HKSA 570 - Going Concern (Condensed)
| Section Name | Key Concept | Brief Description |
|---|---|---|
| Introduction | Scope and Responsibilities | Auditor's duties regarding going concern assessment and reporting; management's primary responsibility for assessment. |
| Objectives | Auditor's Goals | Obtain evidence on going concern basis, conclude on material uncertainty, and report accordingly. |
| Risk Assessment Procedures | Identifying Events/Conditions | Initial and ongoing procedures to detect events casting doubt on going concern. |
| Evaluating Management's Assessment | Assessment Period and Information | Evaluate management's assessment covering at least 12 months; consider all relevant audit evidence. |
| Additional Audit Procedures | Responding to Identified Risks | Procedures when events/conditions are identified, including evaluating plans and forecasts. |
| Auditor Conclusions | Material Uncertainty Determination | Conclude on appropriateness of going concern basis and existence of material uncertainty. |
| Implications for Auditor's Report | Reporting Scenarios | Different report modifications based on appropriateness of basis and adequacy of disclosure. |
| Communication and Delay | Governance and Timeliness | Communicate with those charged with governance; handle significant delays in approval. |
Introduction and Scope (Para 1-9)
Introduction and Scope
Scope of HKSA 570
HKSA 570 (Revised) deals with the auditor's responsibilities in the audit of financial statements relating to going concern and the implications for the auditor's report. (Ref: Para. A1)
Going Concern Basis of Accounting
Under the going concern basis of accounting, the financial statements are prepared on the assumption that the entity is a going concern and will continue its operations for the foreseeable future. General purpose financial statements are prepared using the going concern basis of accounting, unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so.
Responsibility for Assessment
| Party | Responsibility |
|---|---|
| Management | Make a specific assessment of the entity's ability to continue as a going concern (explicitly required by some frameworks like HKAS 1). |
| Auditor | Obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management's use of the going concern basis of accounting. |
Objectives (Para 8)
Objectives
The objectives of the auditor are:
| Objective | Description |
|---|---|
| (a) | To obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management's use of the going concern basis of accounting in the preparation of the financial statements |
| (b) | To conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity's ability to continue as a going concern |
| (c) | To report in accordance with this HKSA |
Risk Assessment Procedures (Para 10-11)
Risk Assessment Procedures and Related Activities
Initial Assessment (Paragraph 10)
When performing risk assessment procedures as required by HKSA 315 (Revised), the auditor shall consider whether events or conditions exist that may cast significant doubt on the entity's ability to continue as a going concern.
Ongoing Alertness (Paragraph 11)
The auditor shall remain alert throughout the audit for audit evidence of events or conditions that may cast significant doubt on the entity's ability to continue as a going concern.
Examples of Events or Conditions That May Cast Significant Doubt
| Category | Examples |
|---|---|
| Financial Indicators | Net liability position, fixed-term borrowings approaching maturity without renewal prospects, negative operating cash flows, adverse key financial ratios, inability to comply with loan agreements |
| Operating Indicators | Management intentions to liquidate, loss of key management without replacement, loss of a major market or key customer, labor difficulties |
| Other Indicators | Non-compliance with capital or regulatory requirements, pending legal proceedings, changes in law or regulation expected to adversely affect the entity |
Evaluating Management's Assessment (Para 12-14)
Evaluating Management's Assessment
General Evaluation (Paragraph 12)
The auditor shall evaluate management's assessment of the entity's ability to continue as a going concern.
Period of Assessment (Paragraph 13)
In evaluating management's assessment, the auditor shall cover the same period as that used by management as required by the applicable financial reporting framework, or by law or regulation if it specifies a longer period.
Consideration of All Relevant Information (Paragraph 14)
In evaluating management's assessment, the auditor shall consider whether management's assessment includes all relevant information of which the auditor is aware as a result of the audit.
Guidance on Evaluation
| Situation | Approach |
|---|---|
| History of profitable operations and ready access to financial resources | Management may make its assessment without detailed analysis; auditor's evaluation may be made without performing detailed evaluation procedures if other audit procedures are sufficient |
| When detailed evaluation is required | Evaluate the process management followed, the assumptions on which the assessment is based, and management's plans for future action and whether they are feasible |
Additional Audit Procedures (Para 15-16)
Additional Audit Procedures When Events or Conditions Are Identified
Period Beyond Management's Assessment (Paragraph 15)
The auditor shall inquire of management as to its knowledge of events or conditions beyond the period of management's assessment that may cast significant doubt on the entity's ability to continue as a going concern.
