Accounting

In terms of audit and assurance, going concern assumption is a management assertion where an entity is perceived as continuing its routine business operations in the foreseeable future (which is an accounting period usually 12 months). ISA 570 is the auditing standard issued by the International Auditing and Assurance Standards Board (IAASB) which explains the requirements necessary for verification of the going concern assumption.

ISA 570 states that  When preparing and performing audit procedures and in evaluating the results thereof, the auditor should consider the appropriateness of managements use of the going concern assumption in the preparation of the financial statements and consider any relevant disclosures in the financial statements (as cited in Redrafted ISA 570 issued by the IAASB)

Auditors responsibilities

Auditors have numerous responsibilities when considering the appropriateness of the going concern assumption for instance

To look for any material uncertainties regarding the going concern assumption and the need to disclose them in final accounts if any.

Similarly, they should look for any events, conditions or other relevant risks which may cast doubts over an entitys ability to continue as a going concern.

The procedures used by management to ascertain as to whether the entity is a going concern also needs to be assessed.

Possible indications of going concern issues should also be looked into in detail for instance financial, operating or other indications.

Going concern assumption used by management also needs to assessed.

The assessment period in use by the management should also be considered, and in case if its less than twelve months then auditors should ask the management to extend the assessment period to 12 months.
Managements future action plans also need to be considered.

Audit procedures in connection with ISA 570

As per ISA 570, Auditors are specifically required to carry out the following audit procedures

Review managements future action plans in contrast with its going concern assumption. Moreover auditors should also seek to obtain written representations from management regarding their future plans since their action plans are a mere forecast and hence potentially uncertain.

Cashflow, profit and other relevant forecasts also need to be discussed with the management and analyzed whether they adequately reflect the entitys ability to continue as a going concern.

Similarly, an entitys latest interim financial statements (also known as management accounts) probably for the last quarter should also be discussed with the management in order to obtain a better understanding which would subsequently assist auditors in their analysis.

Terms and conditions of debentures and loan agreements should be reviewed as well since they will provide significant insight into companys leverage position and hence bring to light if the company is or will face problems in discharging its obligations which could cast shadow over its functioning as a going concern.
Minutes of AGM, EGM (if any) or any other board and committee (i.e. audit committee, remuneration committee) meeting should be thoroughly read. There is empirical evidence that board minutes have been instrumental in providing references to financial difficulties.

An entitys legal personnel also need to consulted and information about any litigation or claims which could significantly affect its going concern assumption should be obtained. Such cases not only be reviewed independently by the auditors but also discussed with the legal counsel in order to fully understand the gravity of the matter.

Arrangements with related and third parties should also be confirmed for their legality and the ability of such parties should be assessed whether or not they can provide financial help.

ISA 570 further guides auditors on in determining their audit opinion after performing audit procedures on an entitys financial statements. Following are the types of opinion an auditor can express owing to the different types of situation. (Elearning.com, n.d)

Reporting and types of opinion

Emphasis of matter
Instances where material uncertainties are found and management agrees to disclose them in their financial statements, then auditors will give an unqualified opinion but include an emphasis of matter para which will briefly mention the situation and guide to a more detailed note in the financial statements.

Adverse opinion
Instances where material uncertainties are found and their magnitude is such that even disclosing them in the financial statements cannot allow the entity to present its financial statements on the going concern assumption will call for an adverse opinion, since it will not be able to function as a going concern.

Disclaimer opinion
Instances where material uncertainties are found and the management refuses to disclose them in the financial statements, then the auditors should express a disclaimer

However ISA also guides that auditors should extensively discuss the matter with the management and try persuade them to make appropriate disclosures before deciding to give a qualified opinion.

Proposed changes and developments in ISA 570
Owing to the evolution of business methodologies, auditing requirements also need to be updated with the passage of time. Hence the IAASB issues exposure drafts (ED) for its auditing standards when recommending or proposing any modifications to a standard.

