Going concern is an essential principal assumption in accounting. It is one of the fundamental assumptions in accounting on the basis of which financial statements are prepared. The assumption is that a business or other entity will be able to maintain operating for a period of time that is adequate to carry out its assurances, requirements, purposes, and so on.
An auditor is not responsible for predicting future conditions or events. However, SAS 59 the Auditor’s Consideration of an Entity’s ability to continue as a Going Concern provides that the auditor has a responsibility to evaluate whether there is substantial doubt about the entity’s ability to continue as a concern for a reasonable period of time. When the auditor concludes that there is substantial doubt about the entity’s ability to continue as a going concern this time period, the auditor should state this conclusion in the audit report:
(a) If the management’s disclosures in the financial statements concerning the entity’s ability to continue as a going concern are considered adequate by the auditor, an unqualified opinion should be expressed and an explanatory paragraph should be added following the opinion paragraph describing, the uncertainty with reference to management’s disclosures.
(b) If the management’s disclosures in the financial statements are considered inadequate by the auditor, there is a departure from GAAP and the auditor should express either a qualified opinion or an adverse opinion and explain the reasons thereof in an explanatory paragraph preceding the opinion paragraph.
