Question

What is the issues pertaining to the GOING CONCERN Issues…and why you believe SEARS & TOYS R US DID NOT include Going Concern Opinions prior to their DECLARATION of Bankruptcy……Is the CEO responsibility…or did the AUDITORS fail??

Answer 1

Financial statements are prepared assuming that business of entity will continue for a foreseable period without need by management to wind up the business. It is one the fundamental assumptions in accounting on the basis of which financial statements are prepared. It is the responsibility of the management of a company to determine whether the going concern assumption is appropriate in the preparation of financial statements. If the management is of opinion the entity would not be able to continue business in near future for at least the next 12 months, the financial statements of the entity would need to be prepared on realisable value basis.

Issues pertaining to going concern assumption are:

- Negative operating cash flows causing deterioration in liquidity position

- Inability to pay loan/creditors on due dates

-Management intentions to liquidate the entity

-Non-compliance of statutory requirements

- Increasing short term borrowing, without increase in sales

Auditor should evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period. If he believes there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, he should obtain information about management's plans that are intended to mitigate the effect of such conditions.

If Auditor concludes that he has substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time he should disclosure about the entity's possible inability to continue as a going concern and include an explanatory paragraph in his Audit report.

When an organization is facing significant financial distress, the use of the going concern basis of accounting may not be appropriate; that is, the liquidation basis may be required. The auditor is required to conclude whether management use of the going concern basis of accounting is appropriate.

Auditor is responsible to ensure that he has applied reasonable audit techniques to support going concern assumption of the company and when there is any risk he has discussed the same with management and checked the mitigation plan. If such a plan exists, the auditor must assess its likelihood of implementation and obtain evidence about the most significant elements of the plan.

If the Auditor doesnot follow above, he can be held responsible for not exercising due deligence while conduction audit, which can be possible in case of Sears & Toys and R US.