
5
Implementation Guide to SA 570(Revised)
Q.4 What evidence does Management normally consider
when assessing the entity's ability to continue as going
concern?
Ans.4: The evidence normally considered by management when
assessing the entity's ability to continue as going concern
includes:
Cash flow projections that show an ability to pay debts as and
when they fall due after factoring realistic assumptions in the
current market conditions.
If current conditions deteriorate further, detailed business
plans covering the period under consideration.
Support for the entity's ability to obtain new funding upon the
maturity of existing funding arrangements.
Evidence that debt covenants have been assessed and any
risk of breaching them has been managed, such that they do
not provide significant risk.
Management may consider having support of `Support Letter'
from the parent company for financial support for the next
twelve months, as required, from the date of the latest
balance sheet.
In an unlikely situation, Support Letter may be given by the
government or any other financial situation as well; however,
this is a rare phenomenon. However, a mere "Support Letter"
or "Comfort Letter" will generally not constitute sufficient and
appropriate audit evidence to conclude on appropriateness of
management's use of going concern basis of accounting.
Where an auditor relies on a "support letter" as an evidence,
he/ she should also evaluate the financial strength and
capability of the parent company (Group company) issuing
support letter to be able to discharge liabilities of the
company. A standard template of Support Letter is given in
Annexure II of this Implementation Guide.
6
Implementation Guide to SA 570(Revised)
Q.5 What are the auditor's responsibilities for assessing
the entity's ability to continue as going concern?
Ans.5: The auditor's responsibilities are:
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;
To conclude, based on the audit evidence obtained, whether
a material uncertainty exists about the entity's ability to
continue as a going concern.
These responsibilities exist even if the financial reporting
framework used in the preparation of the financial statements
does not include an explicit requirement for management to make
a specific assessment of the entity's ability to continue as a going
concern.
Q.6 What should auditor do if management has not
performed a preliminary assessment of the entity's ability to
continue as going concern?
Ans.6: In such a situation, the auditor needs to:
discuss with management the basis for the intended use of
the going concern basis of accounting.
inquire of management whether events or conditions exist
that, individually or collectively, may cast significant doubt on
the entity's ability to continue as a going concern.
Further, the auditor should remain alert throughout the audit for
audit evidence of events or conditions that may cast significant
doubt on the entity's ability to continue as a going concern.
Q.7 How should auditor evaluate management's
assessment of going concern?
Ans.7: In evaluating management's assessment of the entity's
ability to continue as going concern, the auditor would cover the
7
Implementation Guide to SA 570(Revised)
same period as that used by management to make its assessment
as required by the applicable financial reporting framework, or by
law or regulation if it specifies a longer period. The period of
assessment would be of at least twelve months from the date of
the financial statements. In case the period of assessment is less
than that, the auditor would request the management to cover at
least a 12 months period.
The auditor's procedures for evaluating management's
assessment of going concern would also include:
Ensuring management's assessment includes all relevant
information of which the auditor is aware as a result of the
audit.
Q.8 What are the responsibilities of auditor for the period
beyond management's assessment?
Ans.8: The auditor needs to inquire of management as to its
knowledge of events or conditions beyond the period of
management's assessment that may cast significant doubt on the
entity's ability to continue as a going concern.
Q.9 What are the Additional Audit Procedures to be
performed When Events or Conditions that may cast
significant doubt on the entity's ability to continue as going
concern are identified?
Ans.9: In such a scenario, the auditor needs to perform additional
audit procedures to obtain sufficient appropriate audit evidence to
determine whether or not a material uncertainty exists related to
events or conditions that may cast significant doubt on the entity's
ability to continue as a going concern. In doing so, the auditor
would also need to take into consideration, the mitigating factors,
if any. These procedures include:
Where management has not yet performed an assessment of
the entity's ability to continue as a going concern, requesting
management to make its assessment.
Evaluating management's plans for future actions in relation
to its going concern assessment, whether the outcome of
these plans is likely to improve the situation and whether
management's plans are feasible in the circumstances.
8
Implementation Guide to SA 570(Revised)
Where the entity has prepared a cash flow forecast, and
analysis of the forecast is a significant factor in considering
the future outcome of events or conditions in the evaluation of
management's plans for future action:
o Evaluating the reliability of the underlying data generated
to prepare the forecast; and
o Determining whether there is adequate support for the
assumptions underlying the forecast.
Considering whether any additional facts or information have
become available since the date on which management made
its assessment.
Requesting written representations from management
regarding their plans for future action and the feasibility of
these plans.
Q.10 What should auditor do when use of Going Concern
Basis of Accounting is Appropriate but a Material Uncertainty
Exists?
Ans.10: In such a situation, the disclosure made by the entity in
its financial statements become very important. The auditor
should, therefore, determine whether the financial statements:
Adequately describe the principal events or conditions that
may cast significant doubt on the entity's ability to continue as
a going concern and management's plans to deal with these
events or conditions; and
Disclose clearly that there is a material uncertainty related to
events or conditions that may cast significant doubt on the
entity's ability to continue as a going concern and, therefore,
that it may be unable to realize its assets and discharge its
liabilities in the normal course of business.
For the above purpose the fact whether the information explicitly
draws the readers' attention to the possibility that the entity may
be unable to continue realizing its assets and discharging its
liabilities in the normal course of business, would be an important
factor for the auditor.
9
Implementation Guide to SA 570(Revised)
The auditor is also required to determine whether disclosures
about a material uncertainty, required by the applicable financial
reporting framework, are adequate. Disclosures required by some
financial reporting frameworks that are in addition to matters set
forth above may include disclosures about:
Management's evaluation of the significance of the events or
conditions relating to the entity's ability to meet its obligations;
or
Significant judgments made by management as part of its
assessment of the entity's ability to continue as a going
concern.
Q.11 What should auditor do if Events or Conditions Have
Been Identified but no Material Uncertainty Exists?
Ans.11: If events or conditions have been identified that may cast
significant doubt on the entity's ability to continue as a going
concern but, based on the audit evidence obtained the auditor
concludes that no material uncertainty exists, the auditor shall
evaluate whether, in view of the requirements of the applicable
financial reporting framework, the financial statements provide
adequate disclosures about these events or conditions.
