Going Concern, Uniform Guidance for Single Audit Flashcards
going concern addresses an entity’s ability to…
continue for a reasonable period usually 1 year
if disclosures are not adequate, what type of opinion should auditors issue?
qualified or adverse opinion
if disclosures are adequate and doubt is alleviated by managements plans, auditor will issue what type of report?
unmodified opinion; consider emphasis of matter paragraph
if disclosures are adequate and doubt is not alleviated by managements plans, auditor will issue what type of report?
Unmodified opinion with going concern section:
“substantial doubt about the entity’s ability to continue as a going concern”
if the current ratio (CA/CL) is lower than 1, it may create a…
substantial going concern doubt because it indicates the entity may be unable to pay debts as they come due.
what are some conditions of going concern?
-unable to pay debts as they come due
-several years of operating losses and/or negative working capital
-uneconomic long-term commitments
-restructuring debts
-dividends in arrears (havent paid out dividends)
-loss of key customers
what are the procedures to test going concern assumption?
-read loan agreements
-read minutes of shareholder meetings
-inquire of entity’s attorney about litigation
-confirm lines of credit
-review reports of regulatory action
what are some managements plans to mitigate going concern issues?
-dispose of business unit or major asset
-cut or delay expenditures
-borrow more or restructure existing debt
-increase ownership equity (sell stock)
going concern primary issue for auditors relates to
cash flow
going concern needs what 2 things?
- adequate disclosure
- substantial doubt
if going concern basis is not appropriate, issue what type of opinion?
adverse
profitability ratios
gross margin and return on assets
asset utilization ratios
inventory turnover, receivable turnover
market ratios
price to earnings, sales to cash flow
liquidity ratios
current ratio, quick ratio (acid test)
