AUDITOR’S ROLE IN SAFEGUARDING THE GOING CONCERN CONCEPT IN NIGERIA

CHAPTER ONE: INTRODUCTION

1.1 Background of the Study

The going concern concept is a fundamental principle of accounting that assumes an entity will continue to operate for the foreseeable future, typically the next 12 months, without the intention or necessity of liquidation or ceasing operations. This assumption underpins the preparation of financial statements. Under the going concern assumption, assets are recorded at historical cost (or recoverable amount) rather than liquidation value; liabilities are recorded at amounts expected to be paid in the normal course of business; and depreciation and amortization are calculated over the estimated useful lives of assets. If the going concern assumption is not appropriate, financial statements must be prepared on a break-up basis, with assets stated at net realizable value and liabilities at settlement amounts (IASB, 2018). (IASB, 2018)

The going concern concept is critical for stakeholders because it affects the valuation of assets, the classification of liabilities (current vs. non-current), and the overall reliability of financial statements. If there are material uncertainties that cast significant doubt on an entity’s ability to continue as a going concern, those uncertainties must be disclosed in the financial statements. Failure to disclose material going concern uncertainties can mislead investors, creditors, and other stakeholders, leading to poor investment and credit decisions (IFAC, 2018). (IFAC, 2018)

The auditor plays a critical role in safeguarding the going concern concept. International Standard on Auditing (ISA) 570, “Going Concern,” establishes the auditor’s responsibilities relating to the going concern assumption in an audit of financial statements. The key requirements of ISA 570 include (IFAC, 2018). (IFAC, 2018)

• Risk assessment: The auditor must assess whether events or conditions exist that may cast significant doubt on the entity’s ability to continue as a going concern.
• Evaluation of management’s assessment: The auditor must evaluate management’s assessment of the entity’s ability to continue as a going concern for a period of at least 12 months from the date of the financial statements.
• Evaluation of mitigating factors: The auditor must evaluate management’s plans to mitigate going concern risks (e.g., refinancing, cost reduction, asset sales).
• Sufficiency of audit evidence: The auditor must obtain sufficient appropriate audit evidence to determine whether a material uncertainty exists.
• Audit opinion: If a material uncertainty exists and is adequately disclosed, the auditor expresses an unmodified opinion with an emphasis of matter paragraph (or separate section). If the material uncertainty is not adequately disclosed, the auditor expresses a qualified or adverse opinion. If the entity is not a going concern (e.g., liquidation is imminent), the auditor expresses an adverse opinion.

In Nigeria, the going concern concept has been tested by numerous corporate failures. The banking crisis of 2008-2009 saw several banks fail or require government bailout. Investigations revealed that many banks continued to prepare financial statements on a going concern basis even when they were technically insolvent (liabilities exceeded assets). Auditors failed to identify or disclose going concern uncertainties, leading to investor losses and regulatory sanctions. The Central Bank of Nigeria (CBN) sacked CEOs of eight banks and injected over ₦600 billion in bailout funds. The crisis highlighted the critical importance of the auditor’s role in assessing going concern (CBN, 2011). (CBN, 2011)

More recently, the COVID-19 pandemic (2020-2021) created unprecedented going concern challenges. Many businesses faced revenue declines, supply chain disruptions, liquidity crises, and increased debt. The pandemic required auditors to assess whether entities could continue as going concerns in the face of extreme uncertainty. The pandemic also made it difficult to obtain audit evidence (remote work, travel restrictions, delayed confirmations). The pandemic tested the auditor’s ability to apply professional skepticism and judgment (Ogunyemi and Adewale, 2021). (Ogunyemi and Adewale, 2021)

Several factors make the going concern assessment particularly challenging in Nigeria (Okoye, Okafor, and Nnamdi, 2020). (Okoye et al., 2020)

• Economic volatility: Nigeria’s economy is volatile (oil price shocks, exchange rate depreciation, high inflation, high interest rates). This volatility increases the risk of going concern problems (e.g., importers cannot afford dollars, borrowers cannot repay loans).
• Weak corporate governance: Many Nigerian companies have weak boards, poor internal controls, and inadequate risk management. Management may be overly optimistic about future prospects, leading to understatement of going concern risks.
• Poor financial reporting quality: Some Nigerian companies have poor accounting records, weak internal controls, and inadequate disclosures. This makes it difficult for auditors to obtain sufficient appropriate audit evidence.
• Audit independence threats: Long auditor tenure (over 10 years) reduces professional skepticism. Provision of non-audit services (consulting, tax) creates self-interest threats. Fear of losing the client (audit firm competition) reduces auditor willingness to disclose going concern uncertainties.
• Weak regulatory enforcement: The Financial Reporting Council (FRC) of Nigeria has sanctioned auditors for audit failures, but enforcement has been inconsistent. Weak enforcement reduces deterrent effect.

The consequences of auditor failure to identify or disclose going concern uncertainties are severe. Investors may lose money investing in companies that are about to fail. Creditors may lend to companies that are about to default. Employees may lose jobs. Regulators may sanction auditors (fines, suspension, license revocation). The auditor’s reputation may be damaged (loss of clients, loss of trust). In Nigeria, the FRC has sanctioned several audit firms for going concern-related audit failures (FRC, 2020). (FRC, 2020)

The theoretical framework for this study includes several theories. Agency theory (Jensen and Meckling, 1976) suggests that auditors reduce information asymmetry between management (agents) and stakeholders (principals) by providing independent assurance on going concern. Signaling theory (Spence, 1973) suggests that a clean audit opinion (with no going concern modification) signals that the entity is healthy; a going concern modification signals distress. Liquidation theory suggests that auditors must assess whether liquidation is imminent (assets at liquidation value). Contingency theory suggests that the auditor’s going concern assessment depends on the entity’s specific circumstances (industry, size, financial health) (Jensen and Meckling, 1976; Spence, 1973). (Jensen and Meckling, 1976; Spence, 1973)

This study examines the auditor’s role in safeguarding the going concern concept in Nigeria.

1.2 Statement of the Problem

Despite the professional standards (ISA 570) requiring auditors to assess going concern and disclose material uncertainties, the Nigerian experience has shown that auditors sometimes fail to identify or disclose going concern problems. This problem manifests in several specific issues.

First, auditors fail to identify going concern problems. The banking crisis (2008-2009) revealed that several banks were technically insolvent (liabilities exceeded assets) but had received unqualified audit opinions (no going concern modification). The CBN (2011) noted that auditors failed to identify or disclose going concern uncertainties. This failure contributed to the crisis, as investors and creditors were misled. (CBN, 2011)

Second, auditors fail to disclose going concern uncertainties adequately. Even when auditors identify going concern problems, they may not disclose them adequately in the audit report. Disclosures may be vague, boilerplate, or buried in the notes. Stakeholders may not read or understand the disclosures. The FRC (2020) found that 30% of audit reports with going concern issues had inadequate disclosures. (FRC, 2020)

Third, auditors issue inappropriate audit opinions. When a material uncertainty exists and is adequately disclosed, the auditor should express an unmodified opinion with an emphasis of matter paragraph. However, some auditors express unmodified opinions without the emphasis of matter (understatement). Others express qualified or adverse opinions when the entity is a going concern (overstatement). The FRC (2020) found that 15% of audits had inappropriate opinions. (FRC, 2020)

Fourth, management optimism affects auditor judgment. Management may be overly optimistic about the entity’s ability to continue as a going concern. Auditors may be influenced by management’s optimism (confirmation bias) or may be reluctant to challenge management (auditor independence threats). Okoye, Okafor, and Nnamdi (2020) found that 40% of auditors surveyed reported pressure from management to issue unqualified opinions despite going concern uncertainties. (Okoye et al., 2020)

Fifth, auditor independence threats compromise going concern assessments. Long auditor tenure (over 10 years) reduces professional skepticism. Provision of non-audit services (consulting, tax) creates self-interest threats. Fear of losing the client (audit firm competition) reduces auditor willingness to disclose going concern uncertainties. Adeyemi and Uche (2018) found that 45% of Nigerian financial managers reported that their external auditors were “not very independent.” (Adeyemi and Uche, 2018)

