The going-concern basis assumes continued operations when preparing financial statements. Under U.S. generally accepted accounting principles (GAAP), that basis ordinarily remains appropriate until liquidation becomes imminent, even when serious financial difficulties require disclosure.
- Management evaluates the entity's ability to meet obligations and prepares the financial statements, including required going-concern disclosures.
- The auditor evaluates relevant evidence and management's conclusions; performing an audit does not transfer responsibility for financing or operating decisions.
- An audit opinion provides no guarantee of survival. A later business failure does not, by itself, establish that the earlier audit was deficient.
The auditor should identify factors considered significant to continued operations while performing planned procedures, including analytical procedures, debt testing, inquiries, and inspection. Evidence gathered for individual accounts can reveal a broader inability to fund operations or settle obligations.
The principal warning signs connect to ordinary audit evidence:
The significance of an indicator depends on its severity, persistence, timing, and interaction with other conditions. No fixed number of warning signs establishes substantial doubt, although one sufficiently serious condition can support that conclusion in...
Common mistakes
- Wrong actor's clock. Excluding Marlon's February 1, Year 3 payment from management's evaluation improperly substitutes the issuer auditor's December endpoint.
- Indicator counting. Requiring three adverse conditions invents a threshold; one severe loss of operating rights may be decisive.
- Credit limit equals cash. A $300,000 facility with unsatisfied draw conditions does not establish $300,000 of usable financing.
Bottom line
- Planned audit procedures can reveal financial, operational, relationship, and external threats to continued operations.
- Evaluate conditions together; no fixed indicator count determines substantial doubt.
- Management's U.S. GAAP evaluation extends one year after issuance or availability for issuance, as applicable.
- The nonissuer auditor follows the framework's period; the issuer auditor's separate PCAOB period does not exceed one year beyond the financial-statement date.
Exam shortcut
Identify the actor before choosing an endpoint. Mark management, nonissuer auditor, or issuer auditor beside each date in the facts. Trace warning signs into payment consequences. Distinguish reported losses from an inability to fund obligations when due. Separate existing resources from proposed relief, then inspect commitments, conditions, provider capacity, and funding dates. Look for the earliest shortage. Compare financing availability with that date before relying on an annual surplus.
The full lesson (about 4,838 words, 32 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- III.E5
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