AUDIT CONSIDERATIONS in RESPECT of GOING CONCERN in the CURRENT ECONOMIC ENVIRONMENT doc

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Key Messages within This Alert
• Thegoingconcernassumptionisafundamental
principleinthepreparationofnancialstate-
ments.
• Theassessmentofanentity’sabilitytocon-
tinueasagoingconcernistheresponsibilityof
theentity’smanagement.
• Theappropriatenessoftheuseofthegoing
concernassumptionisamatterfortheauditor
toconsideroneveryauditengagement.
• InternationalStandardonAuditing(ISA)570,
“GoingConcern,”establishestherelevant
requirementsandguidancewithregardtothe
auditor’sconsiderationoftheappropriateness
ofmanagement’suseofthegoingconcernas-
sumptionandauditorreporting.
• Thecreditcrisisandeconomicdownturnhave
ledtoalackofavailablecredittoentitiesof
allsizes,whichmayaffectanentity’sability
tocontinueasagoingconcern;thisandother
factorsmayberelevantintheauditor’sevalu-
ationofforecastspreparedbymanagementto
supportitsgoingconcernassessment.
• Theextentofdisclosuresinthenancialstate-
mentsisdrivenbymanagement’sassessment
ofanentity’sabilitytocontinueasagoingcon-
cern,coupledwiththedisclosurerequirements
oftheapplicablenancialreportingframework.
• Considerationoftheneedforanemphasisof
matterparagraphintheauditor’sreportwillbe

adifcultmatterofjudgmenttobemadeinthe
contextoftheentity’scircumstances;themere
existenceofthecreditcrisis,thoughreferred
tointhenancialstatements,doesnotofitself
createtheneedforanemphasis.
ThisalertisissuedbystaffoftheInternational
AuditingandAssuranceStandardsBoard(IAASB)
toraiseauditors’awarenessaboutmattersrelevant
totheconsiderationoftheuseofthegoingconcern
assumptioninthepreparationofthenancial
statementsinthecurrentenvironment.Inparticular,
management,thosechargedwithgovernanceand
auditorsalikewillbefacedwiththechallengeof
evaluatingtheeffectofthecreditcrisisandeconomic
downturnonanentity’sabilitytocontinueasagoing
concernandwhethertheseeffectsontheentityought
tobedescribed,orotherwisereected,inthenancial
statements.
WhiletheStaffAuditPracticeAlert,“Challenges
inAuditingFairValueAccountingEstimatesin
theCurrentMarketEnvironment[October2008],”
referstogoingconcerninthecontextoftheeffects
ofvaluationinilliquidmarkets,thisalertaddresses
widerissuesthatarelikelytoberelevanttoauditors
ofentitiesinallindustriesandofallsizes.While
thisalertrefersprincipallytoISA570,otherISAs
containrequirementsandguidancetoassisttheauditor
indealingwithotherissuesthatmayalsorequire
particularattentioninthecurrentenvironment,such
asinventoryvaluationandallowancesfordoubtful

receivables.
Thisalertdoesnottakeaccountofmattersspecic
toindustriesorjurisdictions,bothofwhichwillbe
relevanttotheissuesdiscussedbelow.Government
responsestothecriseshavebeensubstantial,but
varied.Thusinsomejurisdictionscertainaspects
ofcreditavailabilitymayhavebeenresolvedwhile
otherscontinuetocausedifculties;andtheparticular
matterstackledbygovernmentsmaydifferasbetween
jurisdictions.Similarly,governmentshavebeen
consideringassistancetocertainindustries,thenature
ofwhichmayhaveamaterialeffectonthematters
discussedinthisalert.Further,theeffectofthecredit
crisisandeconomicdownturnvariesbothastoits
severityandtimingdependingontheindustryandthe
jurisdiction.
AUDIT CONSIDERATIONS in RESPECT of GOING CONCERN
in the CURRENT ECONOMIC ENVIRONMENT
This Staff Alert references the pre-claried ISAs. The claried ISAs are effective for audits of nancial statements for periods beginning on or after
December 15, 2009. The claried standards can be accessed at: www.ifac.org/auditing-assurance/clarity-center/claried-standards
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ThisalertdoesnotamendoroverridetheISAsthat
arecurrentlyeffective,thetextsofwhichaloneare
authoritative.Readingthealertisnotasubstitutefor
readingtheISAs,relevantaccountingstandardsor
otherauthoritativematerial.Thealertisnotmeantto
beexhaustiveandreferencetotheISAsthemselves
shouldalwaysbemade.Inconductinganaudit
inaccordancewithISAs,auditorsarerequiredto
complywithall theISAsthatarerelevanttothe

engagement.
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Background
Thegoingconcernassumptionisafundamental
principleinthepreparationofnancialstatements.
Underthegoingconcernassumption,anentityis
ordinarilyviewedascontinuinginbusinessfor
theforeseeablefuturewithneithertheintention
northenecessityofliquidation,ceasingtradingor
seekingprotectionfromcreditorspursuanttolawsor
regulations.Accordingly,unlessthegoingconcern
assumptionisinappropriateinthecircumstancesof
theentity,assetsandliabilitiesarerecordedonthe
basisthattheentitywillbeabletorealizeitsassets,
dischargeitsliabilities,andobtainrenancing(if
necessary)inthenormalcourseofbusiness.
Theassessmentofanentity’sabilitytocontinue
asagoingconcernistheresponsibilityofthe
entity’smanagement;andtheappropriatenessof
management’suseofthegoingconcernassumption
isamatterfortheauditortoconsideroneveryaudit
engagement.Somenancialreportingframeworks
containanexplicitrequirementformanagementto
makeaspecicassessmentoftheentity’sabilityto
continueasagoingconcern,andstandardsregarding
matterstobeconsideredanddisclosurestobemade
inconnectionwithgoingconcern.Forexample,
withinInternationalFinancialReportingStandards
(IFRS),InternationalAccountingStandard(IAS)
1,“PresentationofFinancialStatements,”requires