Q.12 What are the auditor's reporting responsibilities if the
auditor concludes that a material uncertainty exists and
adequate disclosure of material uncertainty is made in the
financial statements?
Ans.12: In such a situation the auditor would express an
unmodified opinion on the financial statements. However, his
report would also need to include a separate paragraph on
"Material Uncertainty related to going concern". This paragraph
would:
Highlight the existence of a material uncertainty relating to the
event or condition that may cast significant doubt on the
entity's ability to continue as a going concern.
Draw attention to the note in the financial statements that
discloses the matters.
10
Implementation Guide to SA 570(Revised)
An example of such wording for paragraph that may be included
on `Material Uncertainty related to Going Concern' has been given
in Annexure I, Part A of this Implementation Guide.
Q.13 How should auditor report if a material uncertainty
exists and adequate disclosure in respect of material
uncertainty is not made in the financial statements?
Ans.13: In the absence of adequate disclosures in the financial
statements in respect of existence of material uncertainty relating
to going concern basis of accounting, the auditor would need to
express a qualified or an adverse opinion, as may be appropriate,
in terms of principles enunciated in SA 705 (Revised),
"Modifications to the Opinion in the Independent Auditor's Report".
The auditor's report should clearly state that there is a material
uncertainty that may cast significant doubt about the entity's ability
to continue as a going concern.
Examples for paragraph to be included in audit report for;
Qualified opinion and Adverse opinion, have been given in
Annexure I, Part B of this Implementation Guide.
Q.14 What should auditor do if Use of Going Concern Basis
of Accounting is Inappropriate?
Ans.14: If in the auditor's judgment, management's use of the
going concern basis of accounting in the preparation of the
financial statements is inappropriate, due to existing facts and
circumstances then the auditor shall express an adverse opinion.
For example
1. Company has passed a resolution to wind up its operations,
and still used going concern basis of accounting for
preparation of the financial statements, without disclosing the
facts in the financial statements. In such circumstances,
auditor would need to issue an adverse opinion.
2. The company's financing arrangements expire and amounts
outstanding are payable on 30 August 20XX. The company
has been unable to re-negotiate or obtain replacement
financing. This situation indicates the existence of a material
11
Implementation Guide to SA 570(Revised)
uncertainty which may cast significant doubt on the
company's ability to continue as a going concern and
therefore it may be unable to realise its assets and discharge
its liabilities in the normal course of business. The financial
statements (and notes thereto) do not disclose this fact. In
such circumstances, auditor would need to issue an adverse
opinion
Q.15 What should auditor do if management is Unwilling to
Make or Extend Its Assessment?
Ans.15: If management is unwilling to make or extend its
assessment when requested to do so by the auditor, the auditor
should consider the implications for the auditor's report. The
auditor might have to issue a qualified opinion or a disclaimer of
opinion, as considered appropriate, because it may not be
possible for the auditor to obtain sufficient appropriate audit
evidence regarding the management's use of going concern basis
of accounting in the preparation of the financial statements.
Q.16 What should be communicated to Those Charged with
Governance (TCWG) and when?
Ans.16: Unless all those charged with governance are involved in
managing the entity, the auditor needs to communicate with those
charged with governance events or conditions identified that may
cast significant doubt on the entity's ability to continue as a going
concern. Such communication with those charged with
governance includes the following:
Whether the events or conditions constitute a material
uncertainty;
Whether the management's use of the going concern basis of
accounting is appropriate in the preparation of the financial
statements;
The adequacy of related disclosures in the financial
statements; and
Where applicable, the implications for the auditor's report.
Generally, a meeting of the audit committee is not held in the
interim except when it meets to approve the quarterly results and/
12
Implementation Guide to SA 570(Revised)
or annual financial statements. At that meeting, auditors' report
(with the going concern matter) should be placed before Those
Charged with Governance. However, if considered, appropriate,
the auditor may communicate with Those Charged with
Governance before such a meeting of the Audit Committee.
Q.17 What should the auditor do if there is Significant Delay
in the Approval of Financial Statements?
Ans.17: In such cases, the auditor should inquire as to the
reasons for the delay. If delay relates to events or conditions
relating to the going concern assessment, the auditor should
perform additional audit procedures as necessary as well as
consider the effect on the auditor's conclusion regarding the
existence of a material uncertainty, as listed in paragraphs 16 and
18 of SA 570 (Revised).
Q.18 An Interim Resolution Professional (IRP) has been
appointed under the provisions of Insolvency and Bankruptcy
Code, 2016 as the Corporate Insolvency Resolution Process
(CIRP) has been initiated by an order of NCLT. Accordingly,
the affairs of the Company are being managed by an IRP. The
auditor has asked the IRP to provide with management's
assessment of the entity's ability to continue as a going
concern. The IRP provides with the assessment for a period
of 180 days from beginning of CIRP period stating that he has
been appointed for such period. What are the auditor's
responsibilities under such circumstances?
Ans.18: The timing of 12 months period for assessment of a going
concern under SA 570(Revised) cannot be compared with
180/270 days of CIRP period as it will depend from which date the
CIRP period will commence, e.g. if CIRP period starts from 1st
January, auditor may have to assess the assumption of going
concern for 31st March accounts. In other words, the period of
CIRP and assessment period for going concern has no relevance.
So, the auditor may seek sufficient information from the IRP for his
assessment of going concern. The IRP based on availability of
information and his own assessment can furnish the relevant
13
Implementation Guide to SA 570(Revised)
details to the auditor. The auditor would have to examine
independently based on the information available as to whether he
is satisfied or not and then decide the nature of report like
qualified or adverse or disclaimer.
In nutshell, the IRP has to furnish information to the extent
possible for him and the auditor has to make an independent
assessment for going concern. The period has no relevance.
Q.19 The IRP of a company under CIRP contends that as
per Section 20(1) of IBC 2016, an Interim Resolution
Professional shall manage the operations of the Corporate
Debtor as a going concern. Further as per Section 25(1) of the
IBC 2016, it shall be the duty of the IRP to ensure continued
business operations of the corporate debtor and accordingly,
the auditor should not challenge the use of going concern
basis of accounting.
Ans.19: The provisions of IBC 2016 do not affect the auditor's
responsibility as per SA 570(Revised). Accordingly, the auditor
should perform procedures as described in Question 9 above.
