Emphasize on Going Concern by the auditor

irfanahmedmeer · 03-27-2004, 04:46 PM

I was going through ATR issued by ICAP came along the fact that ICAP has prescribed a format for emphasize to be inserted in the audit report of the company for going concern which is as follows

"Without qualifying our opinion, we draw attention to note X in the financial statements which indicate that the company incurred a net loss of ZZZ during the year ended December 31, 20X1 and as of that date, company's current liablities exceed its total assets by ZZZ. These condiitons along with other matters as set forth in Note X, indicate the existance of a material uncertainity which may cast significant doubt about the company's ability to continue as a going concern"

This states that following condition are to be reported
1. Company has incurred loss
2. Company's current liablity exceed its total assets

My question is if company's current liablity exceed its total assets but company is in profit than what should the auditor do whether to still insert emphasize

Irfan

aahan786 · 03-28-2004, 05:50 PM

Dear Mr.Irfan Mir

I`m a new user of this site and posting any mail for the first time.

The ATR to which you have referred is consistent which international standards.But the situation which you are describing is practically impossible rather it would be an ironic situation if a company`s current liabilities exceed its total assets and it would still earn profits.

sumaaan · 03-29-2004, 03:26 AM

<BLOCKQUOTE id=quote>quote<hr height=1 noshade id=quote>
How is it possible in double entry that a company`s liabilities exceeds its assets?

There is a will there is a way.
<hr height=1 noshade id=quote></BLOCKQUOTE id=quote>

Liabilities CAN exceed assets and it has nothing to do with the theory of double entry.

muzammil · 03-29-2004, 04:33 AM

Well i think he wouldnot qualify his opinion and would make a note stating the condition of the company's total assets and liabilites which would show the uncertainties there can be for the company not to be as a going concern. The auditor believes that there is a doubt over the going concern issue but considers that the financial statements give adequate details of the problem so he will give an unqualified report with note in the emphasis paragraph for the financial statements to draw attention.

smraza · 03-30-2004, 03:15 PM

<BLOCKQUOTE id=quote>quote<hr height=1 noshade id=quote>
Dear Mr.Irfan Mir

I`m a new user of this site and posting any mail for the first time.

The ATR to which you have referred is consistent which international standards.But the situation which you are describing is practically impossible rather it would be an ironic situation if a company`s current liabilities exceed its total assets and it would still earn profits.
<hr height=1 noshade id=quote></BLOCKQUOTE id=quote>
Dear aahan, it is possible that company's current liabilities exceed its total assets and the same company earns profits.
I personally myself have seen lot of companies in the same situation.

SMR

Goodman · 03-31-2004, 12:19 AM

Goin

Goodman · 03-31-2004, 12:29 AM

Going concern disclosure is necessary when the auditor concludes that co. is unlikely to carry on trading in the FORESEEABLE FUTURE (defi. of foreseeable future important).

IF going concern is an issue, then the next question to ask is, Whether the concern is significant or not.

If concern significant, then financial stat. need preparing on split up basis (Personally, I have not yet done this in my career).

However, if concern is not significant but substantial, then disclosure required in the notes to the accounts and a "emphasis para" in the audit report as was described by irfanahmedmeer.

Now coming to the question, I have a client, in profit, balance sheet in green territory. But I see a letter from the bank saying that they are unable to renew the overdraft line for the next year. if I conclude that company is then unable to pay its liabilities in the foreseeable future, i need to disclose the precise nature of my concern, its impact and any actions taken by directors to overcome in the notes to the account and then because of the nature of the matter, i will draw readers attention in the audit report. but such attention is not a qualification.

in short, it is quite possible, company making a profit having a red balance sheet have emphasis para inserted in the audit report just because it is unable to finance its liabilities as and when they y fall due.

irfanahmedmeer · 03-31-2004, 06:36 PM

Well said good men. But the problem ever since the ATR i mentioned has been issued by the ICAP many peaple are insisting that these conditions in the Para prescribed by the ICAP have to be used as a checklist and do not recoganize that even auditing standarad gives guidlines, excat circumstances in which going concern is to be inserted depends on judgement not on any para prescibed

Regards

Irfan

Goodman · 03-31-2004, 06:52 PM

<BLOCKQUOTE id=quote>quote<hr height=1 noshade id=quote> many peaple are insisting that these conditions in the Para prescribed by the ICAP have to be used as a checklist <hr height=1 noshade id=quote></BLOCKQUOTE id=quote>

I feel sorry for the companies they audit and for the country who recoginse such people as auditors. Such auditors cant help drive companies forward, however they fit very well at the back end of corporate line up.