managementtomakeanassessmentofanentity’s
abilitytocontinueasagoingconcern:
“Whenpreparingnancialstatements,
managementshallmakeanassessmentof
anentity’sabilitytocontinueasagoing
concern.Financialstatementsshallbe
preparedonagoingconcernbasisunless
managementeitherintendstoliquidatethe
entityortoceasetrading,orhasnorealistic
alternativebuttodoso.Whenmanagement
isaware,inmakingitsassessment,of
materialuncertaintiesrelatedtoeventsor
conditionsthatmaycastsignicantdoubt
upontheentity’sabilitytocontinueasa
goingconcern,thoseuncertaintiesshallbe
disclosed.Whennancialstatementsare
notpreparedonagoingconcernbasis,that
factshallbedisclosed,togetherwiththe
basisonwhichthenancialstatementsare
preparedandthereasonswhytheentityis
notregardedasagoingconcern.
Inassessingwhetherthegoingconcern
assumptionisappropriate,management
takesintoaccountallavailableinformation
aboutthefuture,whichisatleast,butisnot
limitedto,twelvemonthsfromthebalance
sheetdate.Thedegreeofconsideration
dependsonthefactsineachcase.When
anentityhasahistoryofprotable
operationsandreadyaccesstonancial

resources,aconclusionthatthegoing
concernbasisofaccountingisappropriate
maybereachedwithoutdetailedanalysis.
Inothercases,managementmayneedto
considerawiderangeoffactorsrelating
tocurrentandexpectedprotability,debt
repaymentschedulesandpotentialsources
ofreplacementnancingbeforeitcan
satisfyitselfthatthegoingconcernbasisis
appropriate.”
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Thedetailedrequirementsregardingmanagement’s
responsibilitytoassesstheentity’sabilitytocontinue
asagoingconcernandrelatednancialstatement
disclosuresmayalsobesetoutinlaworregulation.
Otherstandardsandguidancemayalsobe
relevant,suchasthoserelatingtodisclosures
ofrisksanduncertaintiesortosupplementary
statementssuchasmanagementdiscussionand
analysisorsimilar.
Relevant Auditing Standards
InternationalStandardonAuditing(ISA)570,
1 ThecompletesetofISAsthatarecurrentlyeffectiveareavailablefordownloadat />Part_I-Compliation.pdf.
2 IAS1asat1January2007,paragraphs23-24.
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consideringtheeffectofanyplansofmanage-
mentandothermitigatingfactors;and
c.Seekwrittenrepresentationsfrommanage-
mentregardingitsplansforfutureaction.
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
Thecreditcrisisandtheeconomicdownturnare
likelytoresultineventsorconditionsbeingidentied
thatwillgiverisetotheauditorperformingtheaudit
proceduresdescribedinparagraph26ofISA570.
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
Onthebasisoftheevidenceobtained,ISA570
requirestheauditortodetermineif,intheauditor’s
judgment,amaterialuncertaintyexistsrelatedto
eventsorconditionsthat,aloneorinaggregate,
maycastsignicantdoubtontheentity’sabilityto
continueasagoingconcern.
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Amaterialuncertainty
existswhenthemagnitudeofitspotentialimpactis
suchthat,intheauditor’sjudgment,cleardisclosure
ofthenatureandimplicationsoftheuncertainty
isnecessaryforthepresentationofthenancial
statementsnottobemisleading.
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Management’s Assessment of the Entity’s Ability
to Continue as a Going Concern
Itisimportantthatauditorscommunicatewith
managementand,whereappropriate,thosecharged
withgovernanceearlyintheaudittoobtainan
understandingofhowmanagementintendstoassess
theentity’sabilitytocontinueasagoingconcernand
toenabletheauditortocommunicateanyeventsor
conditionsrelatingtothegoingconcernassumption

thathavealreadybeenidentiedduringtheaudit.In
somecases,managementmayhavealreadymadea
preliminaryassessmentthattheauditorwouldreview
whenperformingriskassessmentproceduresto
determinewhethereventsorconditionsrelatingtothe
goingconcernassumptionhavebeenidentiedand
whethermanagementhasplanstoaddressthem.
Management’sassessmentofthegoingconcern
assumptioninvolvesmakingajudgment,ata
particularpointintime,aboutthefutureoutcomeof
eventsorconditionswhichareinherentlyuncertain.
Wheremanagementhasmadeapreliminary
“GoingConcern,”establishestherelevant
requirementsandguidanceandisdiscussedin
moredetailbelow.Management’sassessmentofthe
entity’sabilitytocontinueasagoingconcernisa
keypartoftheauditor’sconsiderationofthegoing
concernassumption.
Theauditor’sresponsibilityistoconsider,when
planningandperformingauditproceduresand
evaluatingtheirresults,theappropriatenessof
management’suseofthegoingconcernassumption
inthepreparationofthenancialstatements.
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
Theauditorconsiderstheappropriatenessof
management’suseofthegoingconcernassumption
evenifthenancialreportingframeworkusedin
thepreparationofthenancialstatementsdoesnot
includeanexplicitrequirementformanagementto

