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Going Concern Opinion

kimberly kelly's Profile

I'm trying to confirm that the audit standard for evaluating an entity's ability to continue as a going concern for a period "not to exceed one year from the date of the financial statements" refers to the period being reported on vs. the date on the auditors report.


Robert Holland
(, ) |

AU Section 341

The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern

Effective for audits of financial statements for periods beginning on or after January 1, 1989, unless otherwise indicated.

This section provides guidance to the auditor in conducting an audit of financial statements in accordance with generally accepted auditing standards with respect to evaluating whether there is substantial doubt about the entity's ability to continue as a going concern. Continuation of an entity as a going concern is assumed in financial reporting in the absence of significant information to the contrary. Ordinarily, information that significantly contradicts the going concern assumption relates to the entity's inability to continue to meet its obligations as they become due without substantial disposition of assets outside the ordinary course of business, restructuring of debt, externally forced revisions of its operations, or similar actions.

The Auditor's Responsibility

[The following paragraph is effective for audits of fiscal years ending on or after November 15, 2007. See PCAOB Release 2007-005. For audits of fiscal years ending before November 15, 2007.]

The auditor has a responsibility to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited (hereinafter referred to as a reasonable period of time). The auditor's evaluation is based on his or her knowledge of relevant conditions and events that exist at or have occurred prior to the date of the auditor's report. Information about such conditions or events is obtained from the application of auditing procedures planned and performed to achieve audit objectives that are related to management's assertions embodied in the financial statements being audited. Evidential Matter.

The auditor should evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time in the following manner:

a. The auditor considers whether the results of his procedures performed in planning, gathering evidential matter relative to the various audit objectives, and completing the audit identify conditions and events that, when considered in the aggregate, indicate there could be substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time. It may be necessary to obtain additional information about such conditions and events, as well as the appropriate evidential matter to support information that mitigates the auditor's doubt.

b. If the auditor believes there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, he should (1) obtain information about management's plans that are intended to mitigate the effect of such conditions or events, and (2) assess the likelihood that such plans can be effectively implemented.

c. After the auditor has evaluated management's plans, he concludes whether he has substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time. If the auditor concludes there is substantial doubt, he should (1) consider the adequacy of disclosure about the entity's possible inability to continue as a going concern for a reasonable period of time, and (2) include an explanatory paragraph (following the opinion paragraph) in his audit report to reflect his conclusion. If the auditor concludes that substantial doubt does not exist, he should consider the need for disclosure.

The auditor is not responsible for predicting future conditions or events. The fact that the entity may cease to exist as a going concern subsequent to receiving a report from the auditor that does not refer to substantial doubt, even within one year following the date of the financial statements, does not, in itself, indicate inadequate performance by the auditor. Accordingly, the absence of reference to substantial doubt in an auditor's report should not be viewed as providing assurance as to an entity's ability to continue as a going concern.

I hope this helps, basically if the auditor determines that the ability to continue on as a going concern is disclosed, than an unqualified report is OK, otherwise report may need to be qualified if disclosure is missing or disclaimed if auditor does not know.

Bob Holland

Topic Expert
Jim Timmins
Title: Managing Director
Company: Teknos Associates
(Managing Director, Teknos Associates) |

From my position on an audit committee, it seemed as though the audit firm wanted to be sure that the client company was viable for a year from the date that the audit opinion was rendered, not just the end of the fiscal year audited (nearly four months earlier). This was confirmed in essence when the partner talked about demonstrating viability for "the next 12 months"; when the CFO asked if that was measured from the end of the fiscal year or "today," the partner replied "today." It was a critical issue because the company's credit line expired after the end of the next fiscal year, but less than 12 months from "today."

Robert Holland
(, ) |

Be very careful as auditors we do not predict to look forward in our report, our examination are based on period in the audit and a reasonable period after.

Paul Herron
Title: Consultant (former CFO)
(Consultant (former CFO), ) |

The "going concern" issue really becomes sticky for early-stage companies, particularly in industries like biotechnology where progress can be sustained only by an adequate supply of working capital. Auditors get nervous when their client's current burn rate will exhaust cash in less than a year because there is never an absolute guarantee that the client can close a new financing round to replenish in time. To sustain viability and satisfy its auditors, management of these early-stage companies must continually perform what I call the ultimate balancing act: meet all the strategic milestones, exercise tight control over the burn rate, and never allow the tank to get low. Raising cash when you don't need it is usually a good idea. Even with all that said, I would expect there have been more going concern opinions issued recently in light of venture capital financing windows being tightly shut. The good news is that this situation will slowly improve.

Douglas Beck
Title: Consulting
Company: DJB Consulting
(Consulting, DJB Consulting) |

Going concern opinions is often common place for early stage companies for many reasons. Trying to have enough capital for over a year, raising capital is a difficult and a long process, executing on the company's business plan, regulatory issues / set backs, economy, competition to name a few are obstacles to overcome a going concern.

Robert Holland
(, ) |

Guys this is right on, I agree from management viewpoint it is truly a balancing act. Like walking a tight rope, one mess up or mistake can be a killer for the business. Let's just say that each industry has its unique challenges ahead of itself. Certainly biotech, has its challenges whereby funding often comes in after viability and not when research is at a critical state.

When you read what GAAS and GAAP states so long as the going concern is properly disclosed and management reconizes each issue an "unqualified opinion" may be provided by its auditors.

GAAP and GAAS talk about mitigation of risks of going concern as well. if management discloses what Paul states regarding mitigating and the balancing issues then I don't feel the auditors would have a big concern particularily in that industry.

Bob Holland

Randal Shields
Title: Consultant/CFO
Company: Randal Shields, CPA
(Consultant/CFO, Randal Shields, CPA) |

I concur with all of the comments made. One situation I did not see referenced concerns experiences I've had. This depends on the ownership structure, and with an early stage company, might be relevant in this situaiton. It's been proposed as an alternative to getting the "going concern opinion", where the company would secure a "guarantee" of liquidity (up to 18 months out) from it's majority shareholders, i.e. the Private Equity and/or Venture Capital owners. An alternative, but not a likely outcome because PE's and VC's are very reluctant to provide this.


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