Auditing is the core function of an auditor who shall comply with all the Standards on Auditing (SA) prescribed by the Central Government. However, until any auditing standards are notified, any standards of auditing specified by the CA Institute shall be deemed to be the auditing standards.
CG provides SAs as recommended by the Institute of Chartered Accountants of India (ICAI) in consultation with and after examination of the recommendations made by the National Financial Reporting Authority (NFRA).
You may refer clause (7) of section 2 read with sections 143(9) and section 143(10) of the Companies Act, 2013. Recently, the ICAI has issued newly revised Standard of Auditing 570 on Going Concern. I have summarised the whole SA-570 as notes which has been sited below.
Complete Notes on SA-570 – Going Concern
Standard on Auditing (SA)-570 on Going Concern is a revised version of the erstwhile Auditing and Assurance Standard (AAS) 16, “Going Concern” issued by the CA Institute in 1998. Now, CA Institute has further revised SA-570 which is quite detailed in terms of auditor’s responsibility in the audit of financial statements with respect to management’s use of the going concern assumption in the preparation and presentation of the financial statements.
Scope of SA-570
Paragraph-1: SA-570 deals with the auditor’s responsibilities in the audit of financial statements relating to going concern and the implications for the auditor’s report.
As per SA-701, the responsibility of auditor is to communicate Key Audit Matters in his report and therefore it acknowledges that the matters relating to going concern may be determined to be key audit matters.
Accordingly, a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern is, by its nature, a key audit matter.
Going Concern Basis of Accounting
Paragraph-2: Under the going concern basis of accounting, you are required to prepare the financial statements on the assumption that:
- i) the entity is a going concern; and
- ii) the entity will continue its operations for the foreseeable future.
Further, the assets and liabilities are recorded on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course of business.
However, if the management intends to liquidate the entity or cease operations or the entity has no realistic alternative then, there is no need to prepare the financial statements using the going concern basis of accounting. Additionally, the going concern basis of accounting is not relevant while preparing financial statements on a tax basis.
Management Responsibility
Paragraph-3-5: The preparation of the financial statements requires management to assess the entity’s ability to continue as a going concern even if the financial reporting framework does not include an explicit requirement to do so.
Factors like Degree of Uncertainty, Subsequent Events and External Factors are relevant for making a judgment by the management to assess the entity’s ability to continue as a going concern.
Responsibilities of the Auditor
Paragraph-6-7: The auditor of the company is responsible to check whether a material uncertainty exists about the entity’s ability to continue as a going concern. To do that he has to obtain sufficient appropriate audit evidence.
However, the auditor cannot predict future events or conditions due to inherent limitations on the
auditor’s ability to detect material misstatements. Therefore, the absence of any reference to a material uncertainty about the entity’s ability to continue as a going concern in an auditor’s report cannot be viewed as a guarantee as to the entity’s ability to continue as a going concern.
Note that the auditor shall discuss the assessment performed by the management and determine whether management has identified events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern.
Effective Date
Paragraph-8: Standard on Auditing (SA)-570 is effective for audits of financial statements for periods beginning on or after 1st April, 2017.
Objectives of SA-570
Paragraph-9: According to Para-9 of SA-570, the main objectives of the auditor are:
a) Audit Evidence: 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) Material Uncertainty: 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; and
(c) Report: To report in accordance with this SA-570.
Thus, the auditor has to obtain audit evidence and determine that whether a material uncertainty exists to affect the entity’s ability to continue as a going concern and report accordingly.
Risk Assessment Procedures and Related Activities
Paragraph-10-11: If management has performed a preliminary assessment, the auditor shall discuss such assessment and determine whether any event or conditions has been identified that may cast significant doubt on the entity’s ability to continue as a going concern.
Otherwise, the auditor shall discuss with management the basis for the intended use of the going concern basis of accounting. In accordance with paragraph 11 of SA-570, 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.
Evaluating Management’s Assessment
Paragraph-12-14: The auditor shall evaluate management’s assessment of the entity’s ability to continue as a going concern.
In evaluating management’s assessment of the entity’s ability to continue as a going concern, the auditor shall cover the same period as that used by management to make its assessment as required by the applicable financial reporting framework, or by law or regulation if it specifies a longer period. If management’s assessment of the entity’s ability to continue as a going concern covers less than twelve months from the date of the financial statements as defined in SA 560,3 the auditor shall request management to extend its assessment period to at least twelve months from that date.
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.
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.
Additional Audit Procedures When Events or Conditions Are Identified
Paragraph-16: The auditor shall obtain sufficient appropriate audit evidence to determine whether or not 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.
Additional audit procedures shall be performed by auditor and it includes:
(a) Management’s Assessment: Where management has not yet performed an assessment of the entity’s ability to continue as a going concern, requesting management to make its assessment.