makeaspecicassessmentoftheentity’sabilityto
continueasagoingconcern.
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ISA570requirestheauditortoconsidergoing
concernintheearlystagesoftheaudit(i.e.,when
planningtheauditandperformingriskassessment
procedures)byconsideringwhetherthereareevents
orconditionsandrelatedbusinessriskswhichmay
castdoubtontheentity’sabilitytocontinueasa
goingconcern,andtoremainalertduringtheaudit
forauditevidencetothiseffect.
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
Theauditorisrequiredtoevaluatemanagement’s
assessmentoftheentity’sabilitytocontinueasa
goingconcern.
6
Wheneventsorconditionshavebeen
identiedwhichmaycastsignicantdoubtonan
entity’sabilitytocontinueasagoingconcern,ISA
570requirestheauditortoconsiderwhetherthey
affecttheauditor’sassessmentoftherisksofmaterial
misstatementandto:
a.Reviewmanagement’splansforfutureactions
basedonitsgoingconcernassessment;
b.Gathersufcientappropriateauditevidence
toconrmordispelwhetherornotamaterial
uncertaintyexiststhroughcarryingoutaudit
proceduresconsiderednecessary,including
3 ISA570,paragraph2.

4  ISA570,paragraph9.
5 ISA570,paragraphs11-12.
6 ISA570,paragraph17.
7  ISA570,paragraphs12and26.
8 Paragraphs27-29ofISA570providerelatedguidanceontheauditproceduresthatmayberelevant.
9 ISA570,paragraph30.
10 ISA570,paragraph31.
4
becomeincreasinglydifcult,asthelandscapein
whichentitiesareoperatingisrapidlychanging,in
particularasitrelatestoavailabilityofcreditandthe
impactonforecastsandbudgetsastherecessionbites
andthecostofborrowingrises.
12

IAS1andISA570acknowledgethatentitieswith
ahistoryofprotableoperationsandreadyaccess
tonancialresourcesmay not needadetailed
analysistosupportthegoingconcernassumptions.
However,theeffectofthecreditcrisisandeconomic
downturnislikelytobethatsuchanapproach
willnolongerbeappropriateformanyentities.In
particular,theimplicitassumptionsbehindsuch
anapproachmaynolongerbevalidinthecurrent
environment.Issuessurroundingliquidityandcredit
riskmaycreatenewuncertainties,ormayexacerbate
thosealreadyexisting.Evenmanywell-respected
entitieswithalong-standinghistoryofprotsand
availabilityofcreditmaynditdifculttoobtain
orrenewnancing,eitheratalloroncomparable

terms.Further,entitiesthathavetypicallyrelied
onextensionsofdebtpaymentsorwaiversofdebt
covenantsatyear-endmayndthatthesereliefsare
nolongeravailablefromtheirlenders.Inaddition,
theeconomiccrisismayunderminetheprevious
assumptionsaboutprotability.
Consequently,entitiesthathavenotpreviouslyfound
theneedtoprepareadetailedanalysisinsupport
ofthegoingconcernassumptionmayneedtogive
thematterfurtherconsideration.Inmanycases,
themanagementofsmallerentitiesmaynothave
historicallypreparedadetailedassessmentofthe
entity’sabilitytocontinueasagoingconcern,but
insteadmayhavereliedonin-depthknowledgeof
thebusinessandanticipatedfutureprospects.Matters
suchasowner-managersupportmaybecomeeven
morepertinentinthecurrenteconomicenvironment.
Auditorswillbenetfromearlydiscussionwith
entitiesaboutthenatureoftheassessmentthatmay
beappropriateinthecircumstancesoftheentity,how
theentitymightbestgoaboutdoingso,andwhat
maybeneededtosupplementwhathasbeendonein
prioryearswithmorerobustprocessesinlightofthe
currentmarketconditions.
assessment,itmaybemorelikelyinthecurrent
economicconditionsthatitwillbenecessaryto
updateitatyear-endgiventhespeedwithwhich
conditionsmaybechanging.Thefollowingfactors
arerelevant:
• Ingeneralterms,thedegreeofuncertainty

associatedwiththeoutcomeofaneventor
conditionincreasessignicantlythefurther
intothefutureajudgmentisbeingmade
abouttheoutcomeofaneventorcondition.
Forthatreason,mostnancialreporting
frameworksthatrequireanexplicitmanage-
mentassessmentspecifytheperiodforwhich
managementisrequiredtotakeintoaccount
allavailableinformation.
• Anyjudgmentaboutthefutureisbasedon
informationavailableatthetimeatwhich
thejudgmentismade.Subsequenteventscan
contradictajudgmentwhichwasreasonable
atthetimeitwasmade.
• Thesizeandcomplexityoftheentity,the
natureandconditionofitsbusinessandthe
degreetowhichitisaffectedbyexternal
factorsallaffectthejudgmentregardingthe
outcomeofeventsorconditions.
Materialuncertaintiesrelatedtoeventsandconditions
thatmaycastsignicantdoubtontheentity’sability
tocontinueasagoingconcernarerecognizedinthe
ISAsasauditmattersofgovernanceinterestthatthe
auditorshouldcommunicatetothosechargedwith
governance.
11
However,itislikelyinthecurrent
climatethatmattersrelevanttotheassessmentof
theentity’sabilitytocontinueasagoingconcern
arealreadybeingconsideredbythosechargedwith

