Topic going concern module f8 acca

Topic going concern module f8 acca Topic going concern module f8 acca Topic going concern module f8 acca Topic going concern module f8 acca

Going Concern: A Comprehensive Guide

ACCA F8 Audit and Assurance

Prepared by Admin

Updated: July 2025

Introduction to Going Concern

Context

The Going Concernassumption is a foundational principle in financialreporting, assessed during the audit finalization phase

Core topic in ACCA F8 Audit and Assurance

Complex and typically handled by senior auditors

Frequently tested in exams due to its critical impact on financialstatement reliability

Objective: Ensure stakeholders can trust the entitys ongoing viability

Exam Question Types

Common Formats

1 Indicators: Identify and explain potential signs that an entity is not a

going concern (e.g., financial distress signals)

2 Audit Procedures: Describe procedures to evaluate whether an

entity is a going concern

3 Audit Report Impact: Discuss how adequate or inadequate

disclosures affect the auditors report

Mastering these formats is key to scoring high in F8 exams

Learning Objectives

Define the going concern assumption and its implications

Identify financial, operational, and other indicators of going concernrisks

Understand audit procedures to assess going concern status

Analyze the impact of going concern issues on audit opinions

Prepare for ACCA F8 exam questions with practical examples

What is Going Concern?

Definition (ISA 570)

Financial statements are prepared under the assumption that the entitywill continue its operations for the foreseeable future(at least 12 months)without needing to liquidate assets or cease operations

Assets recorded at historical cost or fair value, not liquidation value.Links to F7/FR: A fundamental accounting principle

Example: A factorys machinery is valued at $500,000 under goingconcern, assuming continued use

Non-Going Concern (Break-Up Basis)

Liabilities may require provisions for settlement costs

Long-term assets/liabilities reclassified as short-term

Management must disclose the basis and reasons for not using goingconcern

Managements Responsibilities

Key Duties

Prepare financial statements assuming going concern unless

liquidation is planned or unavoidable

Conduct a formal assessment of the entitys ability to continue as agoing concern

Disclose any material uncertainties that cast significant doubt ongoing concern

Involves judgment about future events and conditions

Example: Disclosing risks from a major lawsuit threatening solvency

Auditors Responsibilities

ISA 570 Requirements

Obtainsufficient and appropriate audit evidence to evaluate

managements use of the going concern assumption

Conclude whether material uncertaintiesexist that cast significantdoubt on the entitys going concern status

Assess the adequacy of related disclosures in financial statements

Audit Objectives for Going Concern

Verify thereasonableness of managements going concern assumption.Identify any material uncertainties affecting the entitys viability

Determine the impact on theaudit opinionbased on evidence anddisclosures

Ensure compliance with ISA 570 for robust audit conclusions

Audit Procedures Framework

Three Core Areas

1 Assess Managements Assumption: Evaluate the process and

assumptions used by management

2 Identify Material Uncertainties: Look for events/conditions casting

doubt on going concern

3 Evaluate Audit Report Impact: Determine how findings affect the

auditors opinion

Assessing Managements Going Concern Assumption

Key Steps

During risk assessment, auditors:

Confirm whether management conducted a preliminary going concernassessment

Review theprocess,assumptions, andfeasibilityof managementsplans

Ensure the assessment covers at least12 months from the reportingdate

Example: Checking if sales forecasts assume unrealistic market growth

Reviewing Managements Plans

Identifying Material Uncertainties

Auditors Role

Evaluateevents or conditions that may cast significant doubton the

entitys ability to continue as a going concern

Discuss with management their awareness of risks

Review managements mitigation plans

Maintain professional skepticism throughout the audit

Example: Investigating a sudden loss of a major customer

Financial Indicators of Going Concern Issues

Key Signs

Withdrawal of Credit: Creditors reducing or stopping financial

support

Payment Delays: Inability to pay creditors on due dates.

Adverse Ratios: Declining liquidity or profitability metrics (e.g.,

current ratio < 1)

Significant Losses: Ongoing operating losses or asset value declines.

Financial Indicators (Continued)

Negative Cash Flows: Past or projected negative operating cash

Operational Indicators

Key Signs

Liquidation Intent: Management plans to cease operations.

Key Personnel Loss: Departure of critical staff without

Additional Audit Procedures (Part 1)

When Significant Doubt Exists

If events/conditions indicate going concern risks:

Request a going concern assessment if not already performed

Review managements plans forfeasibilityand effectiveness

Analyze cash flow,profit, and other forecasts with management

Additional Audit Procedures (Part 2)

Reviewloan agreements for covenant breaches or repayment terms.Examineboard/shareholder minutes for discussions on financial

difficulties

Confirm asset disposal plans (e.g., agreements or valuations)

Consultlegal counsel on litigation or claim risks

Assess third-party financingcapabilities (e.g., investor commitments).Verifyorder fulfillmentcapacity (e.g., open contracts)

Evaluating Cash Flow Forecasts

New supplier contracts resolving supply issues.

Unexpected lawsuits filed post-assessment.

Adjustrisk assessments and audit procedures if new risks emerge

Exam Example: M Co (Dec 2019)

Scenario

M Co, an electronics distributor (year-end 30.4.20X5), faces:

Delayed Payments: Suppliers switched to cash-on-delivery after late

M Co: Indicators and Procedures

Indicators

Payment Delays: Strains cash flow, signals liquidity issues.

Supplier Loss: Threatens operational continuity.

Overdraft Risk: Non-renewal could lead to insolvency.

Procedures

Review cash flow forecasts for realism

Check bank correspondence on overdraft renewal

Verify new supplier arrangements

Obtain written representations on going concern

Impact on Auditors Report

Key Considerations

Determine ifmaterial uncertainties exist

Evaluate theadequacy of managements disclosures

Decide the appropriate audit opinionbased on evidence and

disclosures

Discuss findings with management to ensure proper reporting

Adequate vs Inadequate Disclosures

Conclusion and Exam Tips

Key Takeaways

Going concern is critical for assessing financial statement reliability.Auditors must rigorously evaluate managements assumptions,

evidence, and disclosures

A mix of procedures ensures robust conclusions