7525 Audit conclusions and reporting
Jun-2021

Overview

This topic explains:

  • Auditor conclusions

  • Material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern

  • Adequacy of disclosure when events or conditions have been identified and a material uncertainty exists

  • Adequacy of disclosures when events or conditions have been identified but no material uncertainty exists

  • Use of going concern basis of accounting is inappropriate

  • Use of the going concern basis of accounting is appropriate but a material uncertainty exists

    • Adequate disclosure of a material uncertainty is made in the financial statements

    • Adequate disclosure of a material uncertainty is not made in the financial statements

    • Management unwilling to make or extend its assessment

  • Communication with those charged with governance

  • Significant delay in the approval of financial statements caused by going concern issues

    • Adequacy of disclosure of material uncertainty

    • Audit reporting when disclosure of material uncertainty is adequate

    • Audit reporting when disclosure of material uncertainty is inadequate

Auditor conclusions

CAS Requirement

The auditor shall evaluate whether sufficient appropriate audit evidence has been obtained regarding, and shall conclude on, the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements (CAS 570.17).

Based on the audit evidence obtained, the auditor shall conclude whether, in the auditor’s judgment, a material uncertainty exists related to events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern. A material uncertainty exists when the magnitude of its potential impact and likelihood of occurrence is such that, in the auditor’s judgment, appropriate disclosure of the nature and implications of the uncertainty is necessary for (CAS 570.18):

(a) In the case of a fair presentation financial reporting framework, the fair presentation of the financial statements, or

(b) In the case of a compliance framework, the financial statements not to be misleading.

Material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern

CAS Guidance

The phrase “material uncertainty” is used in IAS 1 in discussing the uncertainties related to events or conditions which may cast significant doubt on the entity’s ability to continue as a going concern that should be disclosed in the financial statements. In some other financial reporting frameworks the phrase “significant uncertainty” is used in similar circumstances (CAS 570.A21).

Adequacy of disclosure when events or conditions have been identified and a material uncertainty exists

CAS Requirement

If the auditor concludes that management’s use of the going concern basis of accounting is appropriate in the circumstances but a material uncertainty exists, the auditor shall determine whether the financial statements (CAS 570.19):

(a) Adequately disclose the principal events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern and management’s plans to deal with these events or conditions; and

(b) Disclose clearly that there is a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern and, therefore, that it may be unable to realize its assets and discharge its liabilities in the normal course of business.

CAS Guidance

Paragraph 18 explains that a material uncertainty exists when the magnitude of the potential impact of the events or conditions and the likelihood of occurrence is such that appropriate disclosure is necessary to achieve fair presentation (for fair presentation frameworks) or for the financial statements not to be misleading (for compliance frameworks). The auditor is required by paragraph 18 to conclude whether such a material uncertainty exists regardless of whether or how the applicable financial reporting framework defines a material uncertainty (CAS 570.A22).

Paragraph 19 requires the auditor to determine whether the financial statement disclosures address the matters set forth in that paragraph. This determination is in addition to the auditor determining whether disclosures about a material uncertainty, required by the applicable financial reporting framework, are adequate. Disclosures required by some financial reporting frameworks that are in addition to matters set forth in paragraph 19 may include disclosures about (CAS 570.A23):

  • Management’s evaluation of the significance of the events or conditions relating to the entity’s ability to meet its obligations; or

  • Significant judgments made by management as part of its assessment of the entity’s ability to continue as a going concern.

Some financial reporting frameworks may provide additional guidance regarding management’s consideration of disclosures about the magnitude of the potential impact of the principal events or conditions, and the likelihood and timing of their occurrence.

OAG Guidance

Material uncertainty about an entity’s ability to continue as a going concern is a significant matter. It will often be desirable to consult with others, including Legal Services and other specialists in situations where going concern issues exist, in order to better understand prevailing economic or industry conditions or to evaluate circumstances relevant to the entity.

Going Concern Note Disclosure—Example

Note 1: Going Concern1
These financial statements have been prepared using Canadian generally accepted accounting principles applicable to a going concern2, which contemplates the realization of assets and settlement of liabilities in the normal course of business as they become due.

For the year ended __________________, _______ the Company reported a loss of $_______ million and an accumulated deficit of $_______ million at that date. In addition to its going working capital requirements, the Company must secure sufficient funding for existing commitments including an operating credit line balloon repayment of $_______ by, XY, and obtain new cash resources sufficient to cover expected reductions on margins due to increased competition and the dynamics of conducting business principally in foreign markets. These circumstances lend significant doubt3 as to the ability of the Company to meet its obligations as they come due and, accordingly, the appropriateness of the use of accounting principles applicable to a going concern4.

In recognition of these circumstances, the Company has secured funding in the amount of $_______ million net of share issue costs and issued warrants for $_______ million to fund operations and meet balloon payment obligations5. These undertakings, while significant, are not sufficient in and of themselves to enable the Company to fund all aspects of its operations and, accordingly, management is pursuing other financing alternatives to fund the Company’s operations so it can continue as a going concern. Management plans to secure the necessary financing through a combination of the exercise of existing warrants for the purchase of common shares, the issue of new equity or debt instruments and the entering into joint venture arrangements. Nevertheless, there is no assurance that these initiatives will be successful6.