governance,atleastintheprivatesector.Afailure
tohaveconsideredrelevantissuesmayrepresent
aweaknessingovernanceorriskmanagement
procedures,andmayleadtoinadequatelyprepared
nancialstatements.
Degree of Consideration of the
Going Concern Assumption
Asnotedabove,IAS1indicatesthattheassessment
ofanentity’sabilitytocontinueasagoingconcern
dependsonthefactsandcircumstances.Intimes
likethepresent,makingthisassessmentmay
11 ISA260,”CommunicationofAuditMatterswithThoseChargedwithGovernance,”paragraph11.
12 Althoughcentralbankshavebeenreducinginterestratesinanattempttostimulateeconomicactivityinthecurrentenvironment,banksmaynotnecessarilybe
passingonsuchreductionstocustomersastheyseektoimprovemarginsandreectrevisedriskassessments.
5
viewedasaguaranteethatfutureeventsorconditions
willnotresultintheentityceasingtocontinueasa
goingconcern.
Nevertheless,thecurrenteconomicconditionsdo
notchangeeithermanagement’sortheauditor’s
responsibilityrelatingtothegoingconcern
assumption.Thereisnodoubtthattheeventsof
thepastyearandtheoutlookforthefuturepresent
challengesthatwillneedtobeconsideredby
managementandauditorsalikeinmeetingthose
responsibilities.
TheISAdescribesfactorsthatmayberelevantto
management’suseofthegoingconcernassumption
andgivesexamplesofeventsorconditionsthat
maycastsignicantdoubtonthegoingconcern

assumptionincluding,butnotlimitedto,anumberof
nancialeventsthatarebecomingmoreprevalentin
thecurrentenvironment,
16
suchas:

• Fixed-termborrowingsapproachingmaturity
withoutrealisticprospectsofrenewalorre-
payment;orexcessiverelianceonshort-term
borrowingstonancelong-termassets.
• Indicationsofwithdrawalofnancialsupport
bycreditors.
• Inabilitytocomplywiththetermsofloan
agreements.
• Lossofamajormarket,franchise,licenseor
principalsupplier.
• Non-compliancewithcapitalorotherstatu-
toryrequirements.
Theexistenceofoneormoreeventsorconditions
highlightedintheISA,aswellastheexamples
mentionedinthisalert,doesnotalwayssignifythata
materialuncertaintyexists.Whenidentied,however,
theseeventsorconditionsprompttheauditorto
performfurtherauditprocedurestogathersufcient
appropriateauditevidencetoconrmordispel
whetherornotamaterialuncertaintyexists.Such
proceduresincludetheconsiderationoftheeffect
ofanyplansofmanagementandothermitigating
factors.
Availability of Credit

Onemajoreffectofthecreditcrisisandeconomic
Period of Time Considered in Making a Going
Concern Assessment
Ordinarilytheapplicablenancialreporting
framework,orsometimesrelevantlaworregulation,
speciestheminimumtimeperiodthatmanagement
isexpectedtoconsiderwhenmakingitsassessment.
IAS1,forexample,requiresthat“management
takesintoaccountallavailableinformationabout
thefuture,whichisatleast,butisnotlimitedto,
twelvemonthsfromthebalancesheetdate.”Other
frameworkslooktotwelvemonthsfromtheapproval
ofthenancialstatements,whilestillotherslimit
theconsiderationtotwelvemonthsfromthebalance
sheetdate.ISA570requirestheauditortoconsider
thesameperiodasthatusedbymanagementin
makingitsassessmentundertheapplicablenancial
reportingframework;however,ifthisassessment
coverslessthantwelvemonthsfromthebalance
sheetdate,theauditorisrequiredtoaskmanagement
toextenditsassessmentperiodtotwelvemonths
fromthebalancesheetdate.
13
Ifmanagementis
unwillingtomakeorextenditsassessmentwhen
requestedtodosobytheauditor,theauditoris
requiredtoconsidertheneedtomodifytheauditor’s
reportasaresultofthelimitationonthescopeof
theauditor’swork,asitmaynotbepossibleforthe
auditortoobtainsufcientappropriateauditevidence

regardingtheuseofthegoingconcernassumptionin
thepreparationofthenancialstatements.
14
Theauditoralsoinquiresofmanagementasto
itsknowledgeofeventsorconditionsandrelated
businessrisksbeyondtheperiodofassessmentused
bymanagementthatmaycastsignicantdoubtonthe
entity’sabilitytocontinueasagoingconcern.
15

Factors in the Current Environment that May
Affect the Going Concern Assessment
Neithermanagementnortheauditorcanpredict
futureeventsorconditionsthatmaycausean
entitytoceasetocontinueasagoingconcern.The
unexpectedseverity,speedandconsequencesofthe
creditcrisisillustratethatfactonlytoowell.Itisfor
thesereasonsthatISA570statesthattheabsence
ofanyreferencetogoingconcernuncertaintyinthe
nancialstatementsortheauditor’sreportcannotbe
13 ISA570,paragraph18.
14 ISA570,paragraph37.
15ISA570,paragraph22.
16 ISA570,paragraphs7-8.
6
provideconrmationsregardingthelikeli-
hoodofanextensionorrenewaloffacilities
frombanksandthirdpartiesthattheymay
havemorereadilyprovidedinthepast);
• Theextenttowhichtheimplicationsofagree-

mentsneedtobeconsidered(e.g.,innormal
timesanentitymayclearlysatisfyvarious
covenantsinanagreement,butinthecurrent
environmentthemargin,ifany,maybeless
andthereforerequiremorespecicconsider-
ation);and
• Theweighttobeplacedonsuchevidenceas
isavailable(e.g.,nancemaybepromised
fromanindividualbutinthecircumstanceshe
orshemaybeunabletofulllthatcommit-
ment).
Management’sassessmentofwhether,andtowhat
extent,inlightofsucheventsorconditions,credit
willbeavailableinthefutureislikelytohavean
effectontheentity’sforecasts,asdiscussedinthe
followingsection.
Forecasts and Budgets
Animportantcomponentofthegoingconcern
assessmentrelatestoanentity’songoingforecasts
andbudgeting.Inevaluatingmanagement’s
assessment,theauditorconsiderstheprocess
managementfollowedtomakeitsassessment,the
assumptionsonwhichtheassessmentisbased
andmanagement’splansforfutureactions.
17
In
consideringalternativestrategiesthatmanagement
mayhavetoovercomeanyadversefactors,
considerationsincludetheireffectivenessandthe
abilityofmanagementtoexecutethem.

