1. 805 Going Concern Considerations

    Conditions and Events

    805.1 SAS No. 59, (AU 341), The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern, 8
    as amended, requires the auditor to evaluate whether conditions and
    events identified during the audit, when considered in the aggregate,
    indicate that there could be a substantial doubt about the entity's
    ability to continue as a going concern for a reasonable period of time,
    that is, for a period not to exceed one year beyond the financial
    statement date. Examples of such conditions or events particularly
    relevant to a CIRA include the following:
    • • Negative trends:td dl { margin-top: 0px; margin-bottom: 0px; }
    • •• Recurring operating losses.
    • •• Negative cash flows from operating activities.
    • •• Adverse key financial ratios
    • .•• Significant decline in members/owners and related assessments.
    • •• Significant increase in unpaid assessments.

    • • Other indications of possible financial difficulties:td dl { margin-top: 0px; margin-bottom: 0px; }
    • •• Denial of usual trade credit from contractors and suppliers.
    • •• Default or restructuring of debt agreements.
    • .•• Need to seek new sources or methods of financing.
    • •• Need to dispose of substantial assets.

    • • Internal matters:td dl { margin-top: 0px; margin-bottom: 0px; }
    • •• Physical structure of complex deteriorating or in disrepair
    • .•• Inadequacy or lack of reserve funding
    • .•• Need for special working capital assessments.
    • •• Uneconomic long-term commitments.
    • •• Use of funds for future major repairs and replacements to finance current operations.
    • •• Mushrooming construction costs relative to major repairs and replacements.
    • •• Large investment losses.
    • •• Severe discord among members of management, board, developer, members/owners, etc.
    • •• Need to significantly revise operations.

    • • External matters that have occurred:td dl { margin-top: 0px; margin-bottom: 0px; }
    • •• Legal proceedings, legislation, or similar matters that might jeopardize the CIRA's ability to operate
    • .•• Significant declines in values of real estate/increase in foreclosures.
    • •• Significant uninsured or underinsured catastrophe or disaster such as earthquake, tornado, or flood.
    • •• Significant economic downturns.
    • •• Lost rental income from commercial units due to a sluggish commercial real estate market.
    • •• Significant ownership of units by developers and financial institutions.
  2. Audit Procedures

    805.2 SAS No. 59 does not mandate
    any procedures specifically and solely to search for conditions or
    events that might indicate inability to continue as a going concern, but
    it does require a specific assessment of whether audit procedures that
    were applied for other purposes identified such conditions and events.
    • Examples of such other auditing
    • procedures include applying analytical procedures, reviewing subsequent
    • events, reading minutes, inquiring of the CIRA's legal counsel about
    • litigation, claims, and assessments, etc
  3. 805.3 If necessary, the auditor
    should apply procedures to obtain additional information about any
    conditions and events identified.
    • If, after considering the
    • identified conditions and events, the auditor believes there is a
    • substantial doubt about the CIRA's ability to continue as a going
    • concern for a reasonable period of time, he or she should obtain
    • information about management's plans that are intended to mitigate the
    • effect of the conditions and events and assess the likelihood that those
    • plans can be effectively implemented.
  4. 805.4 If the preceding procedures
    cause the auditor to conclude that there is substantial doubt about the
    entity's ability to continue as a going concern, the auditor should
    consider the possible effects on the financial statements, adequacy of
    disclosures, and auditor's report
    • Certain disclosures may be
    • necessary, even if the auditor's initial substantial doubt is alleviated
    • based on his consideration of management's plans. If substantial doubt
    • does not exist but the financial statements might lead a reader to
    • conclude there is substantial doubt, the authors recommend disclosing
    • the mitigating factors. The auditor also has an obligation to
    • communicate certain matters to those charged with governance. See
    • further discussion of SAS No. 114, The Auditor's Communication With Those Charged With Governance, at section 812.
  5. Documentation Requirements

    When conditions or events cause the auditor to believe there is
    substantial doubt about the CIRA's ability to continue as a going
    concern for a reasonable period of time, SAS No. 59, as amended (AU 341.17), requires documentation of the following:
    • • Conditions or events causing the auditor to believe there is
    • substantial doubt about the CIRA's ability to continue as a going
    • concern.
    • • The elements of management's plans most significant to overcoming the adverse effects of the conditions or events.
    • • The auditing procedures performed and evidence obtained to evaluate those significant elements.
    • The auditor's conclusion about whether substantial doubt remains or is
    • alleviated and the possible effects on the financial statements and
    • related disclosures.
    • • The possible effects on the
    • auditor's report, including the auditor's conclusion about whether an
    • explanatory paragraph is necessary and whether to modify the auditor's
    • report for inadequate disclosures.
  6. Practice Aids

    805.6 A step in the audit program (HOA-AP-2 or HOA-AP-2-S) and the “Going Concern Checklist” at HOA-CX-16.1 were designed to guide auditors in making and documenting the required considerations and procedures.
    The disclosure checklist at HOA-CX-13 includes the required disclosures. Chapter 6 of PPC's Guide to Auditor's Reports discusses and illustrates the auditor's report modification when there is a going concern uncertainty.
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