Auditing Standard AUS - AUASB · Auditing Standard AUS 708 ... Disclosed in the Financial Report Example 2: ... AUS does not apply when a liquidation basis has been used in the

Auditing Standard AUS 708 (July 2002)

Going Concern Prepared by the Auditing & Assurance Standards Board of the Australian Accounting Research Foundation

Issued by the Australian Accounting Research Foundation on behalf of CPA Australia and The Institute of Chartered Accountants in Australia

The Australian Accounting Research Foundation was established by CPA Australia and The Institute of Chartered Accountants in Australia and undertakes a range of technical and research activities on behalf of the accounting profession as a whole. A major responsibility of the Foundation is the development of Australian Auditing Standards and Statements.

Auditing Standards contain the basic principles and essential procedures identified in bold-type (black lettering) which are mandatory, together with related guidance. For further information about the responsibility of members for compliance with AUSs refer Miscellaneous Professional Statement APS 1.1 ”Conformity with Auditing Standards”. Australian Accounting Research Foundation Level 10, 600 Bourke Street Melbourne Victoria 3000 AUSTRALIA

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COPYRIGHT 2002 Australian Accounting Research Foundation (AARF). The text, graphics and layout of this Assurance Engagement Standard are protected by Australian copyright law and the comparable law of other countries. No part of this Assurance Engagements Standard may be reproduced stored or transmitted in any form or by any means without the prior written permission of the AARF except as permitted by law. ISSN 1324-4183

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AUDITING STANDARD

AUS 708 “GOING CONCERN“

CONTENTS

Paragraphs

Main Features of the Standard

Introduction................................................................................. .01-.05

The Going Concern Basis ........................................................... .06-.08 Management’s Consideration of Circumstances

Facing the Entity ...................................................................... .09

The Auditor’s Responsibility with respect to the Going Concern Basis ............................................................... .10-.11

Circumstances During the Relevant Period................................ .12 Circumstances After the Relevant Period ................................... .13-.14

Causes and Indications of Going Concern Problems .................. .15-.16

Audit Procedures......................................................................... .17-.21 Management Plans ..................................................................... .22-.25 Third Parties ............................................................................... .26 Borrowing Facilities ................................................................... .27-.28

Audit Reporting Considerations Going Concern Basis Considered Appropriate .......................... .29-.30 Going Concern Basis Considered Inappropriate........................ .31 Significant Uncertainty ............................................................... .32-.33

Other Considerations .................................................................. .34

Operative Date ............................................................................ .35

Compatibility with International Standards on Auditing ............ .36

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Appendix 1: Linking Going Concern Considerations with Types of Audit Opinions

Appendix 2: Examples of Indications of Going Concern Problems

Appendix 3: Examples of Mitigating Factors

Appendix 4: Examples of Audit Reports Modified Regarding the Going Concern Basis Example 1: Significant Uncertainty Exists and is Adequately

Disclosed in the Financial Report Example 2: Significant Uncertainty Exists but is not

Adequately Disclosed in the Financial Report Example 3: Going Concern Basis Considered Inappropriate

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Main Features of the Standard

The Standard:

(a) establishes standards and provides guidance to auditors in fulfilling their responsibilities regarding the appropriateness of management using the going concern basis in the preparation of a financial report;

(b) identifies causes and indications of going concern problems;

(c) identifies audit procedures which the auditor considers when assessing going concern; and

(d) identifies audit reporting considerations in relation to going concern.

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Introduction

.01 The purpose of this Auditing Standard (AUS) is to establish standards and provide guidance to auditors in fulfilling their responsibilities regarding the appropriateness of management using the going concern basis in the preparation of a financial report. This AUS does not apply when a liquidation basis has been used in the preparation of a financial report. When a liquidation basis has been used, the standards and guidance contained in AUS 802 “The Audit Report on Financial Information Other than a General Purpose Financial Report” is applicable.

.02 When planning and performing audit procedures and in evaluating the results thereof, the auditor should consider the appropriateness of the going concern basis underlying the preparation of the financial report.

