Auditing issues under COVID 19 – going concern

As at 31 December 2019 China had alerted the World Health Organisation (WHO) of several cases of an unknown illness. Further information about what has now been identified as Coronavirus (or COVID-19) only came to light in early 2020.

One of the biggest areas for an auditor to be focusing their work will be on going concern.

An entity is a going concern unless management either intends to liquidate the entity or to cease trading or has no realistic alternative but to do so.  

It is the responsibility of management to make the assessment as to whether the entity is a going concern.  An auditor responsibility is to review and test the appropriateness of those assessments. 

Management would generally be expected to prepare detailed forecasts, updated regularly, until the financial statements are authorised for issue. These forecasts should reflect potential scenarios and management’s plans and contingencies.  Again, the auditor will be examining and analysing the appropriateness of those forecasts and plans.  

Management should be considering the impact of COVID 19 on its entire supply chain including customers, suppliers and staff.  The auditor will do the same. 

When management is aware, in making its assessment, that the existing or potential impact of COVID-19 results in there being material uncertainties which may cast significant doubt upon the entity’s ability to continue as a going concern, those uncertainties are required to be disclosed in the financial statements. 

In some circumstances it may be necessary to consider whether it is appropriate to prepare the accounts on a going concern basis.

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Stay safe!