Thursday, February 6, 2014

Audit Procedures to be DONE when EVENTS or CONDITIONS that may cast doubt about GOING CONCERN have been Identified

As described within my previous post, Event or Conditions that may cast DOUBT about GOING CONCERN Assumption, if events of conditions have been identified that may cast significant doubt on the entity’s ability to continue as a GOING CONCERN, the auditor shall obtain sufficient appropriate audit evidence to determine whether or not a material uncertainty exists through performing ADDITIONAL AUDIT PROCEDURES, including consideration of mitigating factors.

As disclosed in paragraph 16 of ISA 570, the required additional audit procedures to be done shall include :

  1. Where management has not yet performed an assessment of the entity’s ability to continue as a going concern, requesting management to make its assessment;
  2. Evaluating management’s plans for future actions in relation to its going concern assessment, whether the outcome of these plans is likely to improve the situation and whether management’s plans are feasible in the circumstances;
  3. Where the entity has prepared a cash flow forecast, and analysis of the forecast is a significant factor in considering the future outcome of events or conditions in the evaluation of management’s plans for future action : (i) Evaluating the reliability of the underlying data generated to prepare the forecasts; and (ii) Determining whether there is adequate support for the assumptions underlying the forecast;
  4. Considering whether any additional facts or information have become available since the date on which management made its assessment;
  5. Requesting written representation from management and, where appropriate, those charged with governance, regarding their plans for future action and the feasibility of these plans

Several audit procedures which are relevant to the requirement in paragraph 16 of ISA 570 may include the following :

  1. Analyzing and discussing cash flow, profit and other relevant forecasts with management
  2. Analyzing and discussing the entity’s latest available interim financial statements
  3. Reading the terms of debentures and loan agreements and determining whether any have been breached
  4. Reading minutes of the meetings of shareholders, those charged with governance and relevant committees for reference to financing difficulties
  5. Inquiring of the entity’s legal counsel regarding the existence of litigation and claims and the reasonableness of management’s assessments of their outcome and the estimate of their financial implications
  6. Confirming the existence, legality and enforceability of arrangements to provide or maintain financial support with related and third parties and assessing the financial ability of such parties to provide additional funds
  7. Evaluating the entity’s plans to deal with unfilled customer orders
  8. Performing audit procedures regarding subsequent events to identify those that either mitigate or otherwise affect the entity’s ability to continue as a going concern
  9. Confirming the existence, terms and adequacy of borrowing facilities
  10. Obtaining and reviewing reports of regulatory actions
  11. Determining the adequacy of support for any planned disposals of assets

Evaluating management’s plans for future actions may include inquiries of management as to its plans for future action, including, for example, its plans to liquidate assets, borrow money or restructure debt, reduce or delay expenditures, or increase capital (HRD).