The Company’s ability to continue as a going concern is dependent upon its ability to fund its research and development programs, manage its foreign currency exposures, defend its patent rights and generate positive cash flows from operations. These financial statements do not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and balance sheet classifications that would be necessary if the Company were unable to realize its assets and settle its liabilities as a going concern in the normal course of operations. Such adjustments could be material7.

Adequacy of disclosures when events or conditions have been identified but no material uncertainty exists

CAS Requirement

If events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern but, based on the audit evidence obtained the auditor concludes that no material uncertainty exists, the auditor shall evaluate whether, in view of the requirements of the applicable financial reporting framework, the financial statements provide adequate disclosures about these events or conditions (CAS 570.20).

CAS Guidance

Even when no material uncertainty exists, paragraph 20 requires the auditor to evaluate whether, in view of the requirements of the applicable financial reporting framework, the financial statements provide adequate disclosure about events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern. Some financial reporting frameworks may address disclosures about (CAS 570.A24):

  • Principal events or conditions;

  • Management’s evaluation of the significance of those events or conditions in relation to the entity’s ability to meet its obligations;

  • Management’s plans that mitigate the effect of these events or conditions; or

  • Significant judgments made by management as part of its assessment of the entity’s ability to continue as a going concern.

When the financial statements as a whole are prepared in accordance with a fair presentation framework, the auditor’s evaluation as to whether the financial statements achieve fair presentation includes the consideration of the overall presentation, structure and content of the financial statements, and whether the financial statements, including the related notes, represent the underlying transactions and events in a manner that achieves fair presentation. Depending on the facts and circumstances, the auditor may consider it appropriate in extremely rare cases to express a disclaimer of opinion instead of adding determine that additional disclosures are necessary to achieve fair presentation. This may be the case, for example, when events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern but, based on the audit evidence obtained, the auditor concludes that no material uncertainty exists, and no disclosures are explicitly required by the applicable financial reporting framework regarding these circumstances (CAS 570.A25).

OAG Guidance

Material uncertainty about an entity’s ability to continue as a going concern is a significant matter. It will often be desirable to consult with others, including Legal Services and other specialists in situations where going concern issues exist, in order to better understand prevailing economic or industry conditions or to evaluate circumstances relevant to the entity.

Consider whether additional disclosures are necessary to achieve fair presentation in the financial statements, where appropriate. For example, in situations when some events or conditions were identified but we concluded that no material uncertainty exists, we may determine that disclosures of those events or conditions in addition to those explicitly required by the financial reporting framework are necessary to appropriately describe the events or conditions. In this case, consider whether appropriate disclosures were made in the financial statements and communicate with management and those charged with governance, as appropriate.

When assessing a Company's ability to continue as a going concern, engagement teams may also assess liquidity risk and asset recoverability. It is important to consider that there are differences between going concern note disclosure and liquidity or recoverability note disclosures (the first one requires the emphasis of matter paragraph in the auditor's report, the other one may not depending on the specific facts and circumstances). It is important for engagement teams to be aware of the differences. Liquidity or recoverability note disclosures should not resemble going concern note disclosures. If you are unsure whether going concern or liquidity disclosure is required, engagement teams are reminded that a consultation with Audit Services is required in cases where the engagement team identifies events and conditions that are indicative of uncertainty about the entity’s ability to continue as a going concern whether or not going concern note disclosure may be required.

Use of going concern basis of accounting is inappropriate

CAS Requirement

If the financial statements have been prepared using the going concern basis of accounting but, in the auditor’s judgment, management’s use of the going concern basis of accounting in the preparation of the financial statements is inappropriate, the auditor shall express an adverse opinion (CAS 570.21).

CAS Guidance

If the financial statements have been prepared using the going concern basis of accounting but, in the auditor’s judgment, management’s use of the going concern basis of accounting in the financial statements is inappropriate, the requirement in paragraph 21 for the auditor to express an adverse opinion applies regardless of whether or not the financial statements include disclosure of the inappropriateness of management’s use of the going concern basis of accounting (CAS 570.A26).

When the use of the going concern basis of accounting is not appropriate in the circumstances, management may be required, or may elect, to prepare the financial statements on another basis (e.g., liquidation basis). The auditor may be able to perform an audit of those financial statements provided that the auditor determines that the other basis of accounting is acceptable in the circumstances. The auditor may be able to express an unmodified opinion on those financial statements, provided there is adequate disclosure therein about the basis of accounting on which the financial statements are prepared, but may consider it appropriate or necessary to include an Emphasis of Matter paragraph in accordance with CAS 706 in the auditor’s report to draw the user’s attention to that alternative basis of accounting and the reasons for its use (CAS 570.A27)

Use of the going concern basis of accounting is appropriate but a material uncertainty exists

CAS Requirement

Adequate disclosure of a material uncertainty is made in the financial statements

If adequate disclosure about the material uncertainty is made in the financial statements, the auditor shall express an unmodified opinion and the auditor’s report shall include a separate section under the heading “Material Uncertainty Related to Going Concern” to (CAS 570.22):

(a) Draw attention to the note in the financial statements that discloses the matters set out in paragraph 19; and

(b) State that these events or conditions indicate that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern and that the auditor’s opinion is not modified in respect of the matter.