.03 The going concern basis is defined in Accounting Standards AAS 6/AASB 1001 “Accounting Policies”:

“going concern basis means the accounting basis whereby in the preparation of the financial report the reporting entity is viewed as a going concern: that is, the entity is expected to:

(a) be able to pay its debts as and when they fall due; and (b) continue in operation without any intention or necessity

to liquidate or otherwise wind up its operations.” .04 “Relevant period” means the period of approximately 12 months

from the date of the auditor’s current report to the expected date of the auditor’s report for:

(a) the next annual reporting period in the case of an annual financial report; or

(b) the corresponding reporting period for the following year in the case of an interim reporting period.

.05 While the auditor’s opinion helps establish the credibility of the financial information, users are not entitled to assume that an unmodified audit report is an assurance as to the future viability of the entity.

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The Going Concern Basis

.06 Accounting Standards AAS 6 and AASB 1001 recognise that the going concern basis is so generally adopted in the preparation of financial reports that its use can be assumed in the absence of any statement to the contrary. In addition, certain legislation, for example the Corporations Act 2001, requires a formal statement as to the solvency of the entity to be made by members of the governing body and included as part of the financial report upon which the auditor’s opinion is expressed.

.07 When the going concern basis is used, it is usually assumed that the entity will realise its assets and extinguish its liabilities in the normal course of business. If this assumption is unjustified, the entity may realise its assets at less than the recorded amounts and there may be changes in the amounts and dates of maturity of liabilities. Therefore, the amount and classification of assets and liabilities in the financial report may need to be adjusted, with consequential adjustments to revenues, expenses and equity, and appropriate disclosures may need to be made.

.08 When it is clear that an entity will not continue as a going concern, its financial report would ordinarily be prepared on a liquidation basis. In these circumstances, the realisation value of assets assumes importance, additional liabilities may accrue, for example provisions in respect of redundancy payments, and the current versus non-current classification of liabilities becomes less critical than the seniority features of debt and other preferences in liquidation.

Management’s Consideration of Circumstances Facing the Entity

.09 Management is responsible for the financial report and for deciding whether to use the going concern basis in its preparation. In assessing the appropriateness of the going concern basis, management will need to take account of all relevant information of which it is aware at the time. The nature of this exercise requires management to look forward, and in doing so there will be some future period to which management will pay particular attention. It is not possible to specify a standard length for this period since in reality there is no cut off point after which there ought to be a sudden change in the approach adopted by management. The length of the period is likely to be influenced by such factors as:

(a) the entity’s reporting and budgeting systems; and

(b) the nature of the entity, including its size and complexity.

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However, where the period considered by management is less than 12 months from the date of approval of the financial report, the auditor would need to consider whether the information upon which management has based its assessment constitutes sufficient appropriate audit evidence for the auditor’s purpose, and whether the auditor concurs with the adoption of the going concern basis by management.

The Auditor’s Responsibility with respect to the Going Concern Basis

.10 The auditor should obtain sufficient appropriate audit evidence that it is appropriate, based on all reasonably foreseeable circumstances facing the entity, for management to prepare the financial report on the going concern basis. It is implicit in assessing the reasonably foreseeable circumstances facing the entity, that a judgement be made about uncertain future events. No certainty exists, nor can any guarantee be given, that any entity will continue as a going concern. Hence the auditor’s judgement will always involve an assessment, made at the time the audit report is signed, of the risk that the going concern basis is inappropriate.

.11 In considering what is reasonably foreseeable, it is necessary to draw a distinction between the circumstances that may face an entity during the relevant period and events that may occur after that time. As possible events become more distant, there is likely to be less evidence available about them, and what evidence is available is likely to be less reliable. Accordingly, while the auditor needs to be alert to the possibility that a going concern problem might arise at any time in the future, the auditor’s work will ordinarily be focussed primarily on anticipated events during the relevant period.

Circumstances During the Relevant Period

.12 The auditor should consider the likelihood that, during the relevant period, the entity will:

(a) liquidate or otherwise wind up its operations; or

(b) be unable to pay its debts as and when they fall due.

In particular, during the audit planning process, when undertaking the audit risk assessment, and at the final review stage when forming a conclusion, the auditor will need to specifically consider the potential for going concern problems during the relevant period.

