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Chapter 1 Going Concern—Introduction and Overview

100 INTRODUCTION

100 INTRODUCTION

Going Concern—Defined

100.1 The term going concern is not defined in the accounting or auditing literature. However, most financial

statement users, analysts, and accountants agree that going concern refers to an entity's ability to continue

functioning in the normal course of business for the near term. Going concern assumes the entity's ability to

continue in operation for the foreseeable future with neither the intention nor the necessity of liquidation or

otherwise seeking protection from creditors pursuant to bankruptcy laws and regulations. Accordingly, unless

use of the going concern assumption is inappropriate in the entity's circumstances, it will prepare its financial

statements on a basis that assumes it will be able to realize its assets, discharge its liabilities, and obtain

refinancing (if necessary) in the normal course of operations.

100.2 However, situations may arise when the entity is no longer able to meet its obligations as they become

due without substantial disposal of assets, restructuring of debt, externally forced revisions of its operations,

or similar actions. In addition, factors such as the loss of key personnel, principal customers, sources of

supply, or primary revenue-producing assets may call into question an entity's ability to continue to exist as a

going concern. Historically, financial statement users have expected practitioners, especially auditors, to “red

flag” those entities for which bankruptcy is inevitable or at least highly probable since they believe auditors are

in the best position to make and report on that determination.

Current Economy

100.3 In 2008 and 2009, the U.S. economy experienced a severe credit crisis which caused the U.S. to

experience a deep economic recession. In response to the economic recession, many entities (companies,

nonprofits, and governments) contracted: consumer confidence dropped, plant closing and layoffs increased

dramatically, profit margins slipped, and many entities failed. While the U.S. Department of Commerce

reported that the recession formally ended in June 2009, entities continue to suffer from its effects and

economists believe that the recovery will be slow, taking many years. Throughout 2010 we saw banks

increase restrictions over access to credit as Congress enacted new banking regulations, venture capitalists

increased discounts on private equity, and the markets continued to experience volatility as economists

feared a double-dip recession.

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100.4 The economic contraction continues to concern companies and auditors about the viability of entities

throughout the country, and there have been an unprecedented number of so-called going concern opinions

(that is, audit reports modified by the inclusion of a going concern paragraph). The most notable of these is

General Motors, which received a going concern opinion from its auditors early in 2009 because of “recurring

losses from operations, stockholders' deficit, and inability to generate sufficient cash flow to meet its

obligations and sustain its operations.” GM, though, is only one of the more prominent casualties of the credit

crisis and recession to have received a going concern opinion from its auditors. While entities involved in

industries such as the auto industry have seen an increase in going concern opinions, entities in other sectors

such as homebuilders, financial services firms, and retailers also have seen an increase in such opinions.

Going concern questions have even arisen in the more stable nonprofit and local government sectors.

New Guidelines on the Way

100.5 As a result, more uncomfortable conversations are occurring between entities and their auditors and

those discussions likely will become lengthier and more intense as both consider the new accounting

guidelines being proposed by the FASB. These guidelines would require management to assess and report

on the appropriateness of the going concern presumption in the preparation of the entity's financial

statements. (Currently, accounting principles contain no requirement for management to make such an

evaluation or guidance on how to perform it.) The proposed accounting rules also would require management

to look out further into the future than their auditors when assessing their entities' sustainability. Many

observers believe these proposed new accounting rules could lead to direct and very public disagreements

over going concern issues between auditors and management.

Current Rules—Audit

100.6 Current auditing rules require auditors to assess an entity's ability to continue as a going concern by

considering several factors during their audits that may indicate that an entity won't be in existence by the

next time they do their annual audit. Among such factors are recurring operating losses, working capital

deficiencies, negative equity, loan defaults, unlikely prospects for more financing, and work stoppages.

Auditors also consider external issues, like legal proceedings and the loss of a key customer or supplier when

considering the entity's ability to continue as a going concern for a reasonable period of time.

100.7 If there is substantial doubt about an entity's going concern status, the auditor talks to management

about how they plan to keep the entity afloat—such as by selling off noncritical assets—and the feasibility of

such plans. If, after assessing management's strategies, the auditors still have substantial doubt about the

entity's ability to continue as a going concern, they are required to add an explanatory paragraph to their

report that explains their doubts.

