Responsibility for Assessment of the EntResponsibility for Assessment of the Entity’s Ability to Continue as a Going Concern

Responsibility for Assessment of the Entity’s Ability to Continue as a Going Concern

Responsibilities of Management

1. Some financial reporting frameworks contain an explicit requirement for management to make a specific assessment of the entity’s ability to continue as a going concern and include standards regarding matters to be considered and disclosures to be made in connection with going concern. For example, Australian Accounting Standard (AASB) 101 requires management to make an assessment of an entity’s ability to continue as a going concern. [1] The detailed requirements regarding management’s responsibility to assess the entity’s ability to continue as a going concern and related financial statement disclosures may also be set out in law or regulation. (Ref: Para. A4)

Aus 3.1 The Corporations Act 2001[#], requires a formal statement as to the solvency of the entity to be made by the directors and included as part of the financial report upon which the auditor’s opinion is expressed.

1. In other financial reporting frameworks, there may be no explicit requirement for management to make a specific assessment of the entity’s ability to continue as a going concern. Nevertheless, where the going concern basis of accounting is a fundamental principle in the preparation of a financial report as discussed in paragraph 2, the preparation of the financial report requires management to assess the entity’s ability to continue as a going concern even if the financial reporting framework does not include an explicit requirement to do so.
2. Management’s assessment of the entity’s ability to continue as a going concern involves making a judgement, at a particular point in time, about inherently uncertain future outcomes of events or conditions. The following factors are relevant to that judgement:

• The degree of uncertainty associated with the outcome of an event or condition increases significantly the further into the future an event or condition or the outcome occurs. For that reason, most financial reporting frameworks that require an explicit management assessment specify the minimum period for which management is required to take into account all available information.
• The size and complexity of the entity, the nature and condition of its business and the degree to which it is affected by external factors affect the judgement regarding the outcome of events or conditions.
• Any judgement about the future is based on information available at the time at which the judgement is made. Subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made.

Responsibilities of the Auditor