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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.
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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
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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.
-
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.
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Documentation Requirements
805.5
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.
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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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