100.8 Despite the requirement in professional standards, many auditors are reluctant to issue going concern

opinions, believing such opinions might cause creditors, suppliers, and others to lose confidence in the entity,

thereby contributing to the entity's inability to obtain raw materials, services, new capital, etc. A going concern

opinion, they believe, may cause the entity to succumb to a “self-fulfilling prophecy” since it may give wary

investors, suppliers, and lenders a reason to turn away from an entity already on the brink of filing for

reorganization under Chapter 11, thereby forcing the entity into bankruptcy.



100.9 Other auditors believe they cannot—and should not be required to—predict the future. They argue that

the failure to issue a going concern opinion is not sufficient evidence of an audit failure, and the absence of a

going concern qualification should not be viewed as providing assurance about an entity's continued viability.

Current Rules—Compilation and Review

100.10 Accountants engaged to compile or review an entity's financial statements also consider going

concern uncertainties in their engagements when any of their normal compilation or review procedures

provide information that negatively impacts an entity's ability to continue as a going concern. In that case,

professional standards require the accountant to discuss the information with management and determine

whether he or she agrees with management's conclusions. Unlike the auditing standards, compilation review

standards permit, but do not require, the accountant to add a paragraph to the report to highlight a going

concern uncertainty.

Chapter Contents

100.11 Before considering performance and reporting under existing auditing and accounting and review

standards, Section 101 provides an overview of the evolution of going concern standards. Section 102 then

summarizes the ways in which this Guide may be helpful to practitioners when providing services in

connection with financial statements when there are going concern uncertainties. Sections 103 and 104,

respectively, describe the auditing and accounting and review standards currently in effect and how they

might be changing. Finally, Appendix 1A provides a glossary of terms that practitioners should understand

when considering the guidance in this Guide.

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101 Going Concern—a Historical Perspective

101 Going Concern—a Historical Perspective

Compilations and Reviews

101.1 SSARS No. 1, as originally issued in December 1978, did not provide guidance with respect to going

concern considerations in compilation and review engagements. Interpretation No. 11 to SSARS No. 1,

Reporting on Uncertainties, was issued in December 1982 to provide guidance on reporting on uncertainties,

including going concern uncertainties, in such engagements. (In February 2007, Interpretation No. 11,

Reporting on Uncertainties, was rescinded, revised, and reissued as Interpretation No. 29 to SSARS No. 1,

Reporting on an Uncertainty, Including an Uncertainty About an Entity's Ability to Continue as a Going

Concern.)

101.2 SSARS No. 7, Omnibus Statement on Standards for Accounting and Review Services—1992, among

other things, added a footnote to the standards to clarify the accountant's reporting responsibilities in a

compilation or review engagement when there are uncertainties about the entity's ability to continue as a

going concern.

101.3 Finally, in February 2008, SSARS No. 17, Omnibus Statement on Standards for Accounting and

Review Services—2008, was issued. SSARS No. 17 added going concern performance guidance to the

standards. Prior to its issuance, the guidance centered around reporting, not performance. Soon after the

issuance of SSARS No. 17, Exhibit B to the SSARS, Going Concern Considerations, was issued to help

practitioners better understand the accounting concepts of going concern as they relate to the performance of

compilation and review engagements. 1

101.4 In December 2009, SSARS No. 19, Compilation and Review Engagements, was issued. SSARS No.

19 supersedes AR 20, AR 50, and AR 100; and is generally effective for compilations and reviews of financial

statements for periods ending on or after December 15, 2010. SSARS No. 19 (AR 80.40-.43 and AR 90.47-

.50) addresses the accountant's responsibility when evidence or information comes to the accountant's

attention during the performance of a compilation or review engagement that a going concern uncertainty may

exist. The objective of the guidance in SSARS No. 19 is to determine whether the report on the engagement

should be modified if disclosure of the going concern uncertainty is not adequate.



Audits

101.5 SAS No. 34

SAS No. 34, The Auditor's Considerations When a Question Arises About an Entity's Continued Existence,

was issued in 1981. Under SAS No. 34, the auditor had a passive responsibility when assessing an entity's

continued existence. In other words, the auditor was not required to explicitly evaluate an entity's ability to

continue in existence as part of an audit. Thus, continued existence was assumed but not specifically

substantiated in most audits. SAS No. 34 required the auditor to assess the entity's going concern status only

when contrary information was discovered during the financial statement audit. If, after assessing an entity's

going concern status, the auditor had both substantial doubt and questions about the recovery of recorded

asset values, the auditor was required to issue a “subject to” qualified audit opinion. However, no modification

was required if the auditor had only substantial doubt about the company's ability to continue as a going

concern.

101.6 SAS No. 59

An auditor's responsibilities for evaluating going concern were broadened in 1988, when the ