What Is Going Concern?Going concern is an accounting term for a company that has the resources needed to continue operating indefinitely until it provides evidence to the contrary. This term also refers to a company's ability to make enough money to stay afloat or to avoid bankruptcy. If a business is not a going concern, it means it's gone bankrupt and its assets were liquidated. As an example, many dot-coms are no longer going concern companies after the tech bust in the late 1990s. Show
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Going ConcernUnderstanding Going ConcernAccountants use going concern principles to decide what types of reporting should appear on financial statements. Companies that are a going concern may defer reporting long-term assets at current value or liquidating value, but rather at cost. A company remains a going concern when the sale of assets does not impair its ability to continue operation, such as the closure of a small branch office that reassigns the employees to other departments within the company. Accountants who view a company as a going concern generally believe a firm uses its assets wisely and does not have to liquidate anything. Accountants may also employ going concern principles to determine how a company should proceed with any sales of assets, reduction of expenses, or shifts to other products. Going concern is not included in the generally accepted accounting principles (GAAP) but is included in the generally accepted auditing standards (GAAS). Red Flags Indicating a Business Is Not a Going ConcernCertain red flags may appear on financial statements of publicly traded companies that may indicate a business will not be a going concern in the future. Listing of long-term assets normally does not appear in a company's quarterly statements or as a line item on balance sheets. Listing the value of long-term assets may indicate a company plans to sell these assets. A firm's inability to meet its obligations without substantial restructuring or selling of assets may also indicate it is not a going concern. If a company acquires assets during a time of restructuring, it may plan to resell them later. Going Concern ConditionsAccounting standards try to determine what a company should disclose on its financial statements if there are doubts about its ability to continue as a going concern. In May 2014, the Financial Accounting Standards Board determined financial statements should reveal the conditions that support an entity's substantial doubt that it can continue as a going concern. Statements should also show management's interpretation of the conditions and management's future plans. In general, an auditor examines a company's financial statements to see if it can continue as a going concern for one year following the time of an audit. Conditions that lead to substantial doubt about a going concern include negative trends in operating results, continuous losses from one period to the next, loan defaults, lawsuits against a company, and denial of credit by suppliers. Accounting Spotlight July 8, 2020 1 For more information about financial reporting considerations related to COVID-19, see Deloitte’s
Financial Reporting Alert, “Financial Reporting Considerations Related to COVID-19 and an Economic Downturn.” 2 For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the
FASB Accounting Standards Codification.” 3 Throughout this publication, the “date financial statements are issued” or “financial statement issuance date” also refers to the date financial statements are available to be issued. 4 The ASC master glossary states that probable refers to the fact that “the future event or events are likely to occur.” 5 The phrase “reasonably knowable” is intended to emphasize that an entity should make a reasonable effort to identify conditions and events that it may not readily know but would be able to identify without undue cost or effort. The Spotlight series is prepared by members of Deloitte’s National Office. New issues in the series are released as developments warrant. This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication. As used in this document, “Deloitte“ means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright © 2022 Deloitte Development LLC. All rights reserved. What is the auditor's responsibility when there is a substantial going concern issue?The auditor has a responsibility to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited (hereinafter referred to as a reasonable period of time).
What is substantial doubt about going concern?Substantial doubt about an entity's ability to continue as a going concern exists when conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or ...
When an auditor has concluded that there is substantial doubt about whether the company's ability to continue as a going concern what type of audit report will be issued?If the auditor believes that the delay could be related to the evaluation of whether there is substantial doubt about the entity's ability to continue as a going concern, the auditor should per- form additional audit procedures as necessary, as described in paragraph .
What procedures should the auditor perform when a question arises regarding going concern?Further procedures that the auditor may perform to conclude whether a material going concern uncertainty exists include: Analysing and discussing the entity's latest available interim financial statements. Reading the terms of debentures and loan agreements and determining whether any have been breached.
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What become auditor consideration when making decision about substantial doubt about going concern?
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