Going concern

In this lesson

1. 0:00 Going concern assumption explained
2. 0:58 Identifying going concern issues
3. 2:01 Auditor responsibilities and disclosures
4. 3:03 Red flags indicating going concern risk
5. 4:39 Audit procedures to assess going concern
6. 6:05 Multiple choice question walkthrough
7. 7:21 Scenario: Flounder Co loan assessment
8. 9:09 Testing loan covenants and bank correspondence
9. 10:24 Reviewing forecasts and obtaining representations

About this lesson

This video covers the key indicators that signal potential going concern issues—from cash flow problems to loss of major customers—and walks you through the specific audit procedures you need to perform to evaluate whether a company can continue operating. Essential knowledge for AA and SBR papers, and critical for understanding how auditors assess financial statement reliability. The going concern assumption underpins all financial statements: it assumes a business will continue operating for at least 12 months beyond the year end. Directors are responsible for assessing this status and disclosing any uncertainties in the notes. As an auditor, your role is to evaluate whether management's assessment is reasonable and ensure adequate disclosures are made. If going concern is not in doubt, standard accounting rules apply. If there's uncertainty, the company can still use the going concern basis but must explain the risks. If going concern fails, a completely different accounting basis is required. Red flags that suggest going concern problems include banks withdrawing credit facilities, significant deterioration in liquidity ratios, cash flow problems, loss of major customers, legal action, legislative changes, and technological obsolescence. The video demonstrates how to apply these concepts through worked examples, including a scenario where a company has missed loan repayments. Your audit procedures should focus on reviewing loan agreements for covenant breaches, examining bank correspondence, discussing repayment ability with management, scrutinising cash flow forecasts, and obtaining written representations from directors confirming their going concern assessment.

Duration: 11m