Regular auditing procedures that may identify conditions and events that indicate a going concern problem include the following:
1. Analytical procedures – Analytical procedures used as a substantive test or used in the planning and overall review stages of the audit may indicate: negative trends; slow-moving inventory; Receivable collectability problems; liquidity and solvency problems.
2. Review of subsequent events – Subsequent events, such as the bankruptcy of a major customer, confirm adverse conditions that existed at the balance sheet date. Other subsequent events that indicate a possible going concern problem include: collapse of the market price of the entity‘s inventory; withdrawal of line of credit by bank; and expropriation of entity‘s assets.
3. Review of compliance with the terms of debt and loan agreements – Violation of debt covenants results in debt default.
4. Reading of minutes – Minutes of meetings of stockholders, board of directors, and board committees may indicate
Potentially expensive litigation; loss of lines of credit; loss of a major supplier; and Changes in the operation of the business that could result in significant losses.
5. Inquiry of legal counsel – Responses to inquiries of the entity‘s legal counsel about litigation, claims, and assessments could indicate possible significant losses because of product liability claims, copyright or patent infringement, contract violations, and illegal acts.
6. Confirmations concerning financial support – Confirmation with related parties and third parties of the details of arrangements to provide or maintain financial support may indicate loss of bank lines of credit or loss of third-party guarantees of entity indebtedness.
