isa-570

ISA 570 543 A U D IT IN G G5INTERNATIONAL STANDARD ON AUDITING 570 GOING CONCERN (Effective for audits of financial statements for periods beginning on or after December 15, 2009) CONTENTS Paragraph Introduction Scope of this ISA ........................................................................................ 1 Going Concern Assumption ........................................................................ 2 Responsibility for Assessment of the Entity’s Ability to Continue as a Going Concern .............................................................................. 3−7 Effective Date ............................................................................................. 8 Objectives .................................................................................................. 9 Requirements Risk Assessment Procedures and Related Activities ................................... 10−11 Evaluating Management’s Assessment ....................................................... 12−14 Period beyond Management’s Assessment ................................................. 15 Additional Audit Procedures When Events or Conditions Are Identified .............................................................................................. 16 Audit Conclusions and Reporting ............................................................... 17 Use of Going Concern Assumption Appropriate but a Material Uncertainty Exists ................................................................................ 18−20 Use of Going Concern Assumption Inappropriate ...................................... 21 Management Unwilling to Make or Extend Its Assessment ....................... 22 Communication with Those Charged with Governance ............................. 23 Significant Delay in the Approval of Financial Statements ........................ 24 Application and Other Explanatory Material Going Concern Assumption ........................................................................ A1 Risk Assessment Procedures and Related Activities ................................... A2−A6 Evaluating Management’s Assessment ....................................................... A7−A12 Period beyond Management’s Assessment ................................................. A13−A14 GOING CONCERN ISA 570 544 Additional Audit Procedures When Events or Conditions Are Identified .............................................................................................. A15−A18 Audit Conclusions and Reporting ............................................................... A19 Use of Going Concern Assumption Appropriate but a Material Uncertainty Exists ................................................................................ A20−A24 Use of Going Concern Assumption Inappropriate ....................................... A25−A26 Management Unwilling to Make or Extend Its Assessment ....................... A27 International Standard on Auditing (ISA) 570, “Going Concern” should be read in conjunction with ISA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing.” GOING CONCERN ISA 570 545 A U D IT IN G Introduction Scope of this ISA 1. This International Standard on Auditing (ISA) deals with the auditor’s responsibilities in the audit of financial statements relating to management’s use of the going concern assumption in the preparation of the financial statements. Going Concern Assumption 2. Under the going concern assumption, an entity is viewed as continuing in business for the foreseeable future. General purpose financial statements are prepared on a going concern basis, unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so. Special purpose financial statements may or may not be prepared in accordance with a financial reporting framework for which the going concern basis is relevant (for example, the going concern basis is not relevant for some financial statements prepared on a tax basis in particular jurisdictions). When the use of the going concern assumption is appropriate, 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. (Ref: Para. A1) Responsibility for Assessment of the Entity’s Ability to Continue as a Going Concern 3. Some financial reporting frameworks contain an explicit requirement for management to make a specific assessment of the entity’s ability to continue as a going concern, and standards regarding matters to be considered and disclosures to be made in connection with going concern. For example, International Accounting Standard (IAS) 1 requires management to make an assessment of an entity’s ability to continue as a going concern.1 The detailed requirements regarding management’s responsibility to assess the entity’s ability to continue as a going concern and related financial statement disclosures may also be set out in law or regulation. 4. In other financial reporting frameworks, there may be no explicit requirement for management to make a specific assessment of the entity’s ability to continue as a going concern. Nevertheless, since the going concern assumption is a fundamental principle in the preparation of financial statements as discussed in paragraph 2, the preparation of the financial statements requires management to assess the entity’s ability to continue as a going concern even if the financial reporting framework does not include an explicit requirement to do so. 5. 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 1 IAS 1, “Presentation of Financial Statements” as at 1 January 2009, paragraphs 25–26. GOING CONCERN ISA 570 546 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. Responsibilities of the Auditor 6. The auditor’s responsibility is to obtain sufficient appropriate audit evidence about the appropriateness of management’s use of the going concern assumption in the preparation of the financial statements and to conclude whether there is a material uncertainty about the entity’s ability to continue as a going concern. This responsibility exists 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. 7. However, as described in ISA 200,2 the potential effects of inherent limitations on the auditor’s ability to detect material misstatements are greater for future events or conditions that may cause an entity to cease to continue as a going concern. The auditor cannot predict such future events or conditions. Accordingly, the absence of any reference to going concern uncertainty in an auditor’s report cannot be viewed as a guarantee as to the entity’s ability to continue as a going concern. Effective Date 8. This ISA is effective for audits of financial statements for periods beginning on or after December 15, 2009. 2 ISA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing,” paragraphs A51-A52. GOING CONCERN ISA 570 547 A U D IT IN G Objectives 9. The objectives of the auditor are: (a) To obtain sufficient appropriate audit evidence regarding the appropriateness of management’s use of the going concern assumption in the preparation of the financial statements; (b) To conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern; and (c) To determine the implications for the auditor’s report. Requirements Risk Assessment Procedures and Related Activities 10. When performing risk assessment procedures as required by ISA 315,3 the auditor shall consider whether there are events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. In so doing, the auditor shall determine whether management has already performed a preliminary assessment of the entity’s ability to continue as a going concern, and: (Ref: Para. A2–A5) (a) If such an assessment has been performed, the auditor shall discuss the assessment with management and determine whether management has identified events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern and, if so, management’s plans to address them; or (b) If such an assessment has not yet been performed, the auditor shall discuss with management the basis for the intended use of the going concern assumption, and 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. 