Guide to Using International Standards on Auditing in - IFAC

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164 <strong>Guide</strong> <strong>to</strong> <strong>Using</strong> <strong>International</strong> <strong>Standards</strong> on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts Examples of some events or conditions that, individually or collectively, may cast significant doubt about the going-concern assumption are set out below. Exhibit 14.2-2 Indica<strong>to</strong>rs Descriptions Financial • Net liability or net current liability position. • Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment, or excessive reliance on short-term borrowings <strong>to</strong> finance long-term assets. • Indications of withdrawal of financial support by credi<strong>to</strong>rs. • Negative operating cash flows indicated by his<strong>to</strong>rical or prospective financial statements. • Adverse key financial ratios. • Substantial operating losses, or significant deterioration in the value of assets used <strong>to</strong> generate cash flows. • Arrears or discontinuance of dividends. • Inability <strong>to</strong> pay credi<strong>to</strong>rs on due dates. • Inability <strong>to</strong> comply with the terms of loan agreements. • Change from credit <strong>to</strong> cash-on-delivery transactions with suppliers. • Inability <strong>to</strong> obtain financing for essential new-product development or other essential investments. Operating • Management’s intentions <strong>to</strong> liquidate the entity or <strong>to</strong> cease operations. • Loss of key management without replacement. • Loss of a major market, key cus<strong>to</strong>mer(s), franchise, license, or principal supplier(s). • Labor difficulties. • Shortages of important supplies. • Emergence of a highly successful competi<strong>to</strong>r. Other • Non-compliance with capital or other statu<strong>to</strong>ry requirements. • Pending legal or regula<strong>to</strong>ry proceedings against the entity that may, if successful, result in claims that the entity is unlikely <strong>to</strong> be able <strong>to</strong> satisfy. • Changes in law or regulation or government policy expected <strong>to</strong> adversely affect the entity. • Uninsured or underinsured catastrophes. The significance of the above events or conditions often can be mitigated by other fac<strong>to</strong>rs. For example, the effect of an entity being unable <strong>to</strong> make its normal debt repayments may be counterbalanced by management’s plans <strong>to</strong> maintain adequate cash flows by alternative means, such as by disposing of assets, rescheduling loan repayments, or obtaining additional capital. Similarly, the loss of a principal supplier may be mitigated by the availability of a suitable alternative source of supply.
165 <strong>Guide</strong> <strong>to</strong> <strong>Using</strong> <strong>International</strong> <strong>Standards</strong> on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts 14.3 Evaluating Management’s Assessment Paragraph # Relevant Extracts from ISAs 570.12 The audi<strong>to</strong>r shall evaluate management’s assessment of the entity’s ability <strong>to</strong> continue as a going concern. (Ref: Para. A7-A9; A11-A12) 570.13 In evaluating management’s assessment of the entity’s ability <strong>to</strong> continue as a going concern, the audi<strong>to</strong>r shall cover the same period as that used by management <strong>to</strong> 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 <strong>to</strong> continue as a going concern covers less than twelve months from the date of the financial statements as defined in ISA 560, the audi<strong>to</strong>r shall request management <strong>to</strong> extend its assessment period <strong>to</strong> at least twelve months from that date. (Ref: Para. A10-A12) 570.14 In evaluating management’s assessment, the audi<strong>to</strong>r shall consider whether management’s assessment includes all relevant information of which the audi<strong>to</strong>r is aware as a result of the audit. 570.15 The audi<strong>to</strong>r shall inquire of management as <strong>to</strong> its knowledge of events or conditions beyond the period of management’s assessment that may cast significant doubt on the entity’s ability <strong>to</strong> continue as a going concern. (Ref: Para. A13-A14) Evaluating Management’s Plans in Smaller Entities Management of smaller entities may not have prepared a detailed assessment of the entity’s ability <strong>to</strong> continue as a going concern. They may rely instead on their in-depth knowledge of the business and anticipated future prospects. The audi<strong>to</strong>r’s typical evaluation procedures would include: • Discussing medium- and long-term financing with management; • Corroborating management’s intentions with the understanding of the entity obtained and documentary evidence; • Satisfying the requirement for management <strong>to</strong> extend its assessment period <strong>to</strong> at least 12 months. This could be achieved through discussion, inquiry, and inspection of supporting documentation, and the results evaluated by the audi<strong>to</strong>r as <strong>to</strong> their feasibility. For example, a prediction of future sales revenues could be supported by potential sales orders or sales contracts; and • Inquiring if management has knowledge of events/conditions beyond the period of management’s assessment that would cast significant doubt on the entity’s ability <strong>to</strong> continue as a going concern. Particular fac<strong>to</strong>rs that could cast significant doubt on the entity’s ability <strong>to</strong> continue as a going concern include: • The entity’s ability <strong>to</strong> withstand adverse conditions. Small entities may be able <strong>to</strong> respond quickly <strong>to</strong> exploit opportunities, but may lack reserves <strong>to</strong> sustain operations. • Availability of financing This could include banks and other lenders ceasing <strong>to</strong> support the entity. It could also include a withdrawal or major alteration in the terms of a loan or loan guarantees from the owner-manager (or other related parties such as family members).
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Guide to Using International Standards on Auditing in - IFAC

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