Lessons · Accounting · whether the company will still be here next year

Whether the company will still be here next year

Accounts are normally prepared on the assumption the business will continue. The auditor has to consider whether that assumption is reasonable, and where there is significant doubt, whether it has been disclosed. The auditor does not predict failure; they assess an assumption and whether the reader has been told.

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In beta. This lesson was written for Hone and has not yet been checked by a qualified accountant. Practice material, not professional advice. What that means.

What it is for

This is where the gap between what an audit does and what people think it does causes the most damage. A company fails months after a clean opinion, everybody concludes the audit was worthless, and often the doubt WAS disclosed and read by nobody. Being able to say precisely what was assessed, and where it was reported, is the difference between defending the work and sounding evasive.

How to think about it

Look for the indicators: losses, negative operating cash flow, borrowings due for renewal, a lender's conditions close to being breached, a lost major customer. Then ask what management's plan is, whether it is realistic, and whether the reader has been told plainly.

Worked example

Indicators of doubt exist

Losses, cash outflow, borrowings falling due.

Management has a plan

Refinancing, a sale, a cost programme. Assess whether it is realistic rather than whether it is written down.

Doubt is significant and the accounts disclose it properly

The opinion can still be unmodified, with the matter drawn to the reader's attention.

Doubt is significant and the accounts do not disclose it

Now the statements are misleading, and that is a misstatement.

Your turn

Name what the auditor assesses about going concern, given they do not predict failure.

The auditor assesses whether the going concern  is reasonable

The trap

Reading an unmodified opinion as a statement that the company will survive. It is not, it never claimed to be, and where doubt exists the report usually says so in a paragraph most readers never reach.

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