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Circumstances After the Relevant Period

.13 The auditor should be alert to the possibility that reasonably foreseeable circumstances may exist beyond the relevant period that bring into question the appropriateness of management preparing the financial report on a going concern basis. Although it is not necessary to design procedures specifically to test for indications of going concern problems beyond the relevant period, if during the planning and conduct of the audit the auditor becomes aware that a going concern issue may exist beyond the relevant period, the auditor would perform such modified audit procedures as are appropriate.

.14 For all entities there is some uncertainty regarding the ability/intention to continue as a going concern over a prolonged period, and this uncertainty will increase as that period is extended. In considering what is reasonably foreseeable in relation to going concern questions that may arise in the longer-term, the more distant possible events are, for example potential demands on the entity’s cash resources, the more compelling will need to be the indications that they may have going concern implications before it would be reasonable for the auditor to conclude that the uncertainty is significant enough to warrant a modification to the audit report. Further, in obtaining sufficient appropriate audit evidence, it is not necessary for, or reasonable to expect, the auditor to investigate the myriad of possible circumstances that could face an entity over an extended period. Consideration of identified events after the relevant period will therefore, ordinarily be confined to those that are both highly likely and expected to occur.

Causes and Indications of Going Concern Problems

.15 Going concern problems often emerge over a period of time and are ordinarily due to a combination of external conditions, such as general economic and industry trends, and internal conditions, such as an inability to adapt production in response to changes in market conditions. Some entities however, may suffer going concern problems more suddenly as a result of particular events such as specific industrial relations difficulties or poor, in hindsight at least, management decisions regarding a small number of material transactions. Although an auditor’s consideration of such factors as industrial relations policies and controls over managerial decision making may be of some assistance in anticipating an entity’s exposure to sudden problems, because such problems are triggered by a specific event or series of events, they are often impossible to predict prior to the occurrence of that event(s).

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.16 Indications that the going concern basis ought to be questioned may come from the financial report or from other sources. Examples of operating indications (including management attributes), financial indications and other indications of going concern problems are contained in Appendix 2. The significance of any particular indication will vary according to the individual circumstances of each entity and is to be considered in conjunction with any relevant mitigating factors that may exist. Examples of mitigating factors are included as Appendix 3. When considering indications of going concern problems, the auditor also needs to be aware of the possibility that management may deliberately attempt to conceal or disguise deteriorating conditions, for example by the misapplication of accounting policies.

Audit Procedures

.17 The auditor should specifically assess the risk of going concern problems as part of the audit planning process. The early identification of a potential going concern problem will assist in focussing audit effort on the appropriate assertions in the financial report, for example the valuation of assets, and allow for early communication with management and the preparation and examination of any additional information that may be necessary.

.18 An important element in assessing the risk of going concern problems is a sound understanding of the entity’s business and, in particular, any external and internal conditions and events that may have an adverse effect on the entity. When gaining or updating this understanding, the auditor would include consideration of:

(a) internal organisational and operational matters, for example management style, marketing and production strategies and whether the entity’s business is expanding or declining;

(b) appropriate international, national and regional economic

factors, including the entity’s position within its industry and the industry’s position within the economy;

(c) conditions and events within the entity’s industry, or

industries, including those affecting customers, competitors and suppliers;

(d) existing government policies which affect the entity and the

effect of any foreshadowed changes; (e) the nature and stability of relationships with key financiers,

unions, customers and suppliers; and

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(f) the existence of related parties and the nature, extent and basis of transactions with them and/or on their behalf.

.19 When, as a result of the initial risk assessment, the auditor considers

it highly improbable that the going concern basis should be questioned, it is not necessary to design additional procedures specifically to test for the existence of going concern problems. When evaluating the results of other audit procedures however, the auditor would remain alert to the possibility that the going concern basis may be subject to question. In particular, when forming an overall conclusion whether the view presented by the financial report as a whole is consistent with the auditor’s knowledge of the business of the entity, the continued appropriateness of the initial risk assessment would be considered.

.20 When a question arises regarding the appropriateness of the going concern assumption, the auditor should gather sufficient appropriate audit evidence to attempt to resolve the question. When, at any stage of the audit, a question arises regarding the going concern basis:

(a) it may be necessary to employ additional procedures or to update information obtained earlier; and

(b) certain procedures will take on additional significance and

may need to be extended or otherwise modified.