Analysisofcashowmaybeasignicantfactor
inconsideringthefutureoutcomeofeventsor
conditionsintheevaluationofmanagement’splans
forfutureaction.Assumptionsthathavebeenused
inprioryearsmaynolongerberelevantandmay
needtobeadjustedtoaccountforthepressuresof
thecurrentenvironment.Factorsthatmayberelevant
inevaluatingforecastspreparedbymanagement
include:
• Whetherseniormanagementandthose
chargedwithgovernancehavebeenappro-
priatelyinvolvedandhavegivenappropriate
downturnisthelackofavailablecredittoentities
ofallsizes.Turmoilinthebankingsectorhasled
toageneraltighteningofcredit,whichmayhavea
pervasiveeffectonanentity’sabilitytocontinueas
agoingconcern.Inaddition,asanentity’snancial
healthchanges,contractualtermsinloansandother
obligations,includingdebtcovenantsandguarantees,
andanentity’scompliancewithsuchterms,arelikely
tobeundergreaterscrutinyfromlenders,andalso
frommanagementandauditors.
Thereareanumberoffactorsthatmay,inthe
circumstancesoftheentity,needtobeconsidered,
including:
• Whetherbanksmaywithdrawcreditfrom
entitiesthathadpreviouslyhadeasyaccessto
creditwhenevernecessary;
• Whetherreductionsinassetvaluesortrad-
inglosseshaveledtobreachesinlending

covenants;
• Whetherfailuretocomplywiththerespective
covenantshasresulted,orwillresult,inim-
mediatedemandsfromthelenders,orchanges
inthetermsonwhichnanceisavailable;
• Whetheron-demandclausesintermloansaf-
fecttheclassicationofsuchliabilitiesonan
entity’sbalancesheetandwhetherthelenders
mayinfactinvokesuchclauses,ratherthan
continuingapracticeofgrantingwaivers;
• Whetheritisreasonabletoassumethatlend-
erswillrolloverexistingcreditfacilitieson
similarterms,ifatall;
• Whetherbanksarelikelytobeunwillingto
committofuturerenewalofcreditfacilities
(e.g.,toissuelettersconrmingthatthese
facilitieswillbecontinuedintheabsenceof
unforeseencircumstances);and
• Whetherguaranteesorlettersofsupport(e.g.,
fromowners,thosechargedwithgovernance
orothergroupentities)willcontinuetobe
available,orofsignicantvalue.
Whilethesefactorsdonotinthemselvesnecessarily
creatematerialuncertaintiesspecictoanentity,they
arelikelytoaffect:
• Theauditevidencethatmaybeavailable
(e.g.,nancialinstitutionsmaybereluctantto
17 ISA570,paragraph20.
7
Disclosures in the Financial Statements

Financialreportingframeworksspecifythenancial
statementdisclosuresthataretobeincludedin
thenancialstatements.Inadditiontospecic
disclosuresthatmayberequiredregardingamaterial
uncertaintyabouttheentity’sabilitytocontinueasa
goingconcern,manynancialreportingframeworks
requiredisclosuresofrisksanduncertaintiesthat
assistusersofthenancialstatementstobetter
understandtheentity’snancialposition,nancial
performanceandcashows.
Forthoseentitiesthataresignicantlyaffectedby
thecurrenteconomicconditions,managementneeds
toconsiderhowtoaddresstherisksarisingfrom
thecurrenteconomicconditionsintheirnancial
statementsundertheapplicablenancialreporting
framework.
Manynancialreportingframeworksrequirethatthe
nancialstatementsprovidesufcientdisclosures
toenableuserstounderstandtheeffectsofmaterial
transactionsandeventsontheinformationconveyed
inthenancialstatements(forexample,IFRS).
Manyalsorequireentitiestodisclosethenatureand
extentofrisksarisingfromnancialinstrumentsto
whichtheentityisexposedduringtheperiodandat
thereportingdate,andhowtheentitymanagesthose
risks(forexample,IFRS7,“FinancialInstruments:
Disclosures.”
18
).Acombinationofqualitativeand
quantitativedisclosures,thesedisclosuresprovidean

overviewoftheentity’suseofnancialinstruments
andtheexposurestoriskstheycreate;disclosuresof
liquidityriskandcreditriskwillbehelpfultoinves-
torsastheeconomiclandscapeandfutureoutlook
unfolds.
Historically,whenmanagementhasconcludedthat
theentityisagoingconcernwithoutrelatedmate-
rialuncertainty,thisconclusionhasnotusuallybeen
expresslystatedinthenancialstatements.However,
eveninsuchcasesmanagementmaynevertheless
consideritappropriate,orinfactmayberequiredby
theapplicablenancialreportingframework,tomake
disclosuresinthecurrentyear’snancialstatements
tosetoutthechallengesmanagementisfacinginthe
currenteconomicenvironment,howthisaffectsthe
outlookfortheentityandanyuncertaintiesthatcould
haveaneffectontheentity,whethermaterialornot.
attentiontoforecasts;
• Whethertheassumptionsusedintheforecasts
areconsistentwithassumptionsthathave
beenusedinassetvaluationsandmodelsfor
impairment;
• Whethertheforecastshavebeenpreparedon
amonthlybasisand,ifso,howtheforecasts
reectexpectedpaymentpatterns(e.g.,quar-
terlycashoutowssuchastaxinstallments,
andvariablecashinowssuchasexpected
proceedsfromthesaleofassets);
• Whethertheforecastsindicatemonthsofin-
sufcientcashand,ifso,management’splans