Sixth, audit quality varies, affecting going concern assessments. Small and medium audit firms may lack the resources or expertise to assess going concern properly (e.g., industry knowledge, forecasting skills). Large firms (Big Four) may have better going concern assessment procedures but may also face independence threats (non-audit services). The FRC (2020) found that 40% of inspected audits had deficiencies in going concern assessment. (FRC, 2020)

Seventh, the COVID-19 pandemic created unprecedented going concern challenges, and auditors’ response has not been evaluated. The pandemic caused revenue declines, supply chain disruptions, liquidity crises, and increased debt. Auditors had to assess going concern under extreme uncertainty. It is unknown whether Nigerian auditors applied ISA 570 correctly during the pandemic (Ogunyemi and Adewale, 2021). (Ogunyemi and Adewale, 2021)

Eighth, regulatory enforcement against auditors for going concern failures is weak. The FRC has sanctioned auditors for audit failures, but enforcement has been inconsistent. Few audit firms have been significantly penalized for failing to identify or disclose going concern uncertainties. Weak enforcement reduces deterrent effect (Uche and Adeyemi, 2018). (Uche and Adeyemi, 2018)

Ninth, there is a significant gap in the empirical literature on the auditor’s role in safeguarding the going concern concept in Nigeria. Most studies focus on going concern from a management perspective (predicting bankruptcy). Few studies focus on the auditor’s role. Few studies examine the quality of going concern assessments (accuracy of identification, adequacy of disclosure, appropriateness of opinion). Few studies examine the factors affecting auditor going concern judgments (independence, competence, pressure). This study addresses these gaps (Okoye et al., 2020). (Okoye et al., 2020)

Therefore, the central problem this study seeks to address can be stated as: *Despite professional standards (ISA 570) requiring auditors to assess going concern and disclose material uncertainties, Nigerian auditors have failed to identify or disclose going concern problems, as evidenced by the banking crisis (2008-2009) and ongoing audit deficiencies. Management optimism, independence threats, audit quality variation, COVID-19 challenges, and weak enforcement limit the auditor’s role in safeguarding the going concern concept. This study addresses these gaps by examining the auditor’s role in safeguarding the going concern concept in Nigeria.*

1.3 Aim of the Study

The aim of this study is to examine the auditor’s role in safeguarding the going concern concept in Nigeria, with a view to assessing the quality of auditor going concern assessments (accuracy of identification, adequacy of disclosure, appropriateness of opinion), identifying the factors affecting auditor going concern judgments (independence, competence, pressure), and proposing evidence-based recommendations for improving auditor going concern assessments.

1.4 Objectives of the Study

The specific objectives of this study are to:

1. Assess the quality of auditor going concern assessments in Nigeria: accuracy of identification (did auditors correctly identify going concern problems?), adequacy of disclosure (did auditors disclose material uncertainties adequately?), and appropriateness of opinion (was the audit opinion appropriate given the going concern status?).
2. Examine the relationship between auditor independence (auditor tenure, non-audit services, audit fees) and going concern assessment quality.
3. Examine the relationship between auditor competence (professional certifications, experience, industry specialization) and going concern assessment quality.
4. Examine the relationship between management pressure and auditor going concern judgments (likelihood of issuing a going concern modification).
5. Compare going concern assessment quality between Big Four and non-Big Four audit firms.
6. Examine the impact of the COVID-19 pandemic on auditor going concern assessments (did auditors modify opinions more frequently? Did they disclose uncertainties adequately?).
7. Examine the effectiveness of regulatory enforcement (FRC sanctions) in improving auditor going concern assessments.
8. Propose evidence-based recommendations for improving auditor going concern assessments in Nigeria.

1.5 Research Questions

The following research questions guide this study:

1. What is the quality of auditor going concern assessments in Nigeria (accuracy of identification, adequacy of disclosure, appropriateness of opinion)?
2. What is the relationship between auditor independence (auditor tenure, non-audit services, audit fees) and going concern assessment quality?
3. What is the relationship between auditor competence (professional certifications, experience, industry specialization) and going concern assessment quality?
4. What is the relationship between management pressure and auditor going concern judgments (likelihood of issuing a going concern modification)?
5. Is there a significant difference in going concern assessment quality between Big Four and non-Big Four audit firms?
6. How did the COVID-19 pandemic affect auditor going concern assessments (modification frequency, disclosure adequacy)?
7. How effective is regulatory enforcement (FRC sanctions) in improving auditor going concern assessments?
8. What recommendations can be proposed for improving auditor going concern assessments?