.21 Procedures that are relevant in the context of AUS 708.20 may include:

(a) reviewing subsequent events;

(b) analysing and discussing the latest available interim financial information, for example actual versus budgeted cash flow;

(c) examining compliance with the terms of debenture trust

deeds and loan agreements;

(d) attending or reading the minutes of meetings of shareholders, the governing body, audit committee, management committees or other important groups;

(e) requesting from the entity’s solicitors, information

regarding any material legal matters; and

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(f) considering the position of the entity concerning unfilled customer orders.

Management Plans

.22 When going concern problems have been identified, they are considered in the light of any mitigating factors that may exist. In particular, the auditor would consider and discuss with management its plans for future action, the outcome of which is expected to improve the situation. The relevance of such plans to an auditor generally decreases as the time period for planned actions and anticipated events increases. Particular emphasis would ordinarily be placed on plans that might have a significant effect on the solvency of the entity within a reasonable timeframe. The auditor would consider the bases upon which these plans have been prepared, consider whether they conform with existing audit evidence and compare them with such other evidence as is appropriate in the circumstances, so as to obtain reasonable assurance whether they:

(a) are feasible;

(b) are likely to be implemented; and

(c) have the potential to improve the situation within a reasonable timeframe.

.23 In such situations, the auditor would ordinarily obtain written

representations from management concerning such plans, and would analyse and discuss cash flow, profit, and other relevant forecasts with management at the latest practicable date before the date of the audit report.

.24 When analysing cash flow, profit, and other relevant forecasts in the context of management plans, the auditor would consider applying certain of the procedures outlined in AUS 516 “Audit of Accounting Estimates” and AUS 804 “The Audit of Prospective Financial Information”. In particular, the auditor would:

(a) consider the reliability of the accounting system of the entity for generating such information;

(b) consider the support for material assumptions underlying

the forecast, in particular those which are especially sensitive or susceptible to change or which are inconsistent with historical trends; and

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(c) compare the prospective information for recent prior periods with historical results, and the prospective information for the current period with results achieved to date.

.25 If the auditor becomes aware of information that has not been

appropriately considered in the preparation of the forecasts, the matter would be discussed with management and, if necessary, revision of the prospective financial information requested.

Third Parties

.26 The auditor would attempt to obtain a third party’s confirmation of the existence of arrangements made when their support is significant to the success of such plans, for example plans to dispose of assets, borrow, restructure debt, obtain additional contributions from owners or rely upon guarantees provided by a related party. When considering the reliability of confirmations received, the auditor needs to be satisfied that the third party has both the capacity and the intention to honour the agreement. Factors that the auditor would consider in this context include the following (these factors will take on greater significance when the agreement is not legally enforceable):

(a) the willingness of the third party to supply written confirmation of their commitment;

(b) the willingness of the third party to have the existence of

the agreement disclosed in the entity’s financial report or, when appropriate, in their own financial report as, for example, a contingent liability or a capital commitment; and

(c) other matters that affect the commitment of the third party

to support such agreements, for example the economic consequences of not honouring the agreement and the effect that not honouring the agreement may have on the reputation of the third party.

Borrowing Facilities

.27 In examining borrowing facilities the auditor could decide, for example, that it is necessary:

(a) to obtain confirmations of the existence and terms of bank facilities; and

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(b) to make their own assessment of the intentions of the bankers relating thereto.

The latter assessment would involve the auditor examining any written evidence. This would be supplemented by discussions with management and, occasionally, with management and the entity’s bankers. The auditor would ask management whether the bankers are aware of the matters that are causing the auditor to question the going concern basis.

.28 The auditor might be more likely to decide that it is necessary to obtain confirmations of the existence and terms of bank facilities, and to make their own assessment of the intentions of the bankers relating thereto, in cases where, for example:

(a) there is a low margin of financial resources available to the entity;

(b) the entity is dependent on borrowing facilities shortly due for renewal;

(c) the correspondence between the bankers and the entity reveals that the last renewal of facilities was agreed with difficulty, or that, since the last review of facilities, the bankers have imposed additional conditions as a prerequisite for continued lending;

(d) a significant deterioration in cash flow is projected;

(e) the value of assets granted as security for the borrowings is declining; or

(f) the entity has breached the terms of borrowing covenants, or there are indications of potential breaches.

