Auditing Uncertainty and Going Concern

This assignment delves into the complex area of auditing for business continuity. It analyzes ASA 701's recommendations on including auditors' opinions about uncertainties that could impact a company's ability to continue operating. The discussion emphasizes the importance of starting the evaluation process during the planning stage, ongoing communication with management about identified issues and mitigation strategies, and clear reporting requirements outlined in ASA 570 and ASA 706 (Revised).

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Executive Summary
The International Auditing and Assurance Standards Board (IAASB) have taken a significant
turn in the audit report in order to improve the communication to users of audited financial
statements (Anandarajan and Kleinman, 2015). These changes do not only involve changes in
the report, but also in the way the auditor works and in the relationship with his clients. It is of
particular importance that the audit report devotes a new section to the key audit issues - which
we refer to in this document as KAM, which are the acronyms of the NIA 701 and that should be
informed in the opinion of the auditor, except specific specific cases.
Keywords: IAASB; IFAC; Key audit matters; ASA; ASA 700; ASA 701.

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Table of Contents
Main changes in the structure of the audit report Introduction......................................................3
Auditing Issues Surrounding the collapse of ABC Learning Centre...............................................4
Key Audit matters in the collapse of ABC Learning Centre...........................................................5
Audit for Going Concern- ASA 570................................................................................................6
Going concern..................................................................................................................................7
Audit Procedures.............................................................................................................................8
Usefulness of ASA 701- Auditors communication.........................................................................9
Conclusion.....................................................................................................................................11
References......................................................................................................................................11

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Main changes in the structure of the audit report
Introduction
What motivated this reform, according to ISA 701 -Communication of key aspects of the audit in
the report of the independent auditor-, is because the users of the financial statements have
demanded more information of those issues that they are most concerned about the
communications maintained between the GER and the auditors. In accordance with the above,
NIA 260 -Communications of audit issues with those in charge of administration (Revised) -
which covers the aforementioned communications, has an important relevance when it comes to
performing the work (Collings, n.d.).
There have also been major changes in other ISAs. For example, in ISA 720 -Responsibility of
the auditor on other information in documents containing audited financial statements-, dedicated
to the verification of other information - that is, that accompanying the financial statements,
whose level of assurance is lower, but with application in some countries; in ASA 570 -Company
underway (Revised) - about the work to verify that the company applies the principle of business
in operation, where we will see that the material uncertainties about this principle have a section
in the report , before they were part of the emphasis paragraphs (Hayes, Gortemaker and
Wallage, n.d.). The purpose of this review is undoubtedly the new order of audit paragraphs.
By way of summary, the main modified standards have been made in the following norms,

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In addition, a number of modifications of agreement - conforming amendments - have also been
introduced to other ISAs, with a semantic rather than an adaptation to the new terms and
structure of the report. In January 2015, the IAASB made a significant leap forward by
publishing the new standard on the audit report which, as the most important novelty, includes
the inclusion of a section called "Key audit issues" (Choi, Frost and Meek, 2014). This section
should reflect those questions of the audit work - salaries, transactions, disclosures in the notes,
etc. - that represent a high professional judgment - for example, estimates of impairment and
provisions - and that have generated a high flow of communication between those responsible for
the government of the entity -RGE- and the auditors (Doupnik and Perera, 2015).
Auditing Issues Surrounding the collapse of ABC Learning Centre
ABC Learning Centre rose and dominated the daycare industry in Australia like a phoenix in the
space of two decades and had a controlling majority in the countries daycare industry. It is worth
to note that however, its fall was even swifter as the management of the company failed to
control the fortunes of the company efficiently. With a clear vision on growth, the management
failed to strengthen its base (Crumbley, LaGraize and Peters, n.d.). Additionally, accounting
discrepancies and the change in government policy accelerated the company’s downfall which
was the most dominant force in daycare industry at one time.
Financial discrepancies were a major attribute of the company’s downfall. The representatives
from the Australian Competition and Consumer Commission attributed it to financial
mismanagement like high debt level.
Related party transactions also led to its downfall. Risk assessment procedures and related
activities to identify events that indicate that the ability to continue as a functioning company is