Moon · 04-27-2004, 05:02 PM

Salam to all the accountants out there,
well in my opinion, it is impracticable that a company's current liabilities exceed its total assets and the company still earns profit. however, this assumption can only be true if we consider the profit as for the year beacause if the current liabilities exceed total assets, current liabilities should be reduced to become equal to total assets and this is only feasible if the company carry forward its accumulated loss.

secondly the auditor draws attention of the management in his report that the company assets are not sufficient to meet the current liabilities of the company which are required to be settled in the normal course or within 1 year of the balance sheet date.the going concern assumption address the same question that the entity will be able to realize its assets and discharge it s liabilities in the normal course of the biz.

so i think auditors opinion as to going concern assumption is justified.

May GOD fill your life with eternal peace and love.

smraza · 04-28-2004, 02:49 AM

<BLOCKQUOTE id=quote>quote<hr height=1 noshade id=quote>"Without qualifying our opinion, we draw attention to note X in the financial statements which indicate that the company incurred a net loss of ZZZ during the year ended December 31, 20X1 and as of that date, company's current liablities exceed its total assets by ZZZ. These conditions along with other matters as set forth in Note X, indicate the existance of a material uncertainity which may cast significant doubt about the company's ability to continue as a going concern"
<hr height=1 noshade id=quote></BLOCKQUOTE id=quote>
ICAP has prescribed the two main causes which may cast signinficant doubt about the company's ability to continue as a going concern.
1.Net Loss during the year,
2.excess current liabilities than its total assets.

Now back to the question raised by Irfan meer, <BLOCKQUOTE id=quote>quote<hr height=1 noshade id=quote>My question is if company's current liablity exceed its total assets but company is in profit than what should the auditor do whether to still insert emphasize<hr height=1 noshade id=quote></BLOCKQUOTE id=quote>
In my opinion, in above situation the auditor should consider facts that whether the profit is operational or non-operational, and what are the chances that the company will not incurr any loss in forseable future, if the auditor gets some solid facts and ground that the company will now start earning profits in the future, then he can remove the matter of emphasis from his report,
provided, there are no other matters other than two above, which may cast doubt about the company to continue as going concern,
as the ICAP have also used the wording These conditions along with other matters as set forth in Note X so the auditor must consider those other matters before removing the emphasis para from the report.
The detail of Said matters are given by the ICAP in its "Audit Practices Manual" in the form of checklist named "Going Concern Review Checklist", and this checklist is in accordance with the ISAs.

SMR

SNIPER · 07-13-2004, 11:04 PM

<BLOCKQUOTE id=quote>quote<hr height=1 noshade id=quote>
<BLOCKQUOTE id=quote>quote<hr height=1 noshade id=quote>
How is it possible in double entry that a company`s liabilities exceeds its assets?

There is a will there is a way.
<hr height=1 noshade id=quote></BLOCKQUOTE id=quote>

Liabilities CAN exceed assets and it has nothing to do with the theory of double entry.

<hr height=1 noshade id=quote></BLOCKQUOTE id=quote>

Hello!

I'm a beginner in this field, and cannot understand your point. How can the current liabilities exceed your total assets, or by 'total assets' you're refering to the total net assets?, i'm confused on that, kindly explain by giving an appropriate example.

Regards
Mubeen

Edited by - sniper on Jul 13 2004 60941 PM

smraza · 07-14-2004, 03:42 PM

<BLOCKQUOTE id=quote>quote<hr height=1 noshade id=quote>
Hello!

I'm a beginner in this field, and cannot understand your point. How can the current liabilities exceed your total assets, or by 'total assets' you're refering to the total net assets?, i'm confused on that, kindly explain by giving an appropriate example.

Regards
Mubeen

Edited by - sniper on Jul 13 2004 60941 PM
<hr height=1 noshade id=quote></BLOCKQUOTE id=quote>
Dear Mubeen,
lets consider an example of a balance sheet,

Non Current Assets.......25,000
Current Assets.............35,000
Total Assets................60,000

Equity.......................(40,000)
Non current Liabilities....10,000
Current Liabilities..........90,000
Total Liabilities.............60,000

in above case the current liabilities are greater than total assets,
reason being the negative equity which resulted due to heavy losses in preceeding year(s) which exceeded the share capital of company.
I hope that will clear your problems.

SMR

SNIPER · 07-14-2004, 10:57 PM

Got your drift Mr Raza. Thanks a lot for your help, i really appreciate that.

Regards,
Mubeen.

Masood · 07-15-2004, 12:09 AM

<BLOCKQUOTE id=quote>quote<hr height=1 noshade id=quote>
[quote] however they fit very well at the back end of corporate line up.

<hr height=1 noshade id=quote></BLOCKQUOTE id=quote>

Just wanted to clarify, there can be no 'back end' in a line up. Depending on where you stand, there is either a near end or a far end. 'Back ends' are only relevant in either a queue or a hierarchy.