1.6 Research Hypotheses

Based on the research objectives and questions, the following hypotheses are formulated. Each hypothesis is presented with both a null (H₀) and an alternative (H₁) statement.

Hypothesis One (Auditor Independence and Going Concern Assessment)

• H₀₁: There is no significant relationship between auditor independence (auditor tenure, non-audit services, audit fees) and the likelihood of issuing a going concern modification.
• H₁₁: There is a significant negative relationship between auditor independence and the likelihood of issuing a going concern modification (less independent auditors are less likely to issue going concern modifications).

Hypothesis Two (Auditor Competence and Going Concern Assessment)

• H₀₂: There is no significant relationship between auditor competence (professional certifications, experience, industry specialization) and the accuracy of going concern identification.
• H₁₂: There is a significant positive relationship between auditor competence and the accuracy of going concern identification.

Hypothesis Three (Management Pressure and Going Concern Assessment)

• H₀₃: Management pressure does not significantly affect auditor going concern judgments (likelihood of issuing a going concern modification).
• H₁₃: Management pressure significantly reduces the likelihood of auditors issuing a going concern modification.

Hypothesis Four (Audit Firm Size and Going Concern Assessment)

• H₀₄: There is no significant difference in going concern assessment quality between Big Four and non-Big Four audit firms.
• H₁₄: Big Four audit firms have significantly higher going concern assessment quality than non-Big Four audit firms.

Hypothesis Five (Auditor Tenure and Going Concern Assessment)

• H₀₅: There is no significant relationship between auditor tenure (years) and the likelihood of issuing a going concern modification.
• H₁₅: There is a significant negative relationship between auditor tenure and the likelihood of issuing a going concern modification (longer tenure reduces likelihood).

Hypothesis Six (Non-Audit Services and Going Concern Assessment)

• H₀₆: There is no significant relationship between the provision of non-audit services (consulting, tax, advisory) and the likelihood of issuing a going concern modification.
• H₁₆: The provision of non-audit services significantly reduces the likelihood of auditors issuing a going concern modification.

Hypothesis Seven (COVID-19 Impact)

• H₀₇: There was no significant difference in the frequency of going concern modifications before and during the COVID-19 pandemic.
• H₁₇: The frequency of going concern modifications was significantly higher during the COVID-19 pandemic than before.

Hypothesis Eight (Regulatory Enforcement)

• H₀₈: Regulatory enforcement actions (FRC sanctions) did not significantly affect the quality of auditor going concern assessments.
• H₁₈: Regulatory enforcement actions significantly improved the quality of auditor going concern assessments.

1.7 Significance of the Study

This study holds significance for multiple stakeholders as follows:

For Auditors and Audit Firms:
The study provides empirical evidence on factors affecting going concern assessment quality (independence, competence, pressure). Auditors can use this evidence to: (1) improve going concern assessment procedures; (2) enhance professional skepticism; (3) resist management pressure; (4) invest in training and certification; and (5) avoid regulatory sanctions.

For the Financial Reporting Council (FRC) of Nigeria and Regulators:
The study provides evidence on the quality of auditor going concern assessments and the effectiveness of regulatory enforcement. The FRC can use this evidence to: (1) strengthen ISA 570 guidance; (2) increase audit quality reviews; (3) impose sanctions for deficiencies; (4) require mandatory audit firm rotation; (5) restrict non-audit services; and (6) provide training.

For the Central Bank of Nigeria (CBN) and NDIC:
The CBN and NDIC supervise banks and other financial institutions. Going concern problems in banks can trigger systemic crises. The study provides evidence on auditor going concern assessments in the banking sector. The CBN can use this evidence to: (1) require enhanced going concern disclosures; (2) conduct joint audits with FRC; and (3) sanction auditors who fail to identify going concern problems.