Auditor should evaluate impact on auditor's report in accordance
with paragraphs 21, 22, 23 and 24 of SA 570(Revised).
Q.20 The auditor argues that since there are no apparent
indicators that going concern basis of accounting is not
justified, there is no need for any documentation regarding
Going Concern.
Ans.20: As per SA 700(Revised), the auditor's responsibility in
the Auditor's Report include an explicit statement by the auditor to
"Conclude on the appropriateness of management's use of the
going concern basis of accounting and, based on the audit
evidence obtained, whether a material uncertainty exists related to
events or conditions that may cast significant doubt on the
Company's ability to continue as a going concern."
Accordingly, the auditor should document in his/ her working
papers the basis for such conclusion and evidence obtained. This
may be done by completing Section A of the Suggested Checklist
included in this Implementation Guide.
14
Implementation Guide to SA 570(Revised)
Q.21 Is Emphasis of Matter Paragraph (EOM) also required
to be given for the situation where the auditor is required to
give Separate Paragraph on "Material Uncertainty Related to
Going Concern" to highlight material uncertainty" as per SA
570 (Revised).
Ans.21: In situations which warrant separate Paragraph on
"Material Uncertainty Related to Going Concern" (See Q12 above)
as per SA 570(Revised), auditor is not required to give EOM
paragraph.
Q.22 Is including Material Uncertainty Related to Going
Concern as a Key Audit Matter as per SA 701 sufficient
compliance with the requirements of SA 570(Revised)?
Ans.22: As per Paragraph 4 of SA 701, "Communicating Key Audit
Matters in the Independent Auditor's Report", communicating key
audit matters is not a substitute for reporting in accordance with
SA 570(Revised) when a material uncertainty exists relating to
events or conditions that may cast significant doubt on an entity's
ability to continue as a going concern. Accordingly, separate
paragraph as per SA 570(Revised) should be given.
15
Chapter 3
Template for Checklists for Evaluating
Management's Use of Going Concern
Basis of Accounting
An entity's continuance as a going concern for the foreseeable
future is assumed in the preparation of financial statements in the
absence of significant information to the contrary. Accordingly,
assets and liabilities are recorded on the basis that the entity will
be able to realize its assets and discharge its liabilities in the
normal course of business. If this assumption is unjustified, the
amounts and classification of assets and liabilities in the financial
statements may need to be adjusted. A detailed analysis for
testing of related indicators regarding uncertainty of going concern
consideration is briefly enumerated in the below checklist:
Going-Concern Consideration Program
Particulars Going
concern
indicator
present
(Yes/No/Not
Applicable
and
References,
if any)
A: Going Concern Considerations
1. Consider whether there is a risk that the
entity will not continue as a going concern for
the foreseeable future:
Consider Financial Indications
Recurring operating losses.
Negative Net Worth.
Implementation Guide to SA 570(Revised)
Working capital deficiencies.
Continuing negative cash flows from
business activities.
Excessive reliance on short-term
borrowings to finance long-term assets.
Adverse key financial ratios.
Inability to pay creditors on due dates.
Default on loans or similar agreements.
Restrictions on usual trade terms.
Restructuring of debt.
Entered into any arrangement with
creditors for reduction of payment.
Arrears or discontinuance of dividends.
Excessive or obsolete stock.
Unable to obtain finance for new product
development or essential investment.
Need to seek new sources or methods of
financing, or fixed-term borrowings
approaching maturity without realistic
prospects of renewal or repayment.
Need to dispose of substantial assets.
Application filed against Corporate Debtor
in NCLT under IBC 2016.
Sick entity under any statutory definition.
Consider Operating Indications
Loss of key management or staff.
Work stoppages or other labor difficulties.
Substantial dependence on the success of
a particular project or on a particular
asset.
Management intentions to liquidate the
entity or cease operations.
Emergence of a highly successful
competitor.
17
Implementation Guide to SA 570(Revised)
Excessive reliance on the success of a
new product.
Uneconomic long-term commitments.
Loss of a major market or principal
supplier.
Loss of a key franchise, license, or patent.
Consider Other Indications
Noncompliance with capital or other
statutory requirements.
Pending legal proceedings or similar
matters that might jeopardize an entity's
ability to operate.
Changes in or establishment of new
legislation or government policy.
Technical developments that render a key
product obsolete.
B: Consideration of Management's Assessment
1. Evaluate management's assessment of the
entity's ability to continue as a going
concern. (The auditor should consider the
same period as that used by management in
making its assessment under the applicable
financial reporting framework. If
management's assessment of the entity's
ability to continue as a going concern covers
less than twelve months from the balance
sheet date, the auditor should request
management to extend its assessment
period to twelve months from the balance
sheet date.)
2. Inquire of management as to its knowledge
of events or conditions and related business
risks beyond the period of assessment used
by management that may cast significant
doubt on the entity's ability to continue as a
going concern.
18
Implementation Guide to SA 570(Revised)
3. Evaluate the information obtained above in
conjunction with other information obtained
throughout the audit that may impact
auditor's assessment of the appropriateness
of the management's use of the going
concern basis of accounting.
C: Consideration of Management's Plans
1. If, after considering the identified conditions
and events in the aggregate, the auditor
believes that continuance as a going concern
may be questionable, he/she should consider
management's plans for dealing with the
adverse effects of the identified conditions
and events and assess the likelihood of
effective implementation thereof.
2. Obtain information about management's
plans and consider whether it is likely that the
adverse effects will be mitigated for the
foreseeable future. Evaluate the likelihood of
effective implementation of such plans.
Plans that the auditor would consider and
discuss with management may include:
Plans to dispose of assets.
Plans to borrow money or restructure
debt.
Plans to reduce or delay expenditures.
Plans to increase revenues more than
increases in related costs and
expenses.
Plans to increase ownership equity.
3. Consider the bases on which the plans have
been prepared, giving consideration as to
whether they conform with facts already
known and to available independent
evidence.
19
Implementation Guide to SA 570(Revised)
4. Carry out additional procedures to update
information obtained earlier.
Such procedures may include:
Analysis and discussion of cash flow,
profit, and other relevant forecasts with
management.
Review of events after the balance-sheet
date for items affecting the entity's ability
to continue as a going concern.
Analysis and discussion of the entity's
latest available interim financial
statements.
