Guide to Using International Standards on Auditing in - IFAC

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<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).