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in doubt (Oringel, 2012). When risk assessment procedures are applied, the auditor will consider
whether the facts or conditions that may give rise to significant doubts as to the ability to
continue as a going concern. Continuity of the business and validate the following aspects:
Key Audit matters in the collapse of ABC Learning Centre
If the valuation has been made, the auditor will discuss with the management and individual or
jointly identified events or situations, which may generate significant doubts about the continuity
of the business, in which case will find out the action plans to deal with these facts and
conditions. If such an assessment has not yet been made, the auditor will discuss with the
management the basis for the intended use of the business hypothesis under way and inquire with
the management about the existence of facts or conditions that individually or jointly may
generate doubt about the business in progress of the entity (Moroney, 2016). The auditor will
also inquire with management about their knowledge of events or situations after the period
evaluated that may generate significant doubts about the entity's ability to continue as a going
concern. Examples of facts or conditions that may call into question the business assumption on
going. That the company cannot meet the payments corresponding to the debts incurred.
Audit for Going Concern- ASA 570
These are the issues that may lead to a company’s ability to continue as a going concern
Excessive dependence on short-term loans for long-term financial assets is a major risk for a
going concern and either the loss of a principal supplier for the development of its activities,
without having the option of being able to replace it. Indications of withdrawal of financial
support by creditors and change in the way payment of transactions with suppliers, from

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payments to credits to cash payments, and without sufficient liquidity to cover the needs of the
operations of the company. Loss of important customers is also a threat to business.. there are
also changes in regulations that negatively affect the entity and additional audit procedures when
a fact or event is identified that creates doubt about the business in progress (Dauber, 2008).
When identifying facts that generate doubt about the company's business continuity, the auditor
will obtain sufficient evidence to determine whether or not there is material uncertainty through
the application of procedures additions, which will include the following factors: Request to the
management or direction of the assessment or assessment of the entity's ongoing business.
Action plans made by management for future actions related to the risks identified in the
evaluation carried out and whether such action plans are feasible taking into account the
circumstances. Forecast of future cash flow and evaluation of the reliability of the data used to
prepare said forecast. Adequate conclusion of the business case in progress, despite the existence
of material uncertainty (Dauber, 2008).
When the auditor concludes that there is a material uncertainty but that the assumption of
business in sea cha is supported by management is appropriate to determine whether the financial
statements present the following aspects: Issues to be included in the auditor's report If the
financial statements have been prepared under a hypothesis that the auditor believes is not
appropriate, an unfavorable opinion should be expressed.
Going concern
How does the external auditor verify the entity's ability to continue as an "operating company"
or, as it has been called, "business in progress"?

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Therefore, the continuity of the entity will be presumed when its profitability and access to
sources of financing are adequate and have been maintained for a reasonable time and, in
addition, payments of debts and liabilities arising from the operation are programmed with the
due anticipation and are carried out without affecting the financial structure of the entity
(Dauber, 2008). In these cases, it will not be necessary for the management to mention this
situation in the financial statements or in its notes, since it is elaborated on the basis of business
in progress.
The auditor will refer to the International Financial Reporting Standards (IFRS) published by the
International Accounting Standards Board (IASB), in the event that the management of the entity
complies with said regulations in the preparation of its financial statements (Dauber, 2008).
Within the conceptual framework of the IASB, the Basic Postulate, Business on the Move, is
identified as a fundamental hypothesis.
Audit Procedures
The auditor is responsible in the evaluation and conclusion on an entities ability to go on as a
continuing entity or as a going concern for the entity. The auditor is responsible for evaluating
and concluding on the entity's ability to continue as a going concern for the following year from
the date of issuance of its opinion (Dauber, 2008).
The regulations to be applied will be those related to the International Standards on Auditing
(ASA), specifically, ASA 570, Company in operation. This standard establishes with greater
precision and detail the responsibility of the auditor to make an assessment of the entity's ability
to continue as a going concern, obtain evidence of management's hypothesis in this regard, and