Review of the terms of debentures and
loan agreements and determination
whether any have been breached.
Reading of minutes of the meetings of
shareholders, board of directors, and
other important committees for reference
to financing difficulties.
Request for information on relevant
material legal matters from the entity's
legal counsel.
Confirmation of the existence, legality,
and enforceability of arrangements to
provide or maintain financial support with
related and third parties, and assessment
of the financial ability of such parties to
provide additional funds.
Consideration of the entity's position
concerning unfilled customer orders.
Obtaining written representation from
management concerning plans for future
action whose outcome is expected to
mitigate the situation.
20
Implementation Guide to SA 570(Revised)
5. Obtain written confirmation of the
corresponding representations by the
management.
6. When prospective financial information is
particularly significant to management's
plans, consider, based on the auditor's
knowledge of the entity, its business and
management, the adequacy of support for
significant assumptions underlying that
information. Compare the prospective data
for recent prior periods with historical results
and the prospective data for the current
period with results achieved to date.
Consider the reliability of the entity's system
for generating such information and give
particular attention to assumptions that are:
Material to the prospective financial
information.
Especially sensitive or susceptible to
change.
Inconsistent with historical trends.
D Management Representation
1. When additional disclosures are made in the
financial statements relating to the entity's
ability to continue as a going-concern, obtain
a specific management representation stating
that the disclosures contain all of the
pertinent facts.
2. Consider whether particular matters need to
be represented by management related to
the considerations of the entity's ability to
continue as a going concern.
E Consideration of Effects on the Financial
Statements.
21
Implementation Guide to SA 570(Revised)
1. If, after considering management's plans, the
auditor concludes that the going-concern
question is not satisfactorily resolved, the
auditor would consider the possible effects
on the financial statements and ensure the
adequacy of the related disclosure. The
disclosure should:
Describe the principal conditions and
events that raised doubt about the entity's
ability to continue as a going concern for
the foreseeable future.
Describe the possible effects of such
conditions and events and management's
evaluation of the significance of those
conditions.
Describe any mitigating factors and the
management's plans (including relevant
prospective financial information).
State that there are doubts that the entity
will be able to continue as a going
concern and, therefore, may be unable to
realize its assets and discharge its
liabilities in the normal course of
business.
State that the financial statements do not
include any adjustments relating to the
recoverability and classification of
recorded asset amounts or to amounts
and classification of liabilities that may be
necessary should the entity be unable to
continue as a going concern.
2. If the auditor concludes that management's
use of the going concern basis of accounting
22
Implementation Guide to SA 570(Revised)
is appropriate because of mitigating factors
(in particular management's plans for future
action), evaluate the need for disclosure of
the principal conditions and events that
initially caused the substantial doubt.
Disclosure considerations include the
possible effects of such conditions and
events and any mitigating factors, including
management's plans.
F: Consultation
1. If the auditor concludes that an entity's
continuance as a going concern for the
foreseeable future is questionable, consider
consultation within the firm to consider
management's plans or representations and
financial statement effects.
G: Accounting Policies and Disclosures
1. Consider whether the presentation of the
financial statements conforms with
professional standards and the applicable
legal or regulatory requirements. Consider
whether:
Material transactions or items may
require separate disclosure.
Accounting policies used in the financial
statements are appropriate and are
consistent with prior periods.
Balances and associated footnote
disclosures are presented in accordance
with the accounting policies.
H: Conclusion:
Based on the tests performed and
responses as noted above, a conclusion
may be drawn whether management's
23
Implementation Guide to SA 570(Revised)
use of the going concern basis of
accounting is appropriate.
Also give reference to the type of audit
report that may be issued based on the
conclusion drawn under this section
(Refer Annexure I for audit report
format).
24
Chapter 4
Practical Case Studies and
Illustrative Examples
Section A Case Studies
Case Study 1: Going Concern Audit Report
You are the audit manager responsible for performing hot reviews
on audit files where there is a potential disagreement between
your firm and the client regarding a material issue. You are
reviewing the going concern section of the audit file of Sunshine
Ltd, a client with considerable cash flow difficulties, and other, less
significant operational indicators of going concern problems. The
working papers indicate that Sunshine Ltd is currently trying to
raise finance to fund operating cash flows, and state that if the
finance is not received, there is significant doubt over the going
concern status of the company. The working papers conclude that
the going concern basis of accounting is appropriate, but it is
recommended that the financial statements should contain a note
explaining the cash flow problems faced by the company, along
with a description of the finance being sought, and an evaluation
of the going concern status of the company. The directors do not
wish to include the note in the financial statements.
Identify and discuss the implications for the audit report if:
(i) the directors refuse to give the disclosure note.
(ii) the directors agree to give the disclosure note.
Suggested Response
i) The Directors refuse to give the disclosure note:
The audit report should contain a qualified or an adverse opinion
due to the disagreement. The auditors need to make a decision as
to the significance of the non-disclosure of the uncertainty
Implementation Guide to SA 570(Revised)
surrounding going concern basis of accounting. If it is decided that
without the note the financial statements are not fairly presented,
and could be considered misleading, an adverse opinion should
be expressed.
ii) The Directors agree to give the disclosure note:
If the directors agree to give the disclosure note, it should be
reviewed by the auditors to ensure that it is sufficiently detailed. In
evaluating the adequacy of the disclosure in the note, the auditor
should consider whether the disclosure explicitly draws the
reader's attention to the possibility that the entity may not be able
to continue as a going concern in the foreseeable future. The note
should include a description of conditions giving rise to significant
doubt, and the directors' plans to deal with the conditions. If the
disclosure is considered adequate, then the opinion should not be
qualified. The auditors should, however, consider adding a section
on "Material Uncertainty Related to Going Concern" in accordance
with SA 570(Revised) to highlight the existence of the material
uncertainties, and to draw attention to the note to the financial
statements. The section should firstly contain a brief description of
the uncertainties, and also refer explicitly to the note to the
financial statements where the situation has been fully described.
The section should re-iterate that the audit opinion is not qualified.
However, it could be the case that a note has been given in the
financial statements, but that the details are inadequate and do
not fully explain the significant uncertainties affecting the going
concern status of the company. In this situation the auditors
should express a qualified opinion. The auditor, however, may
also consider expressing an adverse opinion, if it is warranted
under the circumstances based on the auditor's professional
judgment.
