ICAI’s Implementation Guide for Revised SA 570 on Going Concern (Third Edition: August 2019)
ICAI has released third edition (August 2019) of it’s Implementation Guide for Revised SA 570, comprising of responses in question answer format on key issues of revised SA 570, including checklists, practical case studies, illustrative auditor’s report formats, etc., as under:
This Implementation Guide of ICAI aimed to provide practical guidance on implementation of the principles enunciated in the Standard on Auditing (SA) 570 (Revised), Going Concern. SA 570 (Revised) is effective for audits of financial statements for periods beginning on or after April 1, 2017.
Certain fundamental accounting assumptions underlie the preparation of financial statements and going concern is one of those fundamental accounting assumptions. They are usually not specifically stated because their use is accepted and assumed. A disclosure is necessary if they are not followed. However, 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 SA 706(Revised) in the auditor’s report to draw the user’s attention to that alternative basis of accounting and the reasons for its use.
The enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable future. An entity’s continuance as a going concern for the foreseeable future is assumed in the preparation of financial statements in the absence of significant information to the contrary. Accordingly, assets and liabilities are recorded on the basis that the entity will be able to
realise its assets and discharge its liabilities in the normal course of business. If this assumption is unjustified, the amounts and classification of assets and liabilities in the financial statements may need to be adjusted.
The importance of ‘going concern’ basis of accounting in the preparation of financial statements can be gauged from the fact that a number of important laws and regulations impose specific responsibilities on managements as well as auditors in relation to going concern. For example, Section 134(5) of the Companies Act, 2013 inter alia requires the Board of Directors to make a specific assertion in their Directors’ Responsibility Statement under this Section that the directors have prepared the annual accounts on a going concern basis. Similarly, regulation 18(3) of the Securities and Exchange Board of India (SEBI) (Listing Obligations and Disclosure Requirements) Regulations, 2015 envisages the Audit Committee had to review with management that the annual financial statements and auditor’s report thereon before submission to the board for approval, with particular reference to matters required to be included in the director’s responsibility statement to be included in the board’s report in terms of clause (c) of sub-section (3) of Section 134 of the Companies Act, 2013 which requires the directors to make a specific assertion that the annual accounts have been prepared on a going concern basis of accounting.
This Implementation Guide of ICAI provides a framework to assist in determining whether the use of going concern basis of accounting in preparation of the financial statements and the related disclosures are appropriate and in making balanced, proportionate and clear disclosures.