(b) Management’s Plan: Evaluating management’s plans for future actions in relation to its going concern assessment, whether the outcome of these plans is likely to improve the situation and whether management’s plans are feasible in the circumstances.
(c) Evaluation of Management’s Plan: Where the entity has prepared a cash flow forecast, and analysis of the forecast is a significant factor in considering the future outcome of events or conditions in the evaluation of management’s plans for future actions:
(i) Evaluating the reliability of the underlying data generated to prepare the forecast; and
(ii) Determining whether there is adequate support for the assumptions underlying the forecast.
(d) Additional Factors: Considering whether any additional facts or information have become available since the date on which management made its assessment.
(e) Written Representation: Requesting written representations from management and, where appropriate, those charged with governance, regarding their plans for future actions and the feasibility of these plans.
Auditor Conclusions
Paragraph-17-20: In compliance with Para 17 of SA-570, 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 in the preparation of the financial statements.
According to Paragraph 18 of SA-570, the auditor shall conclude 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.
However, a material uncertainty exists when the magnitude of its potential impact and likelihood of occurrence is such that, in the auditor’s judgment, appropriate disclosure of the nature and implications of the uncertainty is necessary for:
- (a) In the case of a fair presentation financial reporting framework, the fair presentation of the financial statements, or
- (b) In the case of a compliance framework, the financial statements not to be misleading.
Adequacy of Disclosures When Events or Conditions Have Been Identified and a Material Uncertainty Exists
Paragraph 19 of SA-570 states that if the auditor concludes that management’s use of the going concern basis of accounting is appropriate in the circumstances but a material uncertainty exists, the auditor shall determine whether the financial statements:
(a) Adequately disclose the principal events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern and management’s plans to deal with these events or conditions; and
(b) Disclose clearly that there is a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern and, therefore, that it may be unable to realize its assets and discharge its liabilities in the normal course of business.
Adequacy of Disclosures When Events or Conditions Have Been Identified but No Material Uncertainty Exists
In accordance with paragraph 20 of SA-570, if events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern but, based on the audit evidence obtained the auditor concludes that no material uncertainty exists, the auditor shall evaluate whether, in view of the requirements of the applicable financial reporting framework, the financial statements provide adequate disclosures about these events or conditions.
Implications for the Auditor’s Report
Paragraph-21-24: As per paragraph 21 of SA-570, the auditor shall express an adverse opinion if he founds that the management’s use of the going concern basis of accounting is inappropriate.
In case the management’s use of Going Concern basis of accounting is appropriate but a material uncertainty exists:
1) Adequate Disclosure [Para 22]: If adequate disclosure about the material uncertainty is made in the financial statements then the auditor shall express an unmodified opinion. The auditor’s report shall include a separate section under the heading “Material Uncertainty Related to Going Concern” to:
(a) Draw attention to the note in the financial statements that discloses the matters set out in paragraph 19; and
(b) State that these events or conditions indicate that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern and that the auditor’s opinion is not modified in respect of the matter.
2) No Adequate Disclosure [Para 23]: If adequate disclosure about the material uncertainty is not made in the financial statements, the auditor shall:
(a) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705 (Revised)4; and
(b) In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern and that the financial statements do not adequately disclose this matter.
In accordance with paragraph 24 of SA-570, 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.
Communication with Those Charged with Governance
Paragraph-25: The auditor shall communicate the following matters with those charged with governance:
- a) Whether the events or conditions constitute a material uncertainty;
- b) Whether management’s use of the going concern basis of accounting is appropriate in the preparation of the financial statements;
- c) The adequacy of related disclosures in the financial statements; and
- d) Where applicable, the implications for the auditor’s report.
Significant Delay in Approval of Financial Statements
Paragraph-26: As we know that the financial statement requires approval by management or those charged by government in compliance with the provisions of section 134 of the CA 2013. In Paragraph 26 of SA-570, it has been stated that if there is significant delay in the approval of the financial statements then, the auditor shall inquire the reasons for such significant delay in authorisation of financial statement.
However, if the auditor believes that such delay could be related to going concern assessment then the auditor shall perform additional audit in accordance with the paragraph 16 and consider the existence of any material uncertainty as described in paragraph 18.
As per section 2(40) of the Companies Act, 2013 defines the term “financial statement” to include the following:
- (i) Balance Sheet;
- (ii) Profit and Loss Account, or Income and Expenditure Account;
- (iii) Cash Flow Statement (CFS);
- (iv) Statement of changes in equity, if applicable; and
- (v) Explanatory note.
Note that the financial statement does not include CFS with respect to One Person Company (OPC), Small Company and Dormant Company.