For the Nigerian Exchange Group (NGX) and SEC:
NGX and SEC regulate listed companies. Investors rely on audited financial statements for investment decisions. The study provides evidence on going concern assessment quality. NGX and SEC can use this evidence to: (1) require enhanced going concern disclosures; (2) require auditor independence disclosures; and (3) delist companies with unresolved going concern problems.

For Investors and Creditors:
Investors and creditors rely on auditor going concern assessments to make investment and credit decisions. The study provides evidence on the reliability (or unreliability) of auditor going concern assessments. Investors can use this evidence to: (1) discount financial statements of companies with long-tenure auditors; (2) avoid companies with non-audit services; and (3) demand enhanced disclosures.

For Professional Accounting Bodies (ICAN, ACCA, ANAN):
Professional bodies train auditors. The study provides evidence on auditor competence gaps (going concern assessment). Professional bodies can use this evidence to: (1) enhance ISA 570 training; (2) require CPD on going concern; (3) develop guidance on going concern assessment; and (4) promote professional skepticism.

For Academics and Researchers:
This study contributes to the literature on auditor going concern assessments in several ways. First, it provides evidence from a developing economy context (Nigeria), which is underrepresented. Second, it examines multiple factors affecting going concern assessments (independence, competence, pressure, firm size, tenure, non-audit services). Third, it includes COVID-19 impact. Fourth, it evaluates regulatory enforcement. The study provides a foundation for future research.

For the Nigerian Economy:
Accurate going concern assessments are essential for investor confidence, capital allocation, and economic growth. When auditors fail to identify going concern problems, investors lose money, creditors lose confidence, and the economy suffers. By identifying how to improve auditor going concern assessments, this study contributes to capital market efficiency and economic development.

1.8 Scope of the Study

The scope of this study is defined by the following parameters:

Content Scope: The study focuses on the auditor’s role in safeguarding the going concern concept in Nigeria. Specifically, it examines: (1) quality of going concern assessments (accuracy, disclosure adequacy, opinion appropriateness); (2) factors affecting going concern assessments (auditor independence, competence, management pressure, audit firm size, auditor tenure, non-audit services); (3) COVID-19 impact; and (4) regulatory enforcement effectiveness. The study does not examine management’s going concern assessment (except as it relates to auditor assessment). The study does not examine bankruptcy prediction models (Altman Z-score) except as they relate to auditor assessment.

Organizational Scope: The study covers listed companies on the Nigerian Exchange Group (NGX), banks and financial institutions, insurance companies, and large manufacturing companies. The study excludes small and medium enterprises (SMEs) that are not required to have statutory audits. The study includes companies that received going concern modifications (qualified, adverse, or emphasis of matter) and companies that did not.

Geographic Scope: The study covers Nigeria. The study focuses on companies headquartered in Lagos State, the Federal Capital Territory (Abuja), and Port Harcourt (Rivers State). Findings may be generalizable to other African countries with similar regulatory environments, but caution is warranted.

Respondent Scope: Within each audited company, respondents include: (1) external audit partners/managers (for perspective on going concern assessment procedures); (2) chief financial officers (for perspective on management-auditor interaction); (3) audit committee chairs/members (for perspective on oversight); and (4) regulators (FRC, CBN). The study also includes audit report data (secondary data).

Time Scope: The study covers a 10-year period from 2014 to 2023, encompassing pre-COVID (2014-2019), COVID-19 pandemic (2020-2021), and post-pandemic recovery (2022-2023). This period enables analysis of trends and the impact of external shocks.

Data Sources: The study uses multiple data sources: (1) secondary data from audit reports (going concern modifications); (2) financial statements (financial ratios indicating going concern problems); (3) FRC audit quality review reports; (4) CBN bank examination reports; (5) surveys of auditors (going concern assessment practices); and (6) interviews with regulators.

Theoretical Scope: The study is grounded in agency theory, signaling theory, and contingency theory. These theories provide the conceptual lens for understanding the auditor’s role in safeguarding the going concern concept.