Case Study 2: Going Concern Audit Report
XYZ Inc. is a manufacturer of televisions. The domestic market for
electronic goods is currently not doing well, and therefore many
entities in this business are switching to exports. As per the
audited financial statements for the year ended March 31, 20XX,
the entity had net losses of Rs.120 million. At March 31, 20XX, its
26
Implementation Guide to SA 570(Revised)
current assets aggregate to Rs.1,200 million and the current
liabilities aggregate to Rs.1,500 million. Due to expected favorable
change in the government policies for the electronic industry, the
entity is projecting profits in the coming years. Furthermore, the
shareholders of the entity have arranged alternative additional
sources of finance for its expansion plans and to support its
working capital needs in the next 12 months.
Required
Should XYZ Inc. prepare its financial statements under the going
concern basis of accounting considering management's
assessment for next twelve months?
Suggested Response
In this case, the two factors that raise doubts about the entity's
ability to continue as a going concern are:
The net loss for the year amounting to Rs.120 million.
The working capital deficiency (current liability of Rs.1,500
million Less: current assets of Rs.1,200 million) of Rs.300
million existing at the balance sheet date.
However, there are two mitigating factors:
The arrangements made by the shareholders to fund the
entity's expansion and working capital needs; and
Projected future profitability due to expected favourable
changes in government policies for the industry the entity is
operating in.
Based on these sets of factors, it may be possible for the
management of the entity to argue that the going concern basis of
accounting is appropriate and that any other basis of presentation
of financial statements would be unreasonable at the moment.
If the auditor concludes based on available evidence including
reasonability of future profitability that there is no material
uncertainty related to going concern for at least next twelve
months, there is no need to include section on "Material
Uncertainty Related to Going Concern. It is, however,
27
Implementation Guide to SA 570(Revised)
recommended to include a suitable note in the financial
statements.
However, if matters deteriorate further instead of improving, then
in the future another detailed assessment would be needed to
ascertain whether the going concern basis of accounting is still
valid and accordingly suitable disclosure may be made in the
financial statements and the same shall be considered by the
auditor vis a vis need to include a section on "Material Uncertainty
Related to Going Concern" or Qualified or Adverse Opinion, as the
case may be.
Case Study 3: Going Concern Basis of Accounting is
not appropriate
ABC Ltd is a company which is into manufacturing of Yarn with
two working Directors on Board each holding fifty percent equity.
The Company was incorporated five years back. There was a
dispute among both Directors and due to which both directors filed
for liquidation of company. The Company has sufficient assets
including movable and immovable assets to pay off the liabilities
of the company. Liquidation process is at initial stage. What
disclosures are required in the financial statements and audit
report of the company?
Suggested Response
In the present scenario, as the Company has initiated liquidation
process, it is no longer a Going Concern. Accordingly, the
financial statements cannot be prepared using the going concern
basis of accounting. In case, the financial statements have been
prepared using the going concern basis of accounting, the auditor
shall express an adverse opinion as per paragraph 21 of SA 570
(Revised).
In case the financial statements are prepared on an alternative
basis (e.g. Liquidation basis), the auditor may be able to perform
an audit of those financial statements provided that the auditor
determines that such alternative basis is an acceptable financial
reporting framework in the circumstances. The auditor may be
able to express an unmodified opinion on those financial
28
Implementation Guide to SA 570(Revised)
statements, provided there is adequate disclosure therein about
the basis of accounting on which the financial statements are
prepared, but may consider it appropriate or necessary to include
an Emphasis of Matter paragraph in accordance with SA 706
(Revised) in the auditor's report to draw the user's attention to that
alternative basis of accounting and the reasons for its use.
(Paragraph A27 of SA 570(Revised)).
Case Study 4: Start Up Company incurring losses
A Start-up company is into manufacturing of E-Motor Bikes and E-
Rickshaws has been setup during the year. The Company has a
share capital of Rs. 1 lakhs and unsecured loans of Rs 500 lakhs.
During the year, the Company incurred loss of Rs. 50 lakhs. The
unsecured loan has been granted by the promoter of company
from his savings and by mortgaging his assets and taking loans
from banks and financial institutions in his personal capacity.
Company is ready with the designs of products but is short of
funds to launch the product and for marketing. Bankers have
refused to provide finance. The promoter is discussing funding
from PE investors and is hopeful of getting P/E investment for the
project. How should the auditor gather sufficient and appropriate
audit evidence to conclude on appropriateness of going concern
basis of accounting? What disclosures need to be made in the
financial statements and audit report?
Suggested Response
In the present scenario, there are indicators that the going
concern basis of accounting may not be appropriate. However, the
auditor may consider the following:
(i) The Company is a start-up and this is the first year of
operations. The auditor should consider normal gestation
period in similar industries.
(ii) The auditor should consider any available tax benefits,
subsidy, other benefits available from governments.
(iii) The auditor may consider finance available to similar start-ups
or companies in similar segment.
29
Implementation Guide to SA 570(Revised)
(iv) The auditor should obtain future projections with projected
cash flows including means of financing.
(v) The auditor should obtain evidence to support future
projections and cash flows which may include orders/
enquiries from prospective customers, evidence of
negotiations with potential investors, feasibility studies,
market research, etc.
(vi) The auditor may consider option available with the company
of converting loan from promoter into equity.
Considering the facts, a material uncertainty exists regarding
going concern basis of accounting. However, the auditor will need
to exercise his professional judgement considering available
evidence including its reliability and sufficiency to conclude
whether going concern basis of accounting is appropriate.
Accordingly, disclosures in financial statements and implications
on audit report will be dependent on auditor's conclusion.
Case Study 5: Comfort Letter by promoters
A company is an exclusive seller in the country for retail sale of
imported branded garments and was setup two years ago having
share capital of Rs. 1 lakhs and unsecured loans of Rs 200 lakhs
has accumulated losses of Rs.50 lakhs. The unsecured loan has
been granted by the promoter of company along with his family.
The Company is having negative net-worth and negative working
capital. The promoters have sufficient net worth and have plans to
invest in the business in future.
How should the auditor gather sufficient and appropriate audit
evidence to conclude on appropriateness of going concern basis
of accounting? What disclosures need to be made in the financial
statements and audit report?
