When financial statements of any entity are prepared, it’s presumed that the entity is a “going concern”, meaning that they are and will continue to operate in foreseeable future.
The “going concern” status is retained by the entity until a situation occurs that changes or jeopardizes the entity. Currently, this situation has a new name- “COVID-19”. Thus, the business personnel and the management has to decide which part of the entity has to be given high priority and study the impact of COVID-19, assuming their business is still a going concern.
In this article, we are going to tell you, from the management perspective, and from the perspective of audit of the business: what to prioritize during this time of pandemic.
Going Concern Assessment: The Management Perspective
The going concern assessment of a business entity depends upon its conditions, and the nature of business it conducts. From a managerial standpoint, you have to take care of the following things in mid while you are assessing the going concern of your business:
- Evaluating the impact COVID-19 pandemic has had on your business and your cash flow.
- Evaluating the regulatory measures as per the following:
- Ensuring that the government measures are operated properly in your business
- Evaluating the financial and infrastructural changes within your entity after the implementation of those measures.
- Evaluating your ability to file the compliance documents and financial statements on time.
- Analyzing and reporting about the operating environment measures taken:
- Restructuring the entity components like employees and other resources to ensure cash-flow.
- Analyzing how pricing and volume is impacting your revenue
- Analyzing the loss of revenue and cash flow due to COVID-19 pandemi
- Analyzing the impact on foreign exchange cash-flows
- Analyzing if customers are moving away from your business
- Analyzing if you are capable to operate during the pandemic.
- Analyzing the restrictions to operations during COVID-19
- Analyzing the changes in the prices of raw-materials during pandemic
- Analyzing the loss due to temporary suspension of operations.
- Analyzing the steps taken to stay liquid:
- Analyzing the risk related to receivables
- Analyzing the impact of trade financing products like payment terms, letter of credit, etc.
- Analyzing the COVID-19 risk associated with refinancing.
- Analyzing the risk of uncertain liabilities.
The above assumptions are just the basic ones. The bigger the entity is, the complex its infrastructure and the higher the risks are involved. That being said, the above list lies at the core of going concern of any entity. Thus, update the above on the following basis:
- Support given by your local government
- Customer’s ability to continue to buy from you
- Availability to sources of fund
- Relaxations and restrictions in regulations.
Going Concern during COVID-19: the impact on auditor’s responsibility and Report
When auditing the business, the auditor has to be adaptive in the COVID-19 situation because of one reason:
Operations in many entities are now at a standstill. With nothing moving forward, there is a doubt that these entities will continue be operative, and hence a going concern or not.
Thus, as per the above reason, the auditors have to add several more pointers to their auditing procedures. As such, the new responsibilities of these auditors are as follows:
- The auditor should evaluate the management’s plan for future, and see if they are feasible as per the current state of that management’s entity.
- The auditor should assess the result of the actions taken that are likely to occur from the end of the reporting period.
- Complete assessment of management plant should be done with the management regarding plans to reduce expenditure, borrow money, restructuring debts and liquidating assets.
How the auditor should report
The auditor should act as per the situations as stated below:
- Situation: If the financial statement is prepared using the going concern basis which the auditor deems inappropriate
- Action: Auditor should express dissatisfaction and an adverse opinion
- Situation: If the financial statement is prepared using the going concern basis which the auditor deems appropriate but there is a material uncertainty present that has been disclosed.
- Action: The auditor should express satisfaction and an unmodified opinion but also create a Material Uncertainty section in his/her report.
- Situation: If the financial statement is prepared using the going concern basis which the auditor deems appropriate but there is a material uncertainty present that has not been disclosed.
- Action: The auditor should express a qualified or an adverse opinion.
Disclosing material of uncertainty
The contingent situation that COVID-19 has put every business in should not be hidden. As business personnel, one should be ready to disclose the following:
- Fact of uncertainty: The management thinks that the entity might not be able to survive for long – casting doubt of it being able to be an ongoing concern.
- Fact of uncertainty subjective to material uncertainty: The management think that due to one factor, the entity won’t be able to be an ongoing concern, they should reveal that.
- Change: If the entity is at any form of risk, including liquidity risk, credit risk, price risk etc.
- Additional disclosures: Any issue related to cash flow that has arisen due to COVID-19 has to be disclosed.
Surviving the COVID-19 is the greatest challenge our business might ever face. Therefore, your auditors, your financial statements and your Auditors, have to be ready to face that change and report accordingly.