1.9 Definition of Terms

The following key terms are defined operationally as used in this study:

Term	Definition
Going Concern Concept	The fundamental accounting assumption that an entity will continue to operate for the foreseeable future (typically the next 12 months) without the intention or necessity of liquidation or ceasing operations.
Going Concern Assessment	The auditor’s evaluation of whether events or conditions exist that may cast significant doubt on the entity’s ability to continue as a going concern for a period of at least 12 months from the date of the financial statements.
Material Uncertainty	A significant doubt about the entity’s ability to continue as a going concern that may affect the users’ decisions. If a material uncertainty exists and is adequately disclosed, the auditor expresses an unmodified opinion with an emphasis of matter paragraph.
Going Concern Modification	A modification to the auditor’s report (emphasis of matter paragraph, qualified opinion, adverse opinion, disclaimer of opinion) due to going concern uncertainties or the entity not being a going concern.
Emphasis of Matter Paragraph	A paragraph in the auditor’s report that draws attention to a matter (e.g., going concern uncertainty) that is adequately disclosed in the financial statements. The opinion is unmodified (clean).
Qualified Opinion	An opinion that the financial statements are fairly presented except for a specific matter (e.g., inadequate disclosure of going concern uncertainty).
Adverse Opinion	An opinion that the financial statements are not fairly presented (e.g., the entity is not a going concern but the financial statements are prepared on a going concern basis).
Disclaimer of Opinion	An opinion that the auditor does not express an opinion because the auditor was unable to obtain sufficient appropriate audit evidence (e.g., unable to assess going concern).
Auditor Independence	The freedom of the auditor from conditions that threaten the ability to carry out audit responsibilities in an unbiased manner. Measured by auditor tenure (years), non-audit services (yes/no), and audit fees (as % of total fees).
Auditor Competence	The knowledge, skills, and abilities of the audit team to assess going concern. Measured by professional certifications (CIA, CISA, ACA, ACCA), years of experience, and industry specialization.
Management Pressure	The influence exerted by management on the auditor to issue an unqualified opinion (no going concern modification) despite going concern uncertainties.
Professional Skepticism	An attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.
FRC	Financial Reporting Council of Nigeria. The regulatory body responsible for setting auditing standards (ISA) and enforcing compliance.
ISA 570	International Standard on Auditing 570, “Going Concern.” The standard that establishes the auditor’s responsibilities relating to the going concern assumption.
Liquidation	The process of selling a company’s assets, paying creditors, and distributing any surplus to shareholders. The opposite of going concern.
Break-Up Basis	The basis of accounting used when an entity is not a going concern. Assets are stated at net realizable value (not historical cost), and liabilities are stated at settlement amounts.
COVID-19 Pandemic	The global coronavirus pandemic that created unprecedented going concern challenges (revenue declines, supply chain disruptions, liquidity crises) from 2020 to 2021.

CHAPTER TWO: LITERATURE REVIEW

2.1 Introduction

This chapter presents a comprehensive review of literature relevant to the auditor’s role in safeguarding the going concern concept in Nigeria. The review is organized into five main sections. First, the conceptual framework section defines and explains the key constructs: going concern concept, going concern assessment, material uncertainty, going concern modification, and auditor’s responsibilities under ISA 570. Second, the theoretical framework section examines the theories that underpin the auditor’s role in going concern assessment, including agency theory, signaling theory, contingency theory, and liquidation theory. Third, the empirical review section synthesizes findings from previous studies on auditor going concern assessments globally and in Nigeria, including studies on the accuracy of going concern opinions, factors affecting auditor judgments, and the impact of COVID-19. Fourth, the regulatory framework section examines the Nigerian context, including ISA 570 adoption, FRC enforcement, and CBN guidelines. Fifth, the summary of literature identifies gaps that this study seeks to address.

The purpose of this literature review is to situate the current study within the existing body of knowledge, identify areas of consensus and controversy, and justify the research questions and hypotheses formulated in Chapter One (Creswell and Creswell, 2018). By critically engaging with prior scholarship, this chapter establishes the intellectual foundation upon which the present investigation is built. (Creswell and Creswell, 2018)

2.2 Conceptual Framework

2.2.1 The Going Concern Concept

The going concern concept is a fundamental principle of accounting that assumes an entity will continue to operate for the foreseeable future, typically the next 12 months, without the intention or necessity of liquidation or ceasing operations. This assumption underpins the preparation of financial statements. Under the going concern assumption (IASB, 2018). (IASB, 2018)

• Assets are recorded at historical cost (or recoverable amount) rather than liquidation value.
• Liabilities are recorded at amounts expected to be paid in the normal course of business.
• Depreciation and amortization are calculated over the estimated useful lives of assets.
• Assets and liabilities are classified as current (within 12 months) or non-current (beyond 12 months).

