Going Concern Assumption: Audit Requirements and Disclosure
Quick answer: Under ASU 2014-15, auditors must evaluate substantial doubt about an entity's ability to continue as a going concern for at least 12 months from the date of financial statement issuance. Indicators include recurring losses, negative cash flows, debt defaults, and loss of key customers.
This guide covers the going concern assessment under US GAAP, auditor responsibilities, disclosure requirements, and communication with management.
What is the Going Concern Assumption?
The going concern assumption is a fundamental principle of financial reporting that presumes an entity will continue operating for the foreseeable future. Under US GAAP (ASU 2014-15), the foreseeable future is defined as a period of 12 months from the date of financial statement issuance.
Auditor Responsibilities
Auditors must evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time. This evaluation includes:
- Reviewing management's plans to mitigate conditions affecting going concern
- Assessing the likelihood that these plans can be effectively implemented
- Obtaining written representations from management about their evaluation
- Considering the adequacy of related disclosures
Common Indicators of Substantial Doubt
Auditors should look for these red flags:
- Recurring operating losses
- Negative cash flows from operating activities
- Working capital deficiencies
- Debt defaults or covenant violations
- Loss of key customers or suppliers
- Pending legal proceedings
- Significant adverse changes in regulatory environment
Disclosure Requirements
When substantial doubt exists, management must disclose:
- The principal conditions or events that raised the substantial doubt
- Managements' evaluation of their significance
- Managements' plans to mitigate these conditions
- if substantial doubt is alleviated, the basis for that conclusion
