Introduction
The AICPA (American Institute of Certified Public Accountants) Auditing Standards Board (ASB) issued a Statement on Auditing Standards 132 (SAS 132) in February 2017. The Standard addresses the preparation of financial statements where going concern is a fundamental principle. The going concern principle is the assumption that an entity will remain in business for the foreseeable future. Going concern is not a new issue, as there are auditing guidelines previously established to address this potential issue. SAS 132 is simply an update to the going concern standard. SAS 132 was written to be neutral to all accounting frameworks, so that the standard can be applied to audits of financial statements prepared under various formats.
Objectives
- Obtain sufficient audit evidence to support and conclude the appropriateness of management’s use of the going concern basis of accounting when preparing the financial statements.
- Conclude, based on audit evidence, whether substantial doubt about an entity’s ability to continue as a going concern exists.
- Evaluate the possible financial statement effects if a going concern is present.
What is Changing?
The ASB used several concepts from SAS 126 The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, as the basis for SAS 132. The following are deemed to be the most significant changes made by the ASB.
Auditor’s objectives and related conclusions: SAS 132 attempts to clarify the auditor’s objectives regarding determination and conclusion in the financial statements and whether substantial doubt exists about an entity’s ability to continue as a going concern.
Financial support by third parties or the entity’s manager: When management of the organization intends to receive financial support from a third party or the entity’s manager, the auditor must obtain sufficient documentation evidence about the intent and ability of such parties to provide the financial support, in order to assess if going concern is still present. Under SAS 132, the financial support may be evidenced by either written support from management about the third party or confirming directly with the third party.
Period beyond management’s assessment: SAS 132 requires the auditor to ask management about conditions or events past the period of management’s evaluation that could warrant the entity’s ability to continue as a going concern. Depending upon the responses received, this will affect the presentation in the financial statements.
Emphasis of Matter paragraphs when substantial doubt is present: SAS 132 includes application material to explain situations when an auditor decides that an emphasis of matter paragraph should be included in the financial statement opinion. If a going concern is identified, the auditor should use terms consistent with applicable financial reporting framework.
Communication with those charged with governance: SAS 132 suggests that the auditor communicate with those charged with governance regarding conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern. The communication should include:
- Specific instances/events which help to conclude that substantial doubt exists for an entity to continue as a going concern for a reasonable time period
- The auditor’s consideration of management’s plans
- Whether management’s use of the going concern basis of accounting is the appropriate presentation
When Is SAS 132 Effective?
The requirements of this Standard become effective for audits of financial statements for periods ending on or after December 15, 2017 and reviews of interim financial information for interim periods beginning after fiscal years ending on or after December 15, 2017.
What Should Be Done Now?
- Information gathering:
- Determine early whether liquidity issues/going concern exists within the organization and whether such issues will be on-going concerns.
- Consider the proper reporting of the going concern in the footnotes and the financial statement opinion.
- Assign the task for compiling information to the appropriate individual.
Do you have questions regarding the new standard? Contact Justin Arnt. Please note this summary is not meant to substitute for reading the statement in its entirety as the Statement includes various examples depending on the situation.