Recent Changes to an Auditor’s Consideration of an Entity as a Going Concern

By Matt Vasil September 1, 2012

As part of every financial statement audit, the auditor has the responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time.  A reasonable period of time is defined as the “period of time not to exceed one year beyond the date of the financial statements being audited”. The auditor’s evaluation of an entity’s ability to continue as a going concern is based upon his or her knowledge of relevant conditions that exist at, or have occurred prior to, the date of the auditor’s report. Conditions and events that may give rise to such doubt include; negative trends in earnings, negative cash flow, loan defaults, loss of key customers and suppliers, or the occurrence of uninsured catastrophes such as earthquakes or floods.

As a result of the ongoing Clarity Project by the AICPA, the Auditing Standards Board (ASB) has issued Statement on Auditing Standards (SAS) No. 126, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.

The most noteworthy change caused by SAS No. 126 requires the auditor to obtain written representations from management if conditions or events have been identified that indicate there could be substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time. The representations should address management’s plans to mitigate the adverse effects of the conditions and that the financial statements disclose all matters relevant to the entity’s ability to continue as a going concern (i.e. the conditions that gave rise to such a doubt and management’s plans to mitigate the conditions).

SAS No. 126 is effective for audits of financial statements for periods ending on or after December 15, 2012.

For additional information and guidance on applying the new revenue recognition standards, please contact your BNN advisor at 1.800.244.7444.