Adequate disclosure of a material uncertainty is not made in the financial statements

If adequate disclosure about the material uncertainty is not made in the financial statements, the auditor shall (CAS 570.23):

(a) Express a qualified opinion or adverse opinion, as appropriate, in accordance with CAS 705; and

(b) In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern and that the financial statements do not adequately disclose this matter.

Management unwilling to make or extend its assessment

If management is unwilling to make or extend its assessment when requested to do so by the auditor, the auditor shall consider the implications for the auditor’s report (CAS 570.24).

CAS Guidance

The identification of a material uncertainty is a matter that is important to users’ understanding of the financial statements. The use of a separate section with a heading that includes reference to the fact that a material uncertainty related to going concern exists alerts users to this circumstance (CAS 570.A28).

The Appendix to this CAS provides illustrations of the statements that are required to be included in the auditor’s report on the financial statements when International Financial Reporting Standards (IFRSs) is the applicable financial reporting framework. If an applicable financial reporting framework other than IFRSs is used, the illustrative statements presented in the Appendix to this CAS may need to be adapted to reflect the application of the other financial reporting framework in the circumstances (CAS 570.A29).

Paragraph 22 establishes the minimum information required to be presented in the auditor’s report in each of the circumstances described. The auditor may provide additional information to supplement the required statements, for example to explain (CAS 570.A30):

  • That the existence of a material uncertainty is fundamental to users’ understanding of the financial statements; or
  • How the matter was addressed in the audit (see also paragraph A1).

Adequate disclosure of a material uncertainty is made in the financial statements

Illustration 1 of the Appendix to this CAS is an example of an auditor’s report when the auditor has obtained sufficient appropriate audit evidence regarding the appropriateness of management’s use of the going concern basis of accounting but a material uncertainty exists and disclosure is adequate in the financial statements. The Appendix of CAS 700 also includes illustrative wording to be included in the auditor’s report for all entities in relation to going concern to describe the respective responsibilities of those responsible for the financial statements and the auditor in relation to going concern (CAS 570.A31).

Adequate disclosure of a material uncertainty is not made in the financial statements

Illustrations 2 and 3 of the Appendix to this CAS are examples of auditor’s reports containing qualified and adverse opinions, respectively, when the auditor has obtained sufficient appropriate audit evidence regarding the appropriateness of the management’s use of the going concern basis of accounting but adequate disclosure of a material uncertainty is not made in the financial statements (CAS 570.A32).

In situations involving multiple uncertainties that are significant to the financial statements as a whole, the auditor may consider it appropriate in extremely rare cases to express a disclaimer of opinion instead of including the statements required by paragraph 22. CAS 705 provides guidance on this issue (CAS 570.A33).

Communication with Regulators

When the auditor of a regulated entity considers that it may be necessary to include a reference to going concern matters in the auditor’s report, the auditor may have a duty to communicate with the applicable regulatory, enforcement or supervisory authorities (CAS 570.A34).

Management unwilling to make or extend its assessment

In certain circumstances, the auditor may believe it necessary to request management to make or extend its assessment. If management is unwilling to do so, a qualified opinion or a disclaimer of opinion in the auditor’s report may be appropriate, because it may not be possible for the auditor to obtain sufficient appropriate audit evidence regarding management’s use of the going concern basis of accounting in the preparation of the financial statements, such as audit evidence regarding the existence of plans management has put in place or the existence of other mitigating factors (CAS 570.A35).

Communication with those charged with governance

CAS Requirement

Unless all those charged with governance are involved in managing the entity, the auditor shall communicate with those charged with governance events or conditions identified that may cast significant doubt on the entity’s ability to continue as a going concern. Such communication with those charged with governance shall include the following (CAS 570.25):

(a) Whether the events or conditions constitute a material uncertainty;

(b) Whether management’s use of the going concern basis of accounting is appropriate in the preparation of the financial statements; and

(c) The adequacy of related disclosures in the financial statements; and

(d) Where applicable, the implications for the auditor’s report.

OAG Guidance

See OAG Audit 2214 for guidance on required communications to those charged with governance.

Significant delay in the approval of financial statements

Significant delay in the approval of financial statements

CAS Requirement

If there is significant delay in the approval of the financial statements by management or those charged with governance after the date of the financial statements, the auditor shall inquire as to the reasons for the delay. If the auditor believes that the delay could be related to events or conditions relating to the going concern assessment, the auditor shall perform those additional audit procedures necessary, as described in paragraph 16, as well as consider the effect on the auditor’s conclusion regarding the existence of a material uncertainty, as described in paragraph 18 (CAS 570.26).

OAG Guidance

See OAG Audit 9040 for guidance on subsequent events.