todealwithanyshortfalls;
• Whetherforecastsreectaninappropriate
managementbias,inparticularasbroadly
comparedtoothersinaparticularindustry;
• Howmanagement’sbudgetforthecurrent
periodcompareswithresultsachievedtodate;
• Whethertheforecastsconsiderpotential
lossesofrevenue,includingwhetheranin-
abilityofanentitytoobtainlettersofcredit
affectsitsinternationaltrade;
• Whetherincreasesinthecostofborrowing
havebeenfactoredintomanagement’sanaly-
sis,includingpotentialincreasesinmargin
soughtbybanksandtheeffectofalternative
sourcesofnancing;
• Whethertheforecastsaccountfortrends
typicallynotedinrecessionaryperiods,such
asreducedrevenues,increasedbaddebts(be-
causeoftradingconditionsorthewithdrawal
ofcreditinsurance),andextendedcreditterms
tocustomers;
• Whethermanagementhasperformedanap-
propriatesensitivityanalysis,suchasconsid-
eringtheeffectofthelossofkeycustomersor
keysuppliersduetobankruptcies;
• Howtheforecastdealswithassetrealizations,
includingwhethertheserealizationsareprac-
ticableandrealisticinamount;and
• Whethertheforecastsimplyanyfuture
concernsovertheentity’sabilitytomeetdebt

covenantrequirements.
18 Inreferencingnancialinstruments,thestandardincorporatessimplenancialinstruments,suchasaccountsreceivableandaccountspayable,aswellasmore
complexinstruments,suchasderivatives.
8
necessarilyindicativeoftheexistenceofasignicant
doubtontheentity’sabilitytocontinueasagoing
concern.Infact,anobjectiveofthedisclosuresmay
betoexplainwhythegoingconcernissuesthataffect
theentitydonotgiverisetoasignicantdoubt.
Specic Disclosures about Material Uncertainties
Disclosureinthenancialstatementsisexpected
whenmaterialuncertaintyexistsrelatedtoevents
orconditionsthat,aloneorinaggregate,maycast
signicantdoubtontheentity’sabilitytocontinueas
agoingconcern.
Inevaluatingtheadequacyofsuchdisclosures,ISA
570indicatesthattheauditorconsiderswhetherthe
nancialstatements:
a.Adequatelydescribetheprincipaleventsor
conditionsthatgiverisetothesignicant
doubtontheentity’sabilitytocontinueinop-
erationandmanagement’splanstodealwith
theseeventsorconditions;and
b.Stateclearlythatthereisamaterialuncertain-
tyrelatedtoeventsorconditionswhichmay
castsignicant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.

20

Forming the Opinion on the Financial Statements
and the Implications for the Auditor’s Report
Basedontheauditevidenceobtained,theauditor
concludeswhethermanagement’suseofthegoing
concernassumptioninthepreparationofthenancial
statementsisappropriateanddetermineswhattype
ofopinionistobeissuedinthecircumstances.Ifthe
auditorconcurswithmanagement’sassessment,an
unqualiedopinion wouldbeissued.
21

Forminganopiniononthenancialstatementsin-
cludesconsiderationofdisclosures,certainofwhich
assumemoresignicanceintimesofuncertainty.
Aquestionforauditorstoconsideriswhetherthe
disclosuresprovidedarecoherent:forexample,all
relevantinformationmaybeincludedinthenancial
statements(oraccompanyingreports)butitmaybe
Thesecouldinclude,forexample:
• Concernsoveravailabilityofcredit,inpartic-
ulariftherearefacilitiesdueforrenewalsoon
aftertheissuanceofthenancialstatements;
• Developmentsintheindustryandregionin
whichtheentityoperates;
• Uncertaintiesregardingplanstosellassetsor
disposeofbusinesses;and
• Potentialimpairmentsofxedassetsand
intangibles.

Furtherdiscussionwithinanentity’sannualreport
(suchastheManagement’sDiscussionandAnalysis
sectionorequivalent)ofmanagement’sassessment
oftheentity’sfundingpositionwillbeparticularly
relevanttousersofthenancialstatements.Such
discussion,whencombinedwithrequireddisclosures
regardingdebtmaturities,helptoprovideafuller
viewofanentity’soutlookandfutureuncertainties.
ISA720
19
dealswithanauditor’sresponsibilitieswith
regardtosuchotherinformation,focusingprimarily
ontheconsistencybetweentheauditedandunaudited
informationandthestepsnecessaryshouldanyother
informationcontainamaterialmisstatementoffact.
Someregulatorsandstandardsettershavesuggested
thatitmaybeusefulfornancialstatementusers
tryingtoobtainanunderstandingofthosemattersif
alltherelevantdisclosuresrequiredbythenancial
reportingframeworkwerebroughttogetherin
oneplaceinthenancialstatements.Ifthatisnot
practicable,analternativewouldbetoprovide
appropriatecross-referencesfromtheprincipal
relevantnotetotheplaceswherevariousotherrelated
disclosuresaremade.
Thecurrenteconomicconditionsarelikelyto
increasethelevelofuncertaintyexistingwhen
managementmakestheirjudgmentaboutthe
outcomeoffutureeventsorconditions.However,
whiletheeffectofthecurrentmarketconditions