In February, 2007 IAASB issued an ED on ISA 570 Going Concern which introduced changes which were largely focused at increasing the clarity of the standard in order to make it more useful for auditors to implement the standard.

Huge corporate failures over the years for example that of Enron and WorldCom among numerous others have forced the IAASB along with other professional bodies to consistently update their standards such that they are more reflective of the prevalent business practices and are effective enough to verify an entitys financial performance. (Accaglobal.com, n.d)

Proposed Modifications
Increased guidance has been provided for smaller or unlisted entities and public sector or government funded entities. Although smaller entities or public sector entities do not have a statutory requirement to follow ISA 570 or any other auditing standard but adherence to the standard can result in improved and more accurate reporting.

It has also been proposed that public sector entities particularly those which are funded by the government, would be required to follow this standard where there funding is discontinued.

Moreover the ED has also provided guidance on circumstances where an entity cannot continue as a going concern and hence cannot present its financial statements in that manner. In such circumstances, an entity can prepare special purpose financial statements which would be more accurately reflective of their situation (IFAC, 2007)

Further emphasis has been made on performance of risk assessment procedures. Auditors are now increasingly required to perform risk assessment procedures in order to provide greater insight into the adequacy of an entitys internal control function. (ICAEW, April, 2009)

Criticisms of the changes made
The ED on ISA 570 has received both positive and adverse views for different factions of the business community.

Pubic sector and smaller entities are an important part of the business community and therefore they should be provided necessary guidance on using the going concern assumption. Application and Other Explanatory Material section has although been adequately explained for public sector companies but such consistency is not found for smaller entities and has therefore been subject to criticism.

Similarly, the importance of risk assessment procedures in evaluating an entitys going concern ability has been heavily criticized for the wording used, which is largely misleading and in fact has made the importance of risk assessment procedures secondary to the evaluation of managements assessment methods when they should considered independently. (CGA-Ontario.org, n.d)

The evaluation of a managements assessment method has been discussed in more than two places and is therefore considered  unnecessary when it could have been shown in A  OE sections of the ED.

Auditors responsibility to correct the lack of analysis on managements part is too much of a secondary nature matter and therefore it should have been included in the AOE section, since its misleading here. (Accaglobal.com, n.d)

Adverse opinion is usually given when an entity can not continue as a going concern whether or not appropriate disclosure is given, wording used by the standard in explaining this matter has been criticized for being excessive and misleading.

Similarly, guidance on audit opinions have been discussed more than once and due to this repetition it has greatly affected the readability of the standard hence giving rise to ambiguity.

Communication of audit matters with directors of an entity is although essential but not a constituent of the core requirements of the standards.

In the wake of the global economic crisis which caused financial distress around the globe resulting in pre-mature closure of companies which had been performing extensively well prior the credit crunch. Such instances resulted in unanticipated losses for millions and brought the accounting and auditing profession into spotlight for not doing enough to prevent such abrupt bankruptcies and liquidations which cost a fortune to many. (Accaglobal.com, 2008)

Therefore in a report issued by the ICAEW it was emphasized that increased guidance is provided to directors in order to assist them in evaluating their entitys appropriateness as a going concern.

The report also emphasized the need to update the going concern standard on a more consistent basis so that they remain in line with the existing business practices.

Moreover this report also highlighted the need to delete parts of the standard which were getting repetitive or increasingly irrelevant with the changing business scenario. (ICAEW, 2008)

Conclusions
ISA 570 provides a detailed guideline for both auditors and management alike in determining an entitys ability to continue as a going concern.

Furthermore, they extensively determine the responsibilities of both auditors and management in determining the appropriateness of the going concern assumption.

Similarly, relevant audit procedures and suggested management actions are also mentioned in detail.
Moreover the proposed changes made to the standard have improved the clarity of the requirements and subsequent actions when evaluating the appropriateness of the going concern assumption.

Recommendation
Considering the discussion above, it can be suggested the ISA 570 should be more specific in determining audit requirements. This will help auditors in designing their audit procedures in a likewise manner.