Audit Reporting Considerations

Going Concern Basis Considered Appropriate

.29 When the auditor is satisfied that it is appropriate, based on all reasonably foreseeable circumstances facing the entity, for management to prepare the financial report on the going concern basis, the auditor should issue an unmodified audit report in accordance with AUS 702 “The Audit Report on a General Purpose Financial Report”.

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.30 When consideration of mitigating factors, in particular management’s plans, have had a significant effect upon the auditor in forming the opinion that the going concern basis is appropriate, the auditor should specifically consider the adequacy of the disclosure in the financial report of matters such as:

(a) the principal conditions which initially caused the auditor to question the going concern basis, including as appropriate, management’s evaluation of their significance and possible effects; and

(b) management’s plans and other mitigating factors, including as appropriate, relevant prospective financial information.

If the disclosures considered necessary by the auditor are not made, the auditor should express a qualified opinion on the basis of the lack of disclosure in accordance with AUS 702.

Going Concern Basis Considered Inappropriate

.31 If the auditor is satisfied that it is highly improbable that the entity will continue as a going concern, an adverse opinion should be expressed in accordance with AUS 702. However, if the going concern basis is not considered appropriate due to an event occurring after reporting date which provides new information that does not relate to conditions in existence at reporting date, the auditor should consider whether this event is adequately disclosed in the financial report in accordance with Accounting Standards AASB 1002/AAS 8 “Events Occurring After Reporting Date” paragraph 5.1. If the auditor is satisfied that this event is adequately disclosed in the financial report, an adverse opinion would not be issued in relation to the going concern basis, but the audit report should include an emphasis of matter section in accordance with AUS 702.

Significant Uncertainty

.32 If going concern questions are not satisfactorily resolved, there will remain significant uncertainty regarding the appropriateness of the going concern basis. When this uncertainty is adequately disclosed in the financial report, the audit report should include an emphasis of matter section in accordance with AUS 702. An emphasis of matter section regarding a going concern uncertainty should:

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(a) state clearly that there is significant uncertainty whether the entity will continue as a going concern and, therefore, whether it will realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report;

(b) adequately describe, or refer to a note to the financial statements that adequately describes:

(i) the principal conditions that raise doubt about the entity’s ability to continue as a going concern; and

(ii) the extent to which the financial report includes appropriate adjustments, if any, relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that might be necessary should the entity not continue as a going concern.

Appendix 4 contains an example audit report where a significant uncertainty exists and is adequately disclosed in the financial report.

.33 If the financial report does not:

(a) state clearly that there is significant uncertainty whether the entity will continue as a going concern and, therefore, whether it will realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report; and

(b) adequately describe the matters noted in AUS 708.32(b)(i) and (ii),

an “except for” opinion or an adverse opinion should be expressed on the basis of the lack of disclosure in accordance with AUS 702. In choosing between these two forms of opinion, the auditor would consider the nature and extent of any relevant disclosures that have been made in the financial report, and the nature and amount of any adjustments that would be necessary if the entity does not continue as a going concern. Appendix 4 contains an example audit report where a significant uncertainty exists but is not adequately disclosed in the financial report.

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Other Considerations

.34 When at any stage of an audit conducted under the Corporations Act 2001, the auditor becomes satisfied that the entity is no longer a going concern, the auditor needs to be mindful of the requirements of section 311 of the, Corporations Act 2001 particularly in relation to the duties of directors under that Act.

Operative Date

.35 This AUS, which incorporates amendments made by AUS/AGS Omnibus 3 “Miscellaneous Amendments to AUSs and AGSs”, is operative from July 2002. This version of AUS 708 supersedes AUS 708 “Going Concern”, as revised in October 1998.

