November 26th 2019 / BY: Wisteria

What is Going Concern?

A company is a going concern when the management consider the company can reasonably continue to trade for the foreseeable future, which is usually accepted to be a further twelve months.  The alternatives to a going concern is where the management intends to liquidate the company or to cease trading.

Management should assess the following when considering going concern:

  • Financial forecast
  • Current and future litigation
  • Regulatory changes
  • Funding
  • Intentions of management
  • Economic and political matters

From an auditing perspective the sort of matters and circumstances that an auditor will review to satisfy themselves that the company is a going concern:

  • The forecasts evidence that the business is financially viable
  • Review of board minutes
  • Review of correspondence with the regulators
  • Gain an understanding and obtain evidence that there is funding in place to enable the company to trade for at least 12 further months
  • Review key financial ratios
  • Review trade creditors after the year end to assess the company’s ability to settle its debts
  • Review loan arrangements and in particular covenants to assess if they are being adhered to
  • Assess if key suppliers are not able to supply
  • Assess if there are any labour difficulties
  • Consider if there have been any undesired catastrophes
  • Assess the likelihood of a loss of any key licenses

The alternatives to the going concern basis is the break-up basis; where assets and liabilities are revalued to realisable value, where appropriate.

UK GAAP and IFRS require directors to disclose their accounting policy in regard to going concern; and where there are doubts regarding going concern these must be disclosed together with the circumstances surrounding these.  Failure to do so is likely to result in the auditor qualifying their opinion.

Attached are some related articles:

https://wisteria.co.uk/2019/11/05/accounting-and-auditing-for-bad-debt-provisions/

https://wisteria.co.uk/2019/05/28/audit-thresholds-the-risks-for-directors/