John Selwood Q&As
John reminds us why going concern is important and explores some emerging ethical and independence challenges.
Q) I am auditing a charitable company that has lost its main source of funding. The trustees are executing a plan to curtail approximately 90% of the charity’s activities. The charity will survive but it will be operating entirely differently. What are my responsibilities as auditor in respect of going concern? The company is still a going concern so how do I address this unusual situation?
A) This question forces auditors to examine the reasons why going concern is important. I think that going concern needs to be viewed from two different angles:
- First, the user of the financial statements wants to know whether the entity can and will continue to operate. If there are significant uncertainties the user wants to understand these also. This is necessary for a true and fair view.
- Second, going concern forms the basis on which the financial statements are prepared. If the entity is not a going concern then a basis other than going concern is usually more appropriate for the accounting, and assets and liabilities may need to be carried at different values.
Clearly, as auditor you should be concerned with both of these issues. You should review the disclosure that the trustees have made in the financial statements and consider whether the uncertainties have been properly explained. If the disclosures are inadequate then you should consider the impact on your audit report.
Also, the trustees should have included more information on the charity’s position in the Trustees Annual Report (TAR). If the financial statements are prepared under one of the new Charity SORPs then this disclosure should be extensive, particularly covering the risks that the charity faces and how the trustees intend to address those risks.
This is where determining the nature of your responsibilities as auditor becomes a little more complicated. Prior to periods commencing 1 January 2016, you read the TAR and report on misstatements and inconsistency with the financial statements. You will also have to consider whether the company’s TAR complies with applicable legal requirements, to comply with SI 2015/980. This applies for periods commencing from 1 January 2016, although early adoption of SI 2015/980 is available for periods commencing from 1 January 2015.
In any event, as auditor, you will encourage the trustees to produce the right narrative reporting
The other issue is the valuation of assets and liabilities relating to activities that are being wound up or reduced in scope – if the charity owns an asset that will no longer be used in its operations, it would be inappropriate to continue to measure this asset at depreciated historic cost. Instead it should be revalued to residual value or recoverable amount. Equally, if there are liabilities arising from the cessation, such as redundancy payments or penalties on leases, these should be recognised.
Where the accounts are not prepared on a going concern basis this should be disclosed.
In summary, going concern is not only about whether an entity survives or not, but also the impact on the financial statements and the needs of the users.
This is an extract from an article in the May 2016 edition of Audit & Beyond, the magazine of the Audit and Assurance Faculty.
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