Required Procedures (Paragraph 16)
If events or 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.
| Procedure | Description |
|---|---|
| (a) | Where management has not yet performed an assessment, request management to make its assessment |
| (b) | Evaluate management's plans for future actions, whether the outcome is likely to improve the situation, and whether plans are feasible |
| (c) | Where cash flow forecast is significant, evaluate reliability of underlying data and adequacy of support for assumptions |
| (d) | Consider whether any additional facts or information have become available since management made its assessment |
| (e) | Request written representations from management and, where appropriate, those charged with governance |
Additional Audit Procedures That May Be Relevant
- Analyzing and discussing cash flow, profit, and other relevant forecasts with management
- Reading the terms of debentures and loan agreements and determining whether any have been breached
- Confirming the existence, legality, and enforceability of arrangements to provide or maintain financial support
- Performing audit procedures regarding subsequent events
Auditor Conclusions (Para 17-20)
Auditor Conclusions
Conclusion on Going Concern Basis (Paragraph 17)
The auditor shall evaluate whether sufficient appropriate audit evidence has been obtained regarding, and shall conclude on, the appropriateness of management's use of the going concern basis of accounting.
Conclusion on Material Uncertainty (Paragraph 18)
Based on the audit evidence obtained, the auditor shall conclude whether, in the auditor's judgment, a material uncertainty exists related to events or conditions that, individually or collectively, may cast significant doubt on the entity's ability to continue as a going concern.
Adequacy of Disclosures When Material Uncertainty Exists (Paragraph 19)
If the auditor concludes that management's use of the going concern basis of accounting is appropriate but a material uncertainty exists, the auditor shall determine whether the financial statements:
- Adequately disclose the principal events or conditions that may cast significant doubt and management's plans to deal with these events or conditions
- Disclose clearly that there is a material uncertainty related to events or conditions that may cast significant doubt and therefore the entity may be unable to realize its assets and discharge its liabilities in the normal course of business
Adequacy of Disclosures When No Material Uncertainty Exists (Paragraph 20)
If events or conditions have been identified that may cast significant doubt but, based on audit evidence, the auditor concludes that no material uncertainty exists, the auditor shall evaluate whether the financial statements provide adequate disclosures about these events or conditions in view of the requirements of the applicable financial reporting framework.
Implications for Auditor's Report (Para 21-24)
Implications for the Auditor's Report
Use of Going Concern Basis Is Inappropriate (Paragraph 21)
Use of Going Concern Basis Is Appropriate but Material Uncertainty Exists
| Situation | Auditor's Report |
|---|---|
| Adequate Disclosure Made (Paragraph 22) | Express an unmodified opinion and include a separate section under the heading "Material Uncertainty Related to Going Concern" to draw attention to the note in the financial statements and state that the auditor's opinion is not modified in respect of the matter. |
| Inadequate Disclosure Made (Paragraph 23) | Express a qualified opinion or adverse opinion, as appropriate, in accordance with HKSA 705 (Revised). In the Basis for Qualified (Adverse) Opinion section, state that a material uncertainty exists and the financial statements do not adequately disclose this matter. |
Management Unwilling to Make or Extend Its Assessment (Paragraph 24)
If management is unwilling to make or extend its assessment when requested to do so by the auditor, the auditor shall consider the implications for the auditor's report.
Summary of Reporting Scenarios
| Scenario | Opinion Type | Report Section Required |
|---|---|---|
| Going concern basis appropriate, material uncertainty exists, adequate disclosure | Unmodified opinion | "Material Uncertainty Related to Going Concern" section |
| Going concern basis appropriate, material uncertainty exists, inadequate disclosure | Qualified or Adverse opinion | "Basis for Qualified (Adverse) Opinion" section |
| Going concern basis inappropriate | Adverse opinion | Standard adverse opinion reporting |
| Management unwilling to make/extend assessment | Qualified opinion or Disclaimer | As per HKSA 705 (Revised) |
Communication and Delay (Para 25-26)
Communication with Those Charged with Governance and Significant Delay
Communication with Those Charged with Governance (Paragraph 25)
Unless all those charged with governance are involved in managing the entity, the auditor shall communicate with those charged with governance events or conditions identified that may cast significant doubt on the entity's ability to continue as a going concern.
Required Communications
- Whether the events or conditions constitute a material uncertainty
- Whether management's use of the going concern basis of accounting is appropriate
- The adequacy of related disclosures in the financial statements
- Where applicable, the implications for the auditor's report
Significant Delay in the Approval of Financial Statements (Paragraph 26)
If there is significant delay in the approval of the financial statements by management or those charged with governance after the date of the financial statements, the auditor shall:
- Inquire as to the reasons for the delay
- If the auditor believes the delay could be related to events or conditions relating to the going concern assessment, perform additional audit procedures as described in paragraph 16
- Consider the effect on the auditor's conclusion regarding the existence of a material uncertainty
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