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Syllabus E. Review And Reporting E2. Going concern

Ed/E2e. Going Concern Review & Indicators

Syllabus Ed/E2e)

E2d) Identify and explain potential indicators that an entity is not a going concern.
E2e) Discuss the procedures to be applied in performing going concern reviews.

Going concern is vital as the FS must show a ‘true and fair view’

The auditor will undertake a number of procedures in the going concern review:

  • Look at the economic conditions of the industry at that time

  • Contact providers of finance to check they're happy to continue

  • Assess management intentions for the future

  • Review post Y/E cash flow statements, management accounts and budgets

  • Review management assumptions - are they reasonable

  • Conduct analytical review of the FS to check for worsening performance

  • Review correspondence with solicitors to ensure no likely actions or cases

  • Review correspondence with banks to provide evidence of continued good relations

Indicators of Going Concern

  • Technology changes in the industry

  • Suppliers unwilling to provide credit terms

  • Banks withdrawing loan facilities

  • Management plans for risky diversification

  • Cash-flow problems post year end or large cash outflows

  • Deterioration in key ratios

  • Loss of Key staff

  • Legal action against the company

  • Late payment of staff salaries, PAYE payments, VAT or supplier invoices

  • Sales of major assets without prior warning

  • Loss of key customer or supplier