AUDITING

Auditing the Going Concern Assertion



Table of contents

Introduction3

Background4

Data and an analysis5

Conclusion12

Recommendations13

References15

Auditing the Going Concern Assertion

Introduction

A going concern is the only type of business banks lend money to, and suppliers extend credit to. Directors of publicly traded firms must explicitly state in their respective firm's financial statements (verified through an independent audit) that they have taken all reasonable steps to ensure the continuing viability of the firm as a going concern. Also called continuity of business unit principle.

Audit reports published in the U.K. between 1992 and 1997 exhibited a significant increase in the rate of going-concern disclosures, despite this time period being one of significant economic growth. This increase was associated with the implementation of a new auditing regime consisting of two new auditing standards. The first, SAS No. 600, Auditors' Reports on Financial Statements (Auditing Practices Board [APB] 1993), based on SAS No. 58, Reports on Audited Financial Statements (AICPA 1988a), changed the presentation and content of the audit report. The second, SAS No. 130, The Going-Concern Basis in Financial Statements (APB 1994), broadly resembles but is, in fact, more stringent than SAS No. 59, The Auditors 'Consideration of an Entity's Ability to Continue as a Going-Concern (AICPA 1988b). This focuses mainly on the process of auditing going-concern uncertainties. This paper examines the relative impact of these auditing standards on audit report disclosures of going-concern uncertainties among U.K.-listed companies.

Background

SAS No. 600 changed the nature of the U.K. audit report. It did so principally by requiring a clear statement of management's responsibilities for the financial statements and differentiating this from the auditor's role in expressing an opinion based on his/her audit. SAS No. 600 eliminated the previous "subject to" opinion qualification, while explicit reference to fundamental uncertainties was to be made in an explanatory paragraph (an audit report modification). Importantly, this explanatory paragraph concludes with the explicit statement it does not constitute an audit report qualification.

SAS No. 130 was intended to strengthen the audit of going-concern uncertainties. It requires additional proactive going-concern audit procedures. It also lengthens the time frame over which the auditor should assess the firm's ability to continue as a going concern to one year from the date of the directors' approval of the financial statements.

SAS No. 600 was introduced in May 1993 with an effective date for September 30, 1993 yearends. SAS No. 130 was issued in November 1994 with an effective date for June 30, 1995 year-ends. The time period between the two standards provides us with an opportunity to test their differential impact on going-concern uncertainty disclosure rates. The timeline in Figure 1 highlights the relevant events associated with implementation of this auditing regime.

Previous research explores the impact of going-concern audit procedure standards on goingconcern modification rates (e.g., Carcello et al. 1995,1997; Johnson and Khurana 1995; Raghunandan and Rama 1995). There is no equivalent research into the impact of a new audit report style standard on going-concern disclosure rates.

Data and an analysis

Because the issuance of a going-concern opinion is feared to be a self-fulfilling ...