Compatibility with International Standards on Auditing

.36 Except for the matters noted below, the basic principles and essential procedures of this AUS and of International Standard on Auditing ISA 570, Going Concern, are consistent in all material respects:

(a) AUS 708 requires the auditor to consider all reasonably foreseeable circumstances facing the entity during the period from the date of the auditor’s current report to the expected date of the auditor’s report for the succeeding financial reporting period. ISA 570 however, requires the auditor to consider the appropriateness of the going concern assumption for the foreseeable future, generally a period not to exceed one year after period end. Therefore, as well as being less specific than AUS 708 in terms of what the auditor should consider, the time period anticipated by ISA 570 is shorter than that of AUS 708. The Auditing & Assurance Standards Board believes that the requirements of AUS 708 provide a reasonable and more meaningful time period;

(b) ISA 570 has less detailed requirements regarding the

auditor’s consideration of the disclosure of mitigating circumstances than those identified in AUS 708.30. The Auditing & Assurance Standards Board believes that the detailed requirements of AUS 708.30 are appropriate to ensure auditors are fully aware of their responsibilities in this regard;

(c) AUS 708.31 requires that in those situations where the

going concern basis is considered inappropriate due to an

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event which occurs after reporting date, which provides new information that does not relate to conditions in existence at reporting date and there has been appropriate disclosure in the financial report in accordance with Accounting Standards AASB 1002/AAS 8 “Events Occurring After Reporting Date”, then an emphasis of matter section should be included in the audit report in accordance with AUS 702 “The Audit report on a General Purpose Audit Report”. The Auditing & Assurance Standards Board believes that this provision is necessary, in light of the disclosure requirements of AASB 1002/AAS 8. There is no similar provision in ISA 570.

(d) ISA 570 has less detailed requirements regarding the

content of an emphasis of matter section regarding a going concern uncertainty than those identified in AUS 708.32. The Auditing & Assurance Standards Board believes that the detailed requirements of AUS 708.32 are necessary to ensure consistency in the reporting of such matters;

(e) AUS 708 deals with the application of the going concern

assumption in relation to interim reporting periods; and (f) AUS 708 deals with the auditor’s responsibility for

considering circumstances that may affect the going concern assumption beyond the “relevant period”. This additional guidance is necessary to address the audit implications of the definition of “going concern basis” which has been adopted by Accounting Standards in Australia.

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APPENDIX 1 LINKING GOING CONCERN CONSIDERATIONS

WITH TYPES OF AUDIT OPINIONS

Yes Yes

No

No

Yes Yes

No

Yes No

No

Yes

Does the initial riskassessment indicatethat the probability

of going concernproblems arising is

low?

Do the results ofother auditprocedures

support the initialrisk assessment?

Issue anunmodified audit

report.(AUS 708.29)

Do modified auditprocedures indicate

a reasonableexpectation the

entity will continueas a going concern?

Have mitigatingcirucmstances

been adequatelydisclosed?

Express a qualified opinion

(inadequatedisclosure).

(AUS 708.30)

Express anunqualifed opinion.Add an emphasis of

matter.(AUS 708.32)

Express a qualifiedopinion (inadequate

disclosure).(AUS 708.33)

Express an adverseopinion (goingconcern basisinappropriate).

If due to anevent after

reporting dateand this is

appropriatelydisclosed, addan emphasis of

matter.(AUS 708.31)

It is highly improbablethe entity will continue

as a going concern

Is there adequatedisclosure of the

significantuncertainty?

No

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APPENDIX 2

EXAMPLES OF INDICATIONS OF GOING CONCERN PROBLEMS

This listing is not all-inclusive. Further, the existence of one or more of these indications does not necessarily signify that the going concern basis needs to be questioned. Operating indications (including management attributes)

(a) lack of strategic direction including appropriately documented policies, plans and forecasts such as forward budgets and cash flow projections;

(b) deficiencies in the governing body e.g. lack of independent members, low level of involvement in key decisions, poor documentation and communication of decisions, imbalance or lack of expertise amongst members;

(c) lack of management expertise or loss of key management personnel; (d) concentration of risk in a limited number of products or projects; (e) loss of a major market, franchise or licence; (f) prolonged industrial relations difficulties; (g) shortages of important supplies or loss of a principal supplier; (h) deficiencies in management information systems, including

blockages in information flows, or lack of management action in response to information received;

(i) rapid or unplanned development of business (particularly in non-core activities) without commensurate developments in information systems, management expertise, financing structures, pricing policies, etc.; and

(j) uninsured or underinsured disasters such as drought, flood, fire, fraud or sabotage.