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determine the implications in the report audit (Dauber, 2008).
Without being considered as the only viable procedures to be applied and only as a guide to carry
out such risk assessment and assessment, the auditor should have a detailed work program and a
checklist of the business in progress. Before the end of the year, in the planning stage of the audit
you should talk to the directors of the entity and comment with them if they have identified any
significant issue that causes any uncertainty in the continuity of the company during the coming
months. If this is the case, it will be necessary to follow it up during the entire audit, before the
report is issued and, in all cases, to inform the management of the company about the legal
consequences and impact that this issue will have on the financial statements and, therefore, the
opinion.
The auditor must ensure that the evidence he has made, the internal and external consultations
that may be carried out, the reading of the minutes of the shareholders and of the Board of
Directors, bank and third-party confirmations, future action plans and projections of the entity
and the statements of the directorate, are documented and archived.
Usefulness of ASA 701- Auditors communication
What is the order of the sections of the report?
First, the "Opinion" and the "Foundations of opinion" are prioritized and placed at the beginning
of the report, in this order. They are the only paragraphs that are fixed in accordance with ASA
700. However, in some standards such as ASA 701, indications are given about the order of
auditors paragraphs in relation to emphasis paragraphs. Previously, these paragraphs were almost

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at the end of the audit report (Davies and Aston, n.d.).
With regard to the paragraph "Opinion":
- The audited entity and the financial statements should be identified, if indicated
that they have been audited - except in case of denial of opinion, which will indicate that "We
have been appointed to audit the financial statements of ..." -, and the date of these will be
specified.- The financial information framework which is applicable - IFRS, IFRS for
accounting, other local frameworks, etc. -. If in addition to the financial information framework
there are other legal requirements, they must be identified.- Regarding the types of opinion, the
following are still known, although with new implications:
a) Opinion not modified.
b) Opinion with caveats.
c) View denied. When this type of opinion is given, the paragraphs of "Key audit questions" or
"Other information" cannot be inserted, as this might make the audit report less effective.
d) Unfavorable opinion.
In this case, ASA 701 recommends, but does not prohibit, to include auditors opinion other than
the caveats that give rise to unfavorable opinion, because their inclusion could make the financial
statements more credible than they actually are. On the other hand, "related uncertainty with the
business principle in operation "has a separate section in the report (ASA 570,), provided that the
section is well informed (Davies and Aston, n.d.). With the previous regulation, this uncertainty
was part of the emphasis paragraphs. The content of this paragraph, in its structure, has
practically no changes. Subsequently, the section "Key issues of the audit" will be reported, to

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which we will devote a special section to this article. After the key audit questions, , in this order,
paragraphs of emphasis and paragraphs on other issues [ASA 706 (Revised)]; we recall that the
former have the function of giving relevance to certain disclosures of the financial statements,
while the latter have the purpose of communicating certain issues not disclosed in these but that
may be useful for users' understanding of financial information . . Before the end of the year, in
the planning stage of the audit you should talk to the directors of the entity and comment with
them if they have identified any significant issue that causes any uncertainty in the continuity of
the company during the coming months
Conclusion
In case the auditor concludes that the Management's hypothesis is adequate, regarding the
uncertainty about the capacity of the entity to continue as a company in operation and that,
moreover, is revealed in the auditor’s communication report (Davies and Aston, n.d.).The
international standard establishes that the evaluation of the business in progress must start from
the planning stage and be carried out during the development of the audit until the issuance of
the report, since any matter that causes uncertainty in the continuity of the entity, can be
identified at any stage of the auditor's work. On the other hand, during the auditor shall keep in
mind that he / she should approach the Management of the entity in a timely manner, in order to
know the measures to be applied that tend to mitigate the problems of continuity detected and, if
necessary, to convince it that the states financiers.

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References
Anandarajan, A. and Kleinman, G. (2015). International auditing standards in the United States.
New York: Business Expert Press.
Choi, F., Frost, C. and Meek, G. (2014). International accounting. Harlow: Pearson.
Collings, S. (2013). Interpretation and application of international standards on auditing.
Hoboken, N.J.: Wiley.

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Collings, S. (n.d.). Frequently asked questions in international standards on auditing.
Crumbley, D., LaGraize, W. and Peters, C. (n.d.). Case studies in forensic accounting and fraud
auditing.
Dauber, N. (2008). Wiley, the complete guide to auditing standards, and other professional
standards for accountants, 2008. Hoboken N.J.: John Wiley & Sons.
Davies, M. and Aston, J. (n.d.). Auditing fundamentals.
Doupnik, T. and Perera, H. (2015). International accounting. New York, NY: McGraw-Hill
Education.
Hayes, R., Gortemaker, H. and Wallage, P. (n.d.). Principles of auditing.
Moroney, R. (2016). AUDITING. Melbourne: Wiley.
Oringel, J. (2012). Effective auditing for corporates. London: Bloomsbury Information.