The going concern concept states that the procurement transactions and the procurement records have to be recognized and prepared in such a way that the entity shall continue with operations for the foreseeable future period and shall not cease to be in existence, stop or curtail is present production either currently or in the near future.
The auditor when reporting on the procurement records is categorically concerned of the going concern concept because;
a) It affects true and fair view of the procurement records
b) It facilitates qualification of audit reports.
c) It confirms compliance of procurement records with the generally accepted procurement principles and policies.
d) The auditor’s main interest will be that all material matters affecting the procurement records have been disclosed.
Appropriateness of going concern assumption
The auditor should consider the risk that the going concern assumption may no longer be appropriate. Indications of the risk that the continuance as a going concern may be questionable could come from the procurement records or from other sources. According to ISA 570, factors which would indicate that the going concern assumption of the business entity that he is auditing is threatened include
i) Financial indicators.
– Changes of the financial position of the company drastically within a short period of time especially from bad to worse.
– Financial difficulties affecting the company’s production process and
– Changes of credit policies especially from credit to cash on delivery.
– Difficulties in paying salaries and wages of employees.
– Increased financial borrowing.
ii) Non-financial indicators.
– High staff turnover in key procurement and managerial officials and finance personnel especially without replacement.
– Unfriendly environment between management and employees
– Unusual pressure within the entity for no apparent reason.
– Circumstances of labour disputes e.g. strikes employees leading to demonstrations and protests.
– Where the entity relies heavily on a customer for sale of its products or for marketing its output.
– Pending legal proceedings against the entity that may, if successful, result in judgements that could not be met.
– Non-compliance with capital and other statutory requirements.
Relevant Audit Procedures in Going Concern
ISA 570 requires that the auditor should consider going concern at the preliminary stages of the audit, in particular when performing risk assessment procedures at the planning stage. At that point the auditor should consider whether there are events or conditions that may cast significant doubt about the going concern assumption. The auditor should discuss with management their preliminary assessment of going concern, ascertain whether they have identified issues that may have a significant impact on going concern and how they plan to address them. If management has not performed such a preliminary assessment, the auditor shall discuss with them the grounds on which they intend to use the going concern basis and ask them whether there are events and conditions that may significantly affect going concern.
After the preliminary/risk assessment at the planning stage, the auditor should perform further audit procedures to obtain appropriate evidence to establish whether a material uncertainty about going concern exists. The procedures include;
(a) Analyzing and discussing cash flow, profit and other relevant forecasts with management.
(b) Analyzing and discussing the entity’s latest available interim
(c) Reviewing the terms of debentures and loan agreements and determining whether any have been breached.
(d) Reading minutes of the meetings of shareholders, those charged with governance and relevant committees for reference to financing difficulties.
(e) Enquiring of the entity’s lawyer regarding the existence of litigation and claims and the reasonableness of management’s assessments of their outcome and the estimate of their financial implications.
(f) Confirming the existence, legality and enforceability of arrangements to provide or maintain financial support with related and third parties and assessing the financial ability of such parties to provide additional funds.
(g) Considering the entity’s plans to deal with unfilled customer orders.
(h) Reviewing events after period end to identify those that either mitigate
or otherwise affect the entity’s ability to continue as a going concern