Suggested Response
The auditor should obtain and review management's assessment
of going concern basis of accounting, which includes:
Cash flow projections.
30
Implementation Guide to SA 570(Revised)
Detailed business plan covering the period of assessment.
Support for the entity's ability to obtain new funding.
The auditor may obtain a "Support Letter" from the promoter for
financial support for at least next twelve months. In case of a
support letter, auditor should assess intent and capability of
promoters to provide financial support.
However, in the present circumstances, material uncertainty
exists. Accordingly, the financial statements should include
adequate disclosures including availability of financial support
from promoters. The auditor should report under a separate
paragraph "Material Uncertainty Related to Going Concern" if
adequate disclosures have been given in the financial statements.
Case Study 6: Business Losses and no future business
plans
XYZ Inc. is in business of real estate. Post Demonetization and
introduction of GST, there was a recession in real estate sector
due to significant dip in demand and liquidity crisis in economy.
The Company is facing cash flow problems. The Company has
huge unsold semi-finished and finished inventory in its books of
accounts. As on date of balance sheet, management did not have
any concrete future orders in hand and did not have any realistic
future plans.
What disclosures need to be made in the financial statements and
audit report?
Suggested Response
In the present scenario, it is evident that the use of going concern
basis of accounting is not appropriate. Accordingly, the financial
statements cannot be prepared using the going concern basis of
accounting. In case, the financial statements have been prepared
using the going concern basis of accounting, the auditor shall
express an adverse opinion as per paragraph 21 of SA 570
(Revised).
In case the financial statements are prepared on an alternative
basis (e.g. Liquidation basis), the auditor may be able to perform
31
Implementation Guide to SA 570(Revised)
an audit of those financial statements provided that the auditor
determines that such alternative basis is an acceptable financial
reporting framework in the circumstances. The auditor may be
able to express an unmodified opinion on those financial
statements, provided there is adequate disclosure therein about
the basis of accounting on which the financial statements are
prepared, but may consider it appropriate or necessary to include
an Emphasis of Matter paragraph in accordance with SA 706
(Revised) in the auditor's report to draw the user's attention to that
alternative basis of accounting and the reasons for its use.
(Paragraph A27 of SA 570(revised)).
Section B Other Illustrative Examples
Illustrative Examples of the Auditor's Assessment of Whether
Evidence Provided by Those Charged with Governance,
Concerning the Attention They Have Paid to the Period of
One Year from the Date of the Financial Statements, is
Sufficient.
The examples given below are illustrative only. The purpose of the
examples is to illustrate the application of the SA 570(Revised) to
assist in clarifying their meaning in a number of commercial
situations. These 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
management's or auditor's assessment of the appropriateness of
the going concern basis. As the auditor would need to exercise
judgment in the circumstances described, it is possible that
different auditors may arrive at different conclusions. These
examples neither modify nor override the related Standards on
Auditing.
Example 1 - A small company producing specialized
computer application software
Corollary from the auditor's risk assessment (Read with
paragraph 10-11 of SA 570 Revised)
This owner managed company employs a few highly trained and
highly paid computer system designers to design application
32
Implementation Guide to SA 570(Revised)
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 for developing new products. In addition, the
time needed to develop individual systems relating to an
established product can be considerable. In addition to designing
new systems, the company maintains those systems that 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 capitalized 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 utilize to overcome short term cash shortages.
33
Implementation Guide to SA 570(Revised)
Assessment by the auditor
When the auditor assesses whether the directors have, in
assessing going concern, paid particular attention to a period of
one year from the date of the financial statements, the auditor:
(a) Reviews the cash flow forecasts for the six-month period from
the date of the financial statements; and
(b) Enquires the directors about the steps they have taken to
assess the appropriateness of the going concern basis for the
subsequent six-month period.
The directors inform the auditor 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 auditor concludes that the directors have paid particular
attention to the period ending one year after their approval of the
financial statements.
34
Implementation Guide to SA 570(Revised)
Example 2 - An enterprise in the fashion (or seasonal)
industry
Corollary from the auditor's risk assessment (Read with
paragraph 10-11 of SA 570 Revised)
This company employing 1,000 people designs and manufactures
ladies fashion wear. 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, a 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 six persons. 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 30th June and the directors expect to approve the
financial statements during October. Detailed cash flow forecasts
are only available up to the end of February in the following year,
i.e., 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.
Assessment by the auditor
When the auditor assesses whether the directors have, in
assessing going concern, paid particular attention to a period of
one year from the date of the financial statements the auditor
would:
35
Implementation Guide to SA 570(Revised)
(a) Review the cash flow forecasts for the four-month period from
the date 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 auditor 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 auditor concludes that the directors have paid particular
attention to the period ending one year after their approval of the
financial statements.
The two examples above illustrate that the auditor may conclude
that the directors have paid particular attention to the period
36
Implementation Guide to SA 570(Revised)
ending one year after the approval of the financial statements,
even though they have not prepared cash flow forecasts for that
period.
The auditor may conclude differently in other 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 auditor needs to consider the impact on the auditor's
report which may be either:
(a) The auditor may conclude that there is a significant level of
concern about the entity's ability to continue as a going
concern (but the auditor does not disagree with the use of the
going concern basis). In which case the directors include a
note to the financial statements and the auditor includes a
section on "Material Uncertainty related to Going Concern (in
accordance with paragraph 22 of SA 570(Revised); or
(b) The auditor 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 auditor need not refer to the period in
the basis of opinion; however
(ii) If the directors do not refer to the period paid particular
attention to, the auditor would do so in the auditors' report
in accordance with paragraph 24 and A35 of SA 570
(Revised); or
(c) The auditor may conclude that the directors have not taken
adequate steps to satisfy themselves that it is appropriate to
adopt the going concern basis of accounting. Accordingly,
there is a limitation of scope which gives rise to a qualified or
adverse opinion in the auditor's report in accordance with
paragraph A32 of SA 570 (Revised).
37
Implementation Guide to SA 570(Revised)
Example 3 - A big company in manufacturing industry, at
start up stage with certain facilities in project stage
Corollary from the auditor's risk assessment (Read with
paragraph 10-11 of SA 570 Revised)
This company is a subsidiary of a multinational group and has two
manufacturing plants, located at different places. The company
employing around 3,000 people in both the units directly on its
payroll and further deployed around 10,000 people through
various contractors. The employment of the people considered to
be in equal proportion among the two units. One unit (Unit A) of
the company manufactures product which is a raw material for the
other unit (Unit B).
