28.

GOING CONCERN (AAS-16 / SA 570)

28.1 MEANING AAS-16 / SA 570 'Going Concern' deals with this basic auditing concept. Going Concern is one of the Fundamental Accounting Assumptions. It refers to the intention and ability of the entity to exist in 'near foreseeable future' i.e. the next one year. 28.2 RELEVANCE FOR AUDITOR Generally, balance sheet discloses the book value of assets and liabilities assuming that entity continues to operate in future. If this assumption is wrong, then values of assets and liabilities should be changed. Otherwise, the financial statements cannot show true and fair view. 28.3 INDICATORS OF ABSENCE OF GOING CONCERN Following factors indicate that an entity is not a going concern (a) Financial indicators Negative net worth Negative Working Capital Adverse key financial ratios Negative cash flow positions Continuous operating losses Inability to pay the creditors Compromise with creditors Fixed term loan payable soon without possibility of renewal Change from credit purchase terms to cash purchase terms (b) Operating indicators Loss of key management personnel without replacement Loss of a major market Loss of a major supplier or customer Labour unrest and problems (c) Other indicators Changes in government policies Pending legal proceedings Non- compliances of Statutory rules and regulations. 28.4 AUDITOR'S DUTY Auditor should obtain sufficient audit evidence for deciding whether the entity is a going concern. Auditor should review the events after the Balance Sheet date having an effect on the Going Concern assumption e.g. earthquake, fire, enemy attack etc. Auditor should review the agreement relating to long term debts including debentures and see whether there is any breach of conditions. Auditor should analyse the latest interim Financial Statements. Auditor should analyse and discuss the latest cash flow statement, operating budget and profit forecast. Auditor should review the minutes of Board of Directors, Shareholders and other committees. Auditor should obtain legal opinion regarding the pending cases. Auditor should review the management's future plans by studying the following

(a) (b) (c) (d) (e)

Plans to liquidate the assets Restructuring of debt and further borrowing of money Cost reduction programs. Deferring of major expenditure Increase in the ownership of equity

Auditor should obtain representation (management certificate) in written form in respect of above matters.

28.5 AUDIT REPORT Where the Going Concern assumption is appropriate, auditor should issue unqualified report. Where there were doubts regarding the Going Concern assumption, but the same were cleared due to management explanation, auditor should give an unqualified report provided adequate disclosure is made in Notes on Accounts stating (a) (b) The condition which affected the Going Concern The steps taken by the management.

Auditor should invite the attention of shareholders to these notes. Where there were doubts regarding the Going Concern assumption and management explanation is not adequate, auditor should issue qualified report stating the reasons. If the entity is not a Going Concern, the auditor should express an adverse opinion.