Question Of The Week

• Explanation

Financial statements (F/S) are usually prepared on the assumption that the entity will remain in business for a reasonable period (ie, going concern assumptionAn entity's ability to continue to operate beyond the period of time required by the applicable financial reporting framework or within one year after the date the financial statements are issued (or available to be issued, when applicable).). Management is responsible for evaluating the entity's ability to continue as a going concern.  If there is substantial doubt about the going concern assumption, management must disclose it in a footnote to the F/S.

An auditor has the responsibility to make an independent evaluation of the going concern assumption and management's disclosure of substantial doubt, if any.  The auditor will consider whether management's plans (eg, issue stock) alleviate the doubt.

• If the plans do alleviate (ie, mitigate) the doubt and the disclosure is adequate, the auditor issues an unmodified opinionAn audit opinion concluding that the financial statements are fairly presented in all material respects in compliance with the applicable financial reporting framework (eg, GAAP). and may draw attention to the footnote with an emphasis-of-matterA paragraph in the audit report referring to a matter presented or disclosed in the financial statements that the auditor considers fundamental to a user's understanding of the statements. paragraph.
• If the doubt is not alleviated but the disclosure is adequate, the auditor should issue an unmodified opinion with a separate paragraph titled "Substantial Doubt About the Entity's Ability to Continue as a Going Concern."

In neither case would the auditor's report necessarily include the phrase "reasonable period of time, not to exceed one year." If the F/S should include a disclosure but do not, or if the disclosure is inadequate, the auditor will issue a qualifiedAn opinion included in the audit report expressing that—except for the matter(s) to which the qualification relates—the financial statements present fairly, in all material respects, the entity's financial position, results of operations, and cash flows in conformity with GAAP. or adverse opinion An opinion included in the audit report expressing that the financial statements do not fairly present the entity's financial position, results of operations, or cash flows in conformity with GAAP..

Things to remember:
If substantial doubt exists about an entity's ability to continue as a going concern, and management's disclosure is adequate but its plans do not alleviate the doubt, the auditor will issue an unmodified report. The report should include an additional paragraph titled "Substantial Doubt About the Entity's Ability to Continue as a Going Concern."