Financial indications (a) high gearing or a net liability position; (b) fixed-term borrowings approaching maturity without realistic

prospects of renewal or repayment; (c) reliance on short-term borrowings to finance long-term assets;

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(d) adverse key financial ratios: working capital ratio, gross profit ratio, times interest earned, return on equity, inventory turnover etc.;

(e) lack of sustainable operating profits or cash flows from core business activities;

(f) arrears or discontinuance of dividends; (g) inability to pay creditors on due dates; (h) excessive reliance on transactions with related parties; (i) potential losses on long-term contracts or other uneconomic long-

term commitments; (j) difficulty in complying with the terms of loan agreements or the

need to restructure debt; (k) denial of usual trade credit from suppliers; (l) inability to obtain financing for necessary new product development

or other necessary investments, or conversely, over-investment in new products, ventures or research which are not yet successful;

(m) need to seek new sources or methods of financing or to dispose of substantial assets; and

(n) reduced funding from government.

Other indications

(a) non-compliance with capital or other statutory requirements; (b) undue influence of a market dominant competitor; (c) legal proceedings against the entity that may result in judgments that

could not be met or in restrictions on trading opportunities; (d) technical developments which render a key product obsolete; (e) adverse changes in legislation or government policy; (f) failure of other entities in the same industry; and (g) lack of adequate back-up and recovery capabilities for key financial

or other information systems.

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APPENDIX 3

EXAMPLES OF MITIGATING FACTORS

The significance of those indications which are related to cash flow or solvency can often be mitigated by the existence of, and management plans with respect to, factors such as those listed below: Asset factors

(a) disposability of assets that are not operationally interdependent; (b) capability of delaying the replacement of assets consumed in

operations or of leasing rather than purchasing certain assets; and (c) possibility of using assets for factoring, sale and leaseback, or

similar arrangements.

Debt factors

(a) availability of unused lines of credit or similar borrowing capacity; (b) capability of renewing or extending the due dates of existing loans;

and (c) possibility of entering into debt restructuring agreements.

Cost factors

(a) separability of operations producing negative cash flows; (b) capability of postponing expenditures for such matters as

maintenance or research and development; and (c) possibility of reducing overhead and administrative expenditures.

Equity factors

(a) variability of dividend requirements; (b) capability of obtaining additional contributions by owners; and (c) possibility of increasing cash distributions from subsidiaries or

associates.

Similarly, the significance of those indications which are not directly related to cash flow or solvency may also be mitigated by other factors. For example, the impact of losing a principal supplier may be mitigated by the availability of a suitable alternative source of supply.

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APPENDIX 4

EXAMPLES OF AUDIT REPORTS MODIFIED REGARDING THE GOING CONCERN BASIS

Example 1: Significant Uncertainty Exists and is Adequately Disclosed in the Financial Report

INDEPENDENT AUDIT REPORT To [addressee] Scope We have audited the financial report of [name of entity] for the year ended 30 June 19X1 as set out on pages X to Y1. The [members of the governing body] are responsible for the financial report. We have conducted an independent audit of the financial report in order to express an opinion on it to [addressee]. Our audit has been conducted in accordance with Australian Auditing Standards to provide reasonable assurance whether the financial report is free of material misstatement. Our procedures included examination, on a test basis, of evidence supporting the amounts and other disclosures in the financial report, and the evaluation of accounting policies and significant accounting estimates. These procedures have been undertaken to form an opinion whether, in all material respects, the financial report is presented fairly in accordance with Accounting Standards and other mandatory professional reporting requirements [and relevant statutory and other requirements], so as to present a view which is consistent with our understanding of the [entity’s] financial position, the results of its operations and its cash flows. The audit opinion expressed in this report has been formed on the above basis. Audit Opinion In our opinion, the financial report presents fairly in accordance with applicable Accounting Standards and other mandatory professional reporting requirements (and ...2) the financial position of [name of entity] as at 30 June 19X1 and the results of its operations and its cash flows for the year then ended. Inherent Uncertainty Regarding Continuation as a Going Concern Without qualification to the opinion expressed above, attention is drawn to the following matter. As a result of the matters described in Note X, there is significant uncertainty whether the [entity] will be able to continue as a going concern and therefore whether it will realise its assets and extinguish its liabilities in the normal course of business and at the amounts stated in the financial report. Date Firm Address Partner

1 or identify the individual components when appropriate. 2 cite relevant statutory and other requirements when appropriate.