onindividualentitiesrequirescarefulevaluation,it
shouldnotnecessarilybeassumedthatthegeneral
economicsituationatthepresenttimeinitselfmeans
thatamaterialuncertainty,whichcastssignicant
doubtontheabilityoftheentitytocontinueasa
goingconcern,exists.Norareextensivedisclosures
19 ISA720,“OtherInformationinDocumentsContainingAuditedFinancialStatements.”
20 ISA570,paragraph32.
21 ISA700,“TheIndependentAuditor’sReportonaCompleteSetofGeneralPurposeFinancialStatements,”establishesstandardsandprovidesguidanceonthe
formandthecontenttobeincludedinanauditor’sreportwhenanunqualiedopinionisexpressed.
9
concernassumptionisappropriate,thereisamaterial
uncertaintyrelatedtoeventsorcircumstancesthat,
aloneorinaggregate,maycastsignicantdoubton
theentity’sabilitytocontinueasagoingconcern,
ISA570requirestheauditortoconsidertheadequacy
ofdisclosureinthenancialstatements andto
modifytheauditor’sreport byincludinganappropri-
ateemphasisofmatterparagraphifthedisclosurein
thenancialstatementsisadequate.
24

Managementmayconsideritappropriatetomake
disclosuresinordertoreassureusersofthenancial
statementsabouttheentity’snancialpositionin
thelightofthegeneraluncertainty.Suchdisclosures
may,therefore,reectonlytheexistenceofgeneral,
orsystemic,risk.Suchdisclosuresmaybeconsid-
eredimportantandappropriateinthecircumstances
toensurethatthenancialpositionoftheentity

isplacedinappropriatecontextgiventhegeneral
economicconditionsandhowthoseconditionsmay
affecttheentity.However,thefactthatmanagement
hasincludedsuchdisclosuresinthenancialstate-
mentsdoesnotnecessarilymeanthatthereisamate-
rialuncertaintythatwarrantsanemphasisofmatter
paragraphinthenancialstatements.
If,ontheotherhand,theuncertaintyarisesnotonly
asaresultofthesystemicpositionbutalsobecause
ofcircumstancesspecictotheentity,itismore
likelythattheauditorwilljudgeittobematerial.
Thedecisionastowhetheradiscloseduncertaintyis
a“materialuncertainty”ofthekindenvisagedbythis
requirement(andbyIAS1
25
)isadifcultone.As
indicatedabove,amaterialuncertaintyexistswhen
themagnitudeofitspotentialimpactissuchthat,in
theauditor’sjudgment,cleardisclosureofthenature
andimplicationsoftheuncertaintyisnecessaryfor
thepresentationofthenancialstatementsnottobe
misleading.
26

AspartoftheIAASB’sClarityproject,ISA570was
redraftedbutnotrevised.Aspartoftheredrafting,the
IAASBsoughttoclarifythemeaningofparagraph
31oftheextantISAthatdescribeswhenamaterial
uncertaintyexists.InISA570(Redrafted),thishas
insufcientlydrawntogethertoenabletheuserofthe

nancialstatementstoobtainanunderstandingofthe
position.
Asineveryaudit,circumstancesmayarisethat
requiretheauditortomodifytheopinioninthe
auditor’sreport(i.e.,byissuingaqualied,adverse
oradisclaimerofopinion).
22
Theseare:
• Theauditorisunabletoobtainsufcientap-
propriateauditevidenceaboutwhetherthe
goingconcernassumptionisappropriate;
• Theauditordisagreeswiththeinformation
includedinthenancialstatementsinrelation
togoingconcern,becauseitisinsufcientor
incorrect;and
• Theauditordisagreeswiththebasisonwhich
thenancialstatementshavebeenprepared
–thatis,managementhasusedthegoingcon-
cernbasiswhentheauditorconsidersthata
liquidationbasisisappropriate,ortheauditor
considersagoingconcernbasistobeappro-
priatebutmanagementhasusedaliquidation
basis.
Becauseofthesignicanceofanyauditor’smodied
opinionoverthegoingconcernbasisofaccounting,a
publisheddisagreementonthismatterisrarethough
notimpossible.Forexample,insomecaseswhere
aresolutiontotheentity’sdifculties(suchasan
agreementonnewfacilities)isexpectedwithinavery
shortperiod,itmaybepossibletodelaythenaliza-

tionofthenancialstatementsuntilthematterhas
beenresolvedandtheuncertaintyremoved.
The Inclusion of Emphasis of Matter Paragraphs
Basedontheauditevidenceobtained,theauditor
shoulddetermineif,intheauditor’sjudgment,a
materialuncertaintyexistsrelatedtoeventsorcondi-
tionsthat,aloneorintheaggregate,thatmaycast
signicantdoubtontheentity’sabilitytocontinueas
agoingconcern.
23
If,intheauditor’sjudgment,notwithstanding
management’sconclusionthattheuseofthegoing
22 ISA570,paragraphs34-38,andISA701,“ModicationstotheIndependentAuditor’sReport,”establishstandardsandprovideguidanceontheformandthe
contentofthemodicationstotheauditor’sopinioninthesecircumstances.
23 ISA570,paragraph30.
24 ISA570,paragraphs32-33.
25 IAS1,paragraph23.
26 ISA570,paragraph31.
10
andfairview).
Forcompleteness,itshouldbenotedthatparagraph
33ofISA570alsoacknowledgesthattheremaybe
extremecases,suchassituationsinvolvingmul-
tiplematerialuncertaintiesthataresignicanttothe
nancialstatements,whentheauditormayconsiderit
appropriatetoexpressadisclaimerofopinioninstead
ofaddinganemphasisofmatterparagraph.Sucha
disclaimerwouldonlybeconsideredwhen,notwith-
standinghavingobtainedsufcientappropriateaudit
evidenceregardingeachoftheindividualuncertain-

