A going concern refers to an entity that is assumed to remain operational for the foreseeable future, usually defined as at least 12 months beyond the financial reporting date.
Importance of Going Concern Assessment:
- Auditors must evaluate if the going concern assumption is appropriate when assessing financial statements.
- Failure to qualify risks misleading users about sustainability by masking liquidity deficiencies or uncertainties.
Factors Considered:
- Profitability trends, debt covenants, cash flow forecasts, strategic plans and economic conditions help determine an organization’s viability.
Implications of Going Concern Uncertainty:
By disclosing doubts over a retailer’s ability to continue as a going concern due to losses, mounting debts and uncertain future funding, auditors compelled emergency measures to avoid insolvency.
Significance:
A valid going concern opinion is vital for financial statement users as discrepant assumptions could distort asset valuations, liability estimates and overall risk assessments.