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Example 2: Significant Uncertainty Exists but is not Adequately Disclosed in the Financial Report

INDEPENDENT AUDIT REPORT To [addressee] Scope We have audited the financial report of [name of entity] for the year ended 30 June 19X1 as set out on pages X to Y1. The [members of the governing body] are responsible for the financial report. We have conducted an independent audit of the financial report in order to express an opinion on it to [addressee]. Our audit has been conducted in accordance with Australian Auditing Standards to provide reasonable assurance whether the financial report is free of material misstatement. Our procedures included examination, on a test basis, of evidence supporting the amounts and other disclosures in the financial report, and the evaluation of accounting policies and significant accounting estimates. These procedures have been undertaken to form an opinion whether, in all material respects, the financial report is presented fairly in accordance with Accounting Standards and other mandatory professional reporting requirements and relevant statutory and other requirements, so as to present a view which is consistent with our understanding of the [entity’s] financial position, the results of its operations and its cash flows. The audit opinion expressed in this report has been formed on the above basis. Qualification The [entity] has been unable to renegotiate its borrowings from its bankers. Without such financial support there is significant uncertainty whether it will be able to continue as a going concern. If the [entity] is unable to continue as a going concern, it may be required to realise its assets and extinguish its liabilities other than in the normal course of business and at amounts different from those stated in the financial report. The financial report does not disclose this fact and does not include any adjustments relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that might be necessary should the [entity] not continue as a going concern. In our opinion, knowledge of the significant uncertainty affecting the [entity’s] ability to continue as a going concern is necessary for a proper understanding of the financial report. Qualified Audit Opinion In our opinion, except for the effects on the financial report of the matter referred to in the qualification paragraph, the financial report presents fairly in accordance with applicable Accounting Standards and other mandatory professional reporting requirements (and ...2) the financial position of [name of entity] as at 30 June 19X1 and the results of its operations and its cash flows for the year then ended. Date Firm Address Partner


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Example 3: Going Concern Basis Considered Inappropriate

INDEPENDENT AUDIT REPORT To [addressee] Scope We have audited the financial report of [name of entity] for the year ended 30 June 19X1 as set out on pages X to Y1. The [members of the governing body] are responsible for the financial report. We have conducted an independent audit of the financial report in order to express an opinion on it to [addressee]. Our audit has been conducted in accordance with Australian Auditing Standards to provide reasonable assurance whether the financial report is free of material misstatement. Our procedures included examination, on a test basis, of evidence supporting the amounts and other disclosures in the financial report, and the evaluation of accounting policies and significant accounting estimates. These procedures have been undertaken to form an opinion whether, in all material respects, the financial report is presented fairly in accordance with Accounting Standards and other mandatory professional reporting requirements and relevant statutory and other requirements, so as to present a view which is consistent with our understanding of the [entity’s] financial position, the results of its operations and its cash flows. The audit opinion expressed in this report has been formed on the above basis. Qualification Note X discusses a number of matters that may affect the ability of the entity to continue as a going concern. In that Note, the [members of the governing body] state their opinion that the going concern basis used in the preparation of the financial report is appropriate. In our opinion however, it is highly improbable that the [entity] will be able to continue as a going concern and therefore we believe the going concern basis should not be used. Had the going concern basis not been used, adjustments would need to be made relating to the recoverability and classification of recorded asset amounts, or to the amounts and classification of liabilities, to reflect the fact that the [entity] may be required to realise its assets and extinguish its liabilities other than in the normal course of business, and at amounts different from those stated in the financial report. Qualified Audit Opinion In our opinion, because of the matter referred to in the qualification paragraph, the financial report does not present fairly in accordance with applicable Accounting Standards and other mandatory professional reporting requirements (and ...2) the financial position of [name of entity] as at 30 June 19X1 and the results of its operations and its cash flows for the year then ended. Date Firm Address Partner


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Documents

Auditing Standard AUS - AUASB · Auditing Standard AUS 708 ... Disclosed in the Financial Report Example 2: ... AUS does not apply when a liquidation basis has been used in the