The going concern concept is a key assumption under generally accepted accounting principles, or GAAP. It can determine how financial statements are prepared, influence the stock price of a publicly traded company and affect whether a business can be approved for a loan. Continuation of an entity as a going concern is presumed as the basis for financial reporting unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting. If and when an entity’s liquidation becomes imminent, financial statements are prepared under the liquidation basis of accounting (Financial Accounting Standards Board, 2014).
However, generally accepted auditing standards (GAAS) do instruct an auditor regarding the consideration of an entity’s ability to continue as a going concern. The concept of going concern is an underlying assumption in the preparation of financial statements, hence it is assumed that the entity has neither the intention, nor the need, to liquidate or curtail materially the scale of its operations. If management conclude that the entity has no alternative but to liquidate or curtail materially the scale of its operations, the going concern basis cannot be used and the financial statements must be prepared on a different basis (such as the ‘break-up’ basis). Certain red flags may appear on financial statements of publicly traded companies that may indicate a business will not be a going concern in the future. Listing of long-term assets normally does not appear in a company’s quarterly statements or as a line item on balance sheets.
The going concern principle
And while our site doesn’t feature every company or financial product available on the market, we’re proud that the guidance we offer, the information we provide and the tools we create are objective, independent, straightforward — and free. If a company receives a negative audit and may not be a going concern, there are several implications. Companies that are not a going concern represent a significantly higher level of risk compared to other companies. There are also a number of quantifiable, measurable indicators that auditors use to measure going concern. Companies with low liquidity ratios, high employee turnover, or decreasing market share are more likely to not be a going concern.
- Management’s processes and controls should also address the risk that the going concern assessment could be based on incomplete or inaccurate information about conditions and events that could raise substantial doubt.
- An entity must include disclosures related to uncertainty about its ability to continue as a going concern in the notes to the financial statements in annual and interim periods until the conditions or events giving rise to the uncertainty are resolved.
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- Similarly ISA 580, Written Representations recognises that while written representations do provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal.
- The going concern principle is the assumption that an entity will remain in business for the foreseeable future.
- In general, an auditor examines a company’s financial statements to see if it can continue as a going concern for one year following the time of an audit.
If the business is in a financial position that suggests the going concern assumption can’t be followed (the business might go bankrupt), the financial statements should have a disclosure discussing the going concern. If there’s significant evidence that a privately held business going concern principle might not be viable under the going concern assumption, the auditor must disclose it in the audit report. Even if the business’s financials aren’t audited, an accountant who has concerns about the business’s viability should disclose those concerns to the business owner.
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The auditor is required by the Securities and Exchange Commission to disclose in the financial statements of a publicly traded company whether going concern status is in doubt. This can protect investors from continuing to risk their money on a business that may not be viable for much longer. The https://www.bookstime.com/articles/bookkeeping-for-medium-sized-business is the assumption that an entity will remain in business for the foreseeable future.