If the going concern assumption is not appropriate (i.e., the entity is not a going concern), financial statements must be prepared on a break-up basis (IASB, 2018). (IASB, 2018)

• Assets are stated at net realizable value (what they could be sold for).
• Liabilities are stated at settlement amounts (what must be paid).
• No depreciation or amortization is recorded.
• All assets and liabilities are classified as current.

The going concern concept is critical for stakeholders because it affects the valuation of assets, the classification of liabilities, and the overall reliability of financial statements. If there are material uncertainties that cast significant doubt on an entity’s ability to continue as a going concern, those uncertainties must be disclosed in the financial statements (IASB, 2018). (IASB, 2018)

2.2.2 Auditor’s Responsibilities under ISA 570

International Standard on Auditing (ISA) 570, “Going Concern,” establishes the auditor’s responsibilities relating to the going concern assumption in an audit of financial statements. The key requirements of ISA 570 include (IFAC, 2018). (IFAC, 2018)

• Risk assessment: The auditor must assess whether events or conditions exist that may cast significant doubt on the entity’s ability to continue as a going concern. Events or conditions include: financial difficulties (recurring losses, negative cash flow, default on loans), operational problems (loss of key management, loss of major customers, supply chain disruptions), and external factors (regulatory changes, litigation, natural disasters).
• Evaluation of management’s assessment: The auditor must evaluate management’s assessment of the entity’s ability to continue as a going concern for a period of at least 12 months from the date of the financial statements. The auditor must evaluate management’s assumptions and plans (e.g., refinancing, cost reduction, asset sales).
• Evaluation of mitigating factors: The auditor must evaluate management’s plans to mitigate going concern risks. This includes assessing the feasibility of the plans (e.g., can management obtain refinancing? can management sell assets at realistic prices?).
• Sufficiency of audit evidence: The auditor must obtain sufficient appropriate audit evidence to determine whether a material uncertainty exists. This includes reviewing management’s cash flow forecasts, reviewing debt covenants, confirming lines of credit, and evaluating asset values.
• Audit opinion: If a material uncertainty exists and is adequately disclosed, the auditor expresses an unmodified opinion with an emphasis of matter paragraph (or separate section). If the material uncertainty is not adequately disclosed, the auditor expresses a qualified or adverse opinion. If the entity is not a going concern (e.g., liquidation is imminent), the auditor expresses an adverse opinion.

2.2.3 Going Concern Modification

A going concern modification is a modification to the auditor’s report due to going concern uncertainties or the entity not being a going concern. Types of going concern modifications include (IFAC, 2018). (IFAC, 2018)

Emphasis of Matter Paragraph: The auditor expresses an unmodified (clean) opinion but adds an emphasis of matter paragraph (or separate section) drawing attention to the going concern uncertainty disclosed in the financial statements. This is the most common going concern modification.

Qualified Opinion: The auditor expresses a qualified opinion (“except for” the going concern uncertainty) when the going concern uncertainty is not adequately disclosed in the financial statements. The qualification is “except for the inadequate disclosure.”

Adverse Opinion: The auditor expresses an adverse opinion when the entity is not a going concern (e.g., liquidation is imminent) but the financial statements are prepared on a going concern basis. This is the most severe opinion.

Disclaimer of Opinion: The auditor disclaims an opinion when unable to obtain sufficient appropriate audit evidence to assess going concern (e.g., management refuses to provide forecasts). This is rare.

Research has shown that going concern modifications are associated with subsequent bankruptcy (high false negatives are rare), but many companies that receive going concern modifications survive (false positives are common). This is known as the “auditor’s going concern prediction problem” (Carcello, Hermanson, and Huss, 1995). (Carcello et al., 1995)