Getting know the indications of ‘Going Concern’ problems

Regular procurement audit procedures such as those described above may reveal conditions and events that indicate there could be substantial doubt about the entity‘s ability to continue as a going concern for a reasonable period of time. Examples of these conditions and events (going concern warning signs or red flags’) are as follows:

1. Negative trends:  declining sales;  increasing costs;  recurring operating losses;  Working capital deficiencies;  negative cash flows from operations; and  adverse key financial ratios.
2. Internal matters:  chaotic and inefficient accounting system;  loss of key management or operations personnel;  work stoppages or other labour difficulties;  substantial dependence on the success of a particular project;  uneconomic long-term commitments; and  need to significantly revise operations.
3. External events that have occurred:  legal proceedings;  legislation or similar matters that might jeopardize operating ability;  loss of a key franchise, license, or patent; Loss of a principal customer or supplier;  uninsured catastrophes such as drought, earthquake, or flood.
4. Other indications of possible financial difficulties are:  default on loan or similar agreements;  arrearages in dividends;  denial of usual trade credit from suppliers;  noncompliance with statutory capital requirements;  seeking new sources or methods of
financing.
5. Including consideration of management’s plans
If, after considering the conditions and events described above, the auditor believes there is substantial doubt about the entity’s ability to continue as a going-concern for a reasonable period of time, he or she should consider management‘s plans for addressing these conditions and events. Management‘s plans may be classified as follows:

  • Plans to dispose of assets.
  • Plans to borrow money or restructure debt.
  • Plans to reduce or delay expenditures.
  • Plans to increase ownership equity.

Next, let‘s see what an auditor can do with each of the above four management‘s plans so that she or he get a better view of entity‘s ability to continue as going concern

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