Technology companies often operate at a loss, especially in their early stages as they work to develop their product or service and grow their revenue. When this is the case, the company’s auditor will likely place a heavy emphasis on evaluating the company’s going concern disclosures.
Auditing Standards Related to Going Concern
To remain a going concern, a company must have the resources to continue its operations for the foreseeable future. Financial statements are generally prepared using the assumption that a business will continue to be a going concern.
Management is required to assess whether there are existing conditions that raise substantial doubt about the company’s ability to continue as a going concern. If substantial doubt exists, management must evaluate its plans (and the effectiveness of those plans) to alleviate this risk. This assessment will then be evaluated by the company’s external auditor.
The going concern assessment should be based on whether it is likely the company will not be able to fulfill its obligations within one year of the date the financial statements were issued.
What are Going Concern Disclosures and What is Required?
Under U.S. accounting standards, certain disclosures are required if any conditions give rise to substantial doubt about the company’s ability to continue as a going concern. The disclosures should include:
- Events and conditions that raise the substantial doubt
- Management’s evaluation of the significance of such conditions in relation to the company’s ability to meet its obligations
- Management’s plans to mitigate the conditions that raise substantial doubt
If management’s plans do not alleviate the substantial doubt, the disclosures must also include a statement that there is substantial doubt about the company’s ability to continue as a going concern. In this circumstance, the audit report will also include an emphasis of matter paragraph regarding the existence of the substantial doubt.
The Information Needed to Audit Management’s Going Concern Assessment
A company’s auditor will be required to obtain appropriate evidence to evaluate management’s assessment regarding its ability to remain a going concern. To obtain this evidence, an auditor will likely request the following information from management:
- A financial forecast that extends at least 12 months from the expected issuance of the financial statements
- Budget –to-actual reports for the year under audit
- The most recent bank statements available
- The most recent interim financial statements available
- Discussions with management
We can help
If your business needs assistance regarding your going concern disclosures or assessment, contact us. Our auditors can help you understand how the assessment will affect your financial statement disclosures.