ties,theauditorconcludesthatitisnotpossibleto
formanopiniononthenancialstatementsdueto
thepotentialinteractionoftheuncertaintiesandtheir
possiblecumulativeeffectonthenancialstatements.
ISA570providesfurtherguidanceandexamplesof
wordingtobeusedtheauditor’sreport,depending
onthecircumstances.Thesemaybesummarizedas
follows:
beenclariedasfollows(seeparagraph17):
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uncer-
taintyisnecessaryfor:
a.Inthecaseofafairpresentationnancial
reportingframework,thefairpresentationof
thenancialstatements,or
b.Inthecaseofacomplianceframework,the
nancialstatementsnottobemisleading.
Thechangesrecognizethat,infact,materialityofan
uncertaintydoesnotdependonsizealonewithout
regardtolikelihood;andthat,inthespeciccaseof
nancialstatementspreparedunderafairpresenta-
tionframework,misleadingpresentationderives
eitherfromfailuretocomplywiththerequirements
oftheapplicablenancialreportingframeworkor
fromfailuretogivefairpresentation(orgiveatrue
Outcome
Consequence for
management disclosure

Consequence for
uditor’s opinion and report
Managementconcludesthat
thegoingconcernbasisis
appropriate.Nomaterial
uncertaintiesleadingtoa
signicantdoubtaboutgoing
concernhavebeenidentied.
Financialstatements
mayneverthelessinclude
disclosureexplainingthe
conclusionongoingconcern
andhowthiswasreached.
Unmodiedopinion–providedtheauditor
concurswithmanagement’sassessmentand
supportingdisclosures.Anemphasisofmatter
paragraphreferencingthedisclosuresisnot
required.
Goingconcernassumption
appropriatebutamaterial
uncertaintyexists.
Disclosuresexplainingthe
specicnatureofthematerial
uncertaintiesandwhythe
goingconcernbasishasstill
beenadopted.
Unmodiedopinionwithemphasisofmatter
paragraphisincluded,highlightingthe
existenceofmaterialuncertainties–provided
theauditorconcurswithmanagement’s

assessmentandsupportingdisclosures.This
resultsinamodiedreport.
Managementconcludesthat
thegoingconcernbasisisnot
appropriate.
Disclosuresexplainingthe
basisoftheconclusionand
theaccountingpolicies
appliedindrawingup
nancialstatementsonanon-
goingconcernbasis.
Unmodiedopinion–providedthenancial
statementscontainthenecessarydisclosures
andtheauditorconsidersthebasistobe
appropriatetothefactsandcircumstances.
Theauditormayconsideritappropriate
toincludeanemphasisofmatterinthese
circumstancestodrawtheuser’sattentionto
thebasisofaccountingusedinthenancial
statements,resultinginamodiedreport.
About the IAASB
TheIAASB(www.iaasb.org)developsauditing
andassurancestandardsandguidanceforusebyall
professionalaccountantsunderasharedstandard-set-
tingprocessinvolvingthePublicInterestOversight
Board,whichoverseestheactivitiesoftheIAASB,
andtheIAASBConsultativeAdvisoryGroup,which
providespublicinterestinputintothedevelopment
ofthestandardsandguidance.Thestructuresand
processesthatsupporttheoperationsoftheIAASB

arefacilitatedbyIFAC.
Key Contacts
ProfessorArnoldSchilder,IAASBChairman
()
JimSylph,IFACExecutiveDirector,Professional
StandardsandExternalRelations
()
JamesGunn,IAASBTechnicalDirector
()
KathleenHealy,IAASBSeniorTechnicalManager
()
Other ISAs
WhilethisalertrefersprincipallytoISA570,other
ISAscontainrequirementsandguidancethatmay
assumemoreimportanceinthecurrentenvironment.
Forexample:
• ISA240(“TheAuditor’sResponsibilityto
ConsiderFraudinanAuditofFinancialState-
ments”),inparticularfraudriskfactorsarising
fromeconomicpressures;
• ISA315(“UnderstandingtheEntityandIts
EnvironmentandAssessingtheRisksof
MaterialMisstatement”),inparticularthe
auditor’sunderstandingoftheeconomicenvi-
ronmentanditseffectoncustomers,suppliers
andtheavailabilityofnance;
• ISA540(“AuditofAccountingEstimates”),
inparticular,theauditor’sevaluationofthe
reasonablenessofmanagement’sassumptions
onwhichanestimateisbased,sincethereis

ariskthatover-conservative(i.e.,“bigbath”)
provisionsmayhavebeenrecordedtomanage
futureearnings;
• ISA560(“SubsequentEvents”),sinceevents
inthenancialsectormayhaveimmediate
andunexpectedeffects;and
• ISA580(“ManagementRepresentations”),in
respectofmattersarisingfromtheeconomic
climate(suchasavailabilityofnanceand
adequacyofprovisioningagainstassets).
This document has been prepared by IAASB staff. It is a non-authoritative document issued for information purposes only.
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