The company has made huge investments for establishing
facilities at both the units running in thousands of million dollars.
For Unit A, the company is facing lot of hurdles and construction
of facilities at the unit had to stop due to various related statutory
and environmental clearances from certain authorities. However,
the construction work at Unit B is completed and it is in running
condition post trial run based on purchased raw material from
other sources from domestic and international market, since there
are uncertainty for the start of construction work at Unit A in next
six months and further expects to get the production from Unit A
within twelve month from the date of start of construction work.
The company is hopeful that within the next six months, all the
pending statutory and environmental clearance would be obtained
for smooth operation. Until then and till the commencement of
production at Unit A, the management expects that Unit B would
continue its operation in this manner based on procured raw
materials though it is costlier than the in-house production of raw
materials.
Assessment by the auditor
When the auditor evaluates whether the management have, in
assessing going concern, paid particular attention to a period of
one year from the date of the financial statements the auditor:
38
Implementation Guide to SA 570(Revised)
(a) Reviewed the cash flow forecasts for the twelve-month period
from the period end date for the financial statements; and
(b) Then enquired the management the steps it has taken to
assess the appropriateness of the going concern basis for the
subsequent periods.
The management informed the auditor that they do not consider
there is any need for additional cash flow forecasts to be prepared
beyond the end of twelve-month period from the period end date
for the financial statements for current year because of:
The cash flow forecasts that show a net cash inflow for the
period and the present cash position is strong because of a
recent sale of debtors.
Sanction of large long-term loans from the lead banker with
repayment terms starting in next 3-4 years.
Infusion of long-term loans from certain group company with
repayment terms starting in next 3-4 years.
Conversion of payment for creditors into long term buyer's
credit facilities from the banks with option to rollover for
maximum period available as per banking rules (e.g., three
years from the date of shipment).
Sanction of bill discounting limit with the bankers for the sale
contracts.
Various long-term sale contracts in place.
Based on the above facts, there may not be a prima facie going
concern issue.
However, based on the audit evidence obtained, the auditor may
conclude there may still be significant uncertainties in execution of
the management's plan. In such scenarios, the auditor may
conclude that the management has taken adequate steps to
satisfy itself that it is appropriate to adopt the going concern basis
of accounting and may feel it appropriate to include a detailed
note in the financial statements. Further, the auditor should
include a separate section on "Material Uncertainty related to
Going Concern" in the audit report in accordance with SA
570(Revised)
39
Implementation Guide to SA 570(Revised)
Example 4 A company in sugar industry
There are several aspects which differentiate Sugar Industry from
any other normal manufacturing industry. Some of the peculiar
aspects are as follows:
Cyclicality in the business.
Government control on sugarcane procurement and several
stringent regulations on pricing of sugar and sugarcane.
Manufacturing process.
Sales pattern. (mostly unorganized despite huge
consumption)
Corollary from the auditor's risk assessment (Read with
paragraph 10-11 of SA 570 Revised)
The most peculiar aspect of sugar industry is its being seasonal in
nature and cyclical variations. The sugar industry goes through a
period of loss (when excess sugarcane is produced) and profit
(when there is shortage of sugarcane). Such cycle can be
understood with the following table.
Sugar Industry profit and loss making cycle
Increased sugarcane produced
Increase in sugar recovery
Higher sugar production
Increased availability of the sugar in
retail markets
Period of losses
Decline in sugar price
Reduced profitability
Delayed payment to farmers
High sugarcane arrears
Low area under cultivation
40
Implementation Guide to SA 570(Revised)
Low sugarcane produced
Decline in sugar recovery
Low sugar production
Increase in retail sugar prices
Period of profits
Improved profitability
Prompt payment to growers
Increased cash availability with growers
Increase in area under cultivation
The cycle time normally ranges from 4 to 5 years. To reduce the
effect of this cycle, now-a-days most of the new units are set-up
with a cogeneration of power and distillery unit, so that they can
be profitable even when the sugar unit is making loss.
Thus considering these peculiar aspects, it is important that any
auditor conducting audit of a sugar industry should clearly
understand the details of these processes so as to be able to
conduct effective audit and to obtain sufficient appropriate audit
evidence regarding compliance with the provisions of applicable
laws and regulations generally recognized to have a direct effect
on the determination of material amounts and disclosures in the
financial statements. Also, to perform specified audit procedures
to help identify instances of non-compliance with other laws and
regulations that may have a significant impact on the functioning
of the entity and conclusion drawn on their judgment for using the
going concern basis of accounting in the auditor's report. Refer
AnnexureI of this Implementation Guide for the format of various
types of audit reports that may be used based on facts as
applicable to the specific situation.
41
Annexure - I
An Illustrative Template for the Format of Auditor's
Report under Different Scenarios as Illustrated in
this Implementation Guide
Part A: An example of such wording for Section on "Material
Uncertainty related to Going Concern" in the auditor's report
is given below:
We draw attention to Note X of the financial statements which
indicates that the Company's net worth has got eroded as of
March 31, 20XX and the Company's current liabilities exceeded its
current assets. These conditions, along with other matters as
stated in said note, indicate that a material uncertainty exists that
may cast significant doubt on the Company's ability to continue as
a going concern. Our report is not modified in respect of this
matter.
Reporting under section 143(3)(h)
The matter described under material uncertainty related to Going
Concern paragraph may have an adverse effect on the functioning
of the Company.
Other reporting requirements under section 143(3) of the
Companies Act, 2013 have not been included.
Part B: An example of such wording for paragraph that may
be included in a qualified or adverse opinion, as appropriate
in the auditor's report:
(i) Qualified opinion
An example of such wording for paragraph that may be included
on qualified opinion in the auditor's report for `Disagreement on
Required Disclosures relating to Going Concern is given
below:
Qualified Opinion
We have audited the accompanying Financial Statements of XYZ
Limited ("the Company"), which comprise the Balance Sheet as at
Implementation Guide to SA 570(Revised)
March 31, 20XX, the Statement of Profit and Loss for the year
ended on that date, and the Statement of Cash Flows for the year
ended on that date, and a summary of the significant accounting
policies and other explanatory information (hereinafter referred to
as "financial statements").
In our opinion and to the best of our information and according to
the explanations given to us except for inadequate disclosure of
`Material Uncertainty Related to Going Concern' referred to in
the "Basis for Qualified Opinion" section of this report, the
aforesaid financial statements give a true and fair view in
conformity with Accounting Standards prescribed under section
133 of the Companies Act, 2013(`the Act') and other accounting
principles generally accepted in India, of the state of affairs of the
Company as at March 31, 20XX, the profit/ loss for the year ended
on that date and its cash flows for the year ended on that date.
Basis for Qualified Opinion
The Company's financing arrangements expired and the amount
outstanding to the tune of Rs......was payable on March 31,
20XX. The Company has been unable to re-negotiate or obtain
replacement financing and is considering filing an application
under Insolvency and Bankruptcy Code 2016. These events
indicate a material uncertainty that may cast significant doubt on
the Company's ability to continue as a going concern, and
therefore it may be unable to realize its assets and discharge its
liabilities in the normal course of business. The financial
statements (and notes thereto) do not disclose this fact.
Reporting under section 143(3)(h)
The matter described under basis for qualified opinion paragraph
may have an adverse effect on the functioning of the Company.
Other reporting requirements under section 143(3) of the
Companies Act, 2013 have not been included.
Adverse opinion- Example 1
An example of such wording for paragraph that may be included
on adverse opinion in the auditor's report for `Incomplete
43
Implementation Guide to SA 570(Revised)
Assessment and Disagreement on Required Disclosures
relating to Going Concern' is given below:
Adverse Opinion
We have audited the accompanying Financial Statements of XYZ
Limited ("the Company"), which comprise the Balance Sheet as at
March 31, 20XX, the Statement of Profit and Loss for the year
ended on that date, and the Statement of Cash Flows for the year
ended on that date, and a summary of the significant accounting
policies and other explanatory information (hereinafter referred to
as "financial statements").
In our opinion and to the best of our information and according to
the explanations given to us due to incomplete assessment and
disclosure of `Material Uncertainty Related to Going Concern'
referred to in the "Basis for Adverse Opinion" section of this
report, the aforesaid financial statements do not give a true and
fair view in conformity with Accounting Standards prescribed
under section 133 of the Companies Act, 2013(`the Act') and other
accounting principles generally accepted in India, of the state of
affairs of the Company as at March 31, 2019, the profit/ loss for
the year ended on that date and its cash flows for the year ended
on that date.
Basis for Adverse Opinion
The Company's financing arrangements expired and the amount
outstanding to the tune of Rs. ......was payable on March 31,
20XX. The Company has been unable to re-negotiate or obtain
replacement financing and is considering filing an application
under Insolvency and Bankruptcy Code 2016. These events
indicate a significant doubt on the Company's ability to continue
as a going concern, and therefore it may be unable to realize its
assets and discharge its liabilities in the normal course of
business. The financial statements (and notes thereto) do not
disclose this fact. Despite significant uncertainty as described
above, these financial statements have been prepared on going
concern basis of accounting.
44
Implementation Guide to SA 570(Revised)
Reporting under Section 143(3)(h)
The matter described under basis for adverse opinion paragraph
may have an adverse effect on the functioning of the Company.
Other reporting requirements under Section 143(3) of the
Companies Act, 2013 have not been included.
Adverse opinion- Example 2
An example of such wording for paragraph that may be included
on adverse opinion in the auditor's report where auditor has
concluded that the entity is not a going concern is given
below:
Adverse Opinion
We have audited the accompanying Financial Statements of XYZ
Limited ("the Company"), which comprise the Balance Sheet as at
March 31, 20XX, the Statement of Profit and Loss for the year
ended on that date, and the Statement of Cash Flows for the year
ended on that date, and a summary of the significant accounting
policies and other explanatory information (hereinafter referred to
as "financial statements").
In our opinion and to the best of our information and according to
the explanations given to us these financial statements have been
prepared on going concern basis of accounting even though
the company is no longer a going concern as described in the
"Basis for Adverse Opinion" section of this report, and
accordingly the aforesaid financial statements do not give a true
and fair view in conformity with Accounting Standards prescribed
under Section 133 of the Companies Act, 2013(`the Act') and
other accounting principles generally accepted in India, of the
state of affairs of the Company as at March 31, 2019, the profit/
loss for the year ended on that date and its cash flows for the year
ended on that date.
Basis for Adverse Opinion
The Company is in the business of real estate which is currently
undergoing a recession due to significant dip in demand and
liquidity crisis in economy. The Company is facing cash flow
45
Implementation Guide to SA 570(Revised)
problems and has significant unsold semi-finished and finished
inventory in its books of accounts. The company does not have
any concrete future orders in hand and the management does not
have realistic future plans. These events indicate a significant
doubt on the Company's ability to continue as a going concern,
and therefore it may be unable to realize its assets and discharge
its liabilities in the normal course of business. The financial
statements (and notes thereto) do not disclose this fact. Despite
significant uncertainty as described above, these financial
statements have been prepared on going concern basis of
accounting.
Reporting under section 143(3)(h)
The matter described under basis for adverse opinion paragraph
may have an adverse effect on the functioning of the Company.
Other reporting requirements under section 143(3) of the
Companies Act, 2013 have not been included.
46
Implementation Guide to SA 570(Revised)
Annexure - II
Illustrative Format of Support Letter is given below:
On the Letter-head of the Parent Company (XYZ Limited)
Date: March 31, 20XX
M/s ABC Limited
Address: XXXX, India
Dear Sirs,
Sub: Letter of Support for financial assistance to M/s ABC Limited
for ongoing projects and operations
We, XYZ Limited (`the Parent Company') confirm that we will
provide financial support to M/s ABC Limited (`the Company') in
order to meet the shortfall in its fund requirements over banks and
other borrowings to meet out the projects which are in progress
and other liabilities including loans from other group companies (if
any), for a period of not less than 12 months from the date of
financial closure of accounts of the Company for the year ended
March 31, 20XX.
This letter is being issued at the request of M/s ABC Limited in
respect of support for considering it as a going concern for the
financial year ended March 31, 20XX.
Thanking you,
Yours truly,
Authorized Signatory
47
|
