Going concern

In this lesson

1. 0:00 Going concern assumption explained
2. 1:40 Break-up basis for non-going concerns
3. 2:32 Management and auditor responsibilities
4. 3:54 Red flags indicating going concern issues
5. 5:22 Audit procedures and forecast testing
6. 7:07 Stress testing and post-year-end review
7. 8:19 Audit report outcomes and opinions
8. 10:03 Material uncertainty disclosure requirements

About this lesson

critical assumption. You'll explore the key procedures auditors perform—from reviewing cash flow forecasts to stress-testing assumptions—and understand how going concern issues affect the audit report, including when to issue unmodified opinions, emphasis of matter paragraphs, or qualified opinions. The going concern assumption underpins all financial statements, but it requires careful judgment. Management must produce forecasts and assess the business's viability; auditors must verify this work and ensure appropriate disclosure. In practice, you'll encounter red flags like deteriorating working capital ratios, loss of major customers, bank credit withdrawal, legal action, or legislative changes that threaten the business. Your role is to test whether management's assumptions are reasonable, compare previous forecasts to actual results, and perform sensitivity analysis on cash flows to stress-test key variables like interest rates. The audit report outcome depends on your conclusions. If the company is clearly a going concern, the opinion is unmodified. If there's a material uncertainty that's properly disclosed, you add a material uncertainty relating to going concern paragraph but don't modify the opinion. If management hasn't prepared accounts on a break-up basis when they should have, or hasn't disclosed material uncertainty, you issue a qualified or adverse opinion. Understanding this decision tree is essential for handling going concern issues in AA (Audit and Assurance) scenarios and exams.

Duration: 13m