Concepts and Standards - Going Concern Issues

Question 1

Ususually under a going concern pronblem, what is the main reason of all that would cause an auditor to have a going concern on a company and what ways can they mitigate the substantial doubt on going concern?

Answer 1

The mainly thing to confirm going concern is any way that the company try to reduce cost, going concern is raised based on whether there is a negative in cash flows and also way that the company can save money, some examples include:

• Confirming with third parties the details of arrangements to maintain financial support.
• Cash flows from operating activities are negative.
• Postpone expenditures for research and development projects..
• Negotiate reductions in required dividends being paid on preferred stock.
• Review of compliance with terms of debt agreements. (may reveal that the company is not in compliance due to financial difficulties.)
• Recurring working capital shortages.
• Review compliance with the terms of debt agreements.
• Lease rather than purchase operating facilities.
• Extend the due dates of existing loans.
• matters considered in the meetings of the stockholders and board of directors may bear on the going concern status of the client.
• Usual Trade credit being denied
• Etc.

You can see that in all these situation where the company are trying to save money due to negative cash activity is a cause for a substantial doubt in the company ability to continue to operate as a going concern.

Other reasons that would cause for going concern is management plans:

(1) dispose of assets (2) borrow money or restructure debt, (3) reduce or delay expenditures, and (4) increase ownership equity.