how do Auditors assess going concern?

aintnosunshine

I think it's quite topical at the moment given them amount of businesses in trouble. How do auditors decide whether the going concern assumption is appropriate? Do they use Bankruptcy models or just ratio analysis or how do they decide?

Thanks

hivizman

I can't give you an answer based on current practice, but Statement of Auditing Standards 130 deals with assessing going concern, and the basic approach it adopts there is that (a) part of the auditor's initial risk assessment of the client will involve a consideration of whether possible threats to the client's ability to continue in existence into the foreseeable future may increase the audit risk, and (b) it is for the directors to decide whether it is appropriate to prepare the financial statements on a going concern basis, and the auditors will seek evidence to assure themselves that the directors' decision is appropriate.

There have been proposals in the academic literature that use of bankruptcy prediction models would be useful in assessing going concern, but I don't know how far these have been followed up in practice.

A recent note on going concern from an Irish perspective appears on the ACCA website here.