11. The auditor shall 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. (Ref: Para. A6) Evaluating Management’s Assessment 12. The auditor shall evaluate management’s assessment of the entity’s ability to continue as a going concern. (Ref: Para. A7–A9, A11–A12) 3 ISA 315, “Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment,” paragraph 5. GOING CONCERN ISA 570 548 13. 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 ISA 560,4 the auditor shall request management to extend its assessment period to at least twelve months from that date. (Ref: Para. A10–A12) 14. In evaluating management’s assessment, the auditor shall consider whether management’s assessment includes all relevant information of which the auditor is aware as a result of the audit. Period beyond Management’s Assessment 15. The auditor shall 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. (Ref: Para. A13–A14) Additional Audit Procedures When Events or Conditions Are Identified 16. If events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern, the auditor shall obtain sufficient appropriate audit evidence to determine whether or not a material uncertainty exists through performing additional audit procedures, including consideration of mitigating factors. These procedures shall include: (Ref: Para. A15) (a) 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. (b) 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. (Ref: Para. A16) (c) 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: (Ref: Para. A17–A18) (i) Evaluating the reliability of the underlying data generated to prepare the forecast; and 4 ISA 560, “Subsequent Events,” paragraph 5(a). GOING CONCERN ISA 570 549 A U D IT IN G (ii) Determining whether there is adequate support for the assumptions underlying the forecast. (d) Considering whether any additional facts or information have become available since the date on which management made its assessment. (e) Requesting written representations from management and, where appropriate, those charged with governance, regarding their plans for future action and the feasibility of these plans. Audit Conclusions and Reporting 17. Based on the audit evidence obtained, the auditor shall conclude whether, in the auditor’s judgment, a material uncertainty exists related to events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern. A material uncertainty exists when the magnitude of its potential impact and likelihood of occurrence is such that, in the auditor’s judgment, appropriate disclosure of the nature and implications of the uncertainty is necessary for: (Ref: Para. A19) (a) In the case of a fair presentation financial reporting framework, the fair presentation of the financial statements, or (b) In the case of a compliance framework, the financial statements not to be misleading. Use of Going Concern Assumption Appropriate but a Material Uncertainty Exists 18. If the auditor concludes that the use of the going concern assumption is appropriate in the circumstances but a material uncertainty exists, the auditor shall determine whether the financial statements: (a) 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 (b) 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. (Ref: Para. A20) 19. If adequate disclosure is made in the financial statements, the auditor shall express an unmodified opinion and include an Emphasis of Matter paragraph in the auditor’s report to: (a) 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; and GOING CONCERN ISA 570 550 (b) Draw attention to the note in the financial statements that discloses the matters set out in paragraph 18.5 (Ref: Para. A21–A22) 20. If adequate disclosure is not made in the financial statements, the auditor shall express a qualified opinion or adverse opinion, as appropriate, in accordance with ISA 705.6 The auditor shall state in the auditor’s report that there is a material uncertainty that may cast significant doubt about the entity’s ability to continue as a going concern. (Ref: Para. A23–A24) Use of Going Concern Assumption Inappropriate 21. If the financial statements have been prepared on a going concern basis but, in the auditor’s judgment, management’s use of the going concern assumption in the financial statements is inappropriate, the auditor shall express an adverse opinion. (Ref: Para. A25–A26) Management Unwilling to Make or Extend Its Assessment 22. If management is unwilling to make or extend its assessment when requested to do so by the auditor, the auditor shall consider the implications for the auditor’s report. (Ref: Para. A27) Communication with Those Charged with Governance 23. Unless all those charged with governance are involved in managing the entity,7 the auditor shall 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 shall include the following: (a) Whether the events or conditions constitute a material uncertainty; (b) Whether the use of the going concern assumption is appropriate in the preparation of the financial statements; and (c) The adequacy of related disclosures in the financial statements. Significant Delay in the Approval of Financial Statements 24. If there is significant delay in the approval of the financial statements by management or those charged with governance after the date of the financial statements, the auditor shall inquire as to the reasons for the delay. If the auditor believes that the delay could be related to events or conditions relating 5 See ISA 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report.” 6 ISA 705, “Modifications to the Opinion in the Independent Auditor’s Report.” 7 ISA 260, “Communication with Those Charged with Governance,” paragraph 13. GOING CONCERN ISA 570 551 A U D IT IN G to the going concern assessment, the auditor shall perform those additional audit procedures necessary, as described in paragraph 16, as well as consider the effect on the auditor’s conclusion regarding the existence of a material uncertainty, as described in paragraph 17. *** Application and Other Explanatory Material Going Concern Assumption (Ref: Para. 2) Considerations Specific to Public Sector Entities A1. Management’s use of the going concern assumption is also relevant to public sector entities. For example, International Public Sector Accounting Standard (IPSAS) 1 addresses the issue of the ability of public sector entities to continue as going concerns.8 Going concern risks may arise, but are not limited to, situations where public sector entities operate on a for-profit basis, where government support may be reduced or withdrawn, or in the case of privatization. Events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern in the public sector may include situations where the public sector entity lacks funding for its continued existence or when policy decisions are made that affect the services provided by the public sector entity. Risk Assessment Procedures and Related Activities Events or Conditions That May Cast Doubt about Going Concern Assumption (Ref: Para. 10) A2. The following are examples of events or conditions that, individually or collectively, may cast