Going Concern and Related Party Transactions

Going Concern and Related Party Transactions - Going...

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Going Concern and Related Party Transactions
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Importance of the Going Concern Assumption a company will continue into business into the foreseeable future (usually one year). Why is it a fundamental assumption of accrual accounting? it expects to realize its assets at the recorded amount and extinguish its liabilities in the normal course of business provides a conceptual basis for the definition of an asset, that is, it has probable future economic benefit Without the going concern assumption, use cash- basis accounting.
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Management and Auditors' Responsibilities Management If management is aware of material uncertainties that can cast significant doubt on the entity's ability to continue as a going concern, then those uncertainties must be disclosed. management takes into account all available information about the future, . . up to twelve months from the balance sheet date. In cases where the company's profitability or access to financial resources is in question, management may need to consider a wide range of factors such as debt repayment schedules and potential sources of replacement financing
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Management and Auditors' Responsibilities Auditor According to CAS 570, The objectives of the auditor are: - To obtain sufficient appropriate evidence whether management's use of the going concern assumption is appropriate - To conclude, based on the audit evidence, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity's ability to continue as a going concern - If a material uncertainty exists, the auditor must consider the implications for the auditor's report.
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Planning Phase requires the auditor to ensure that management has performed an assessment of the going concern and whether they have identified any events or conditions that could cast doubt on the entity's ability to continue as a going concern inquire if there are any events or conditions that exist that may cast significant doubt on the ability to continue as a going concern
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Planning Phase – Do exercise Financial - Net liability or net current liability position - Fixed borrowing is maturing without realistic prospects of renewal or repayment, excessive reliance on short-term borrowing - Adverse financial rations - Substantial operating losses or significant deterioration in value of assets used to generate cash flows Operating - Loss of key management without replacement - Loss of major market, key customer, franchise, license, or key supplier - Labor difficulties - Shortages of key supplies - Emergence of highly successful competitor Other - Non-compliance with capital or statutory requirements - Pending legal or regulatory proceedings that may result in claims that the entity cannot satisfy - Changes in regulations or government policy that will have an adverse effect on the entity Many of these conditions would be highlighted while the auditor is performing the business risk analysis (CAS 315) and analytical review.
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This note was uploaded on 03/24/2012 for the course ACCOUNTING IAF taught by Professor Ganesh during the Spring '12 term at Seneca.

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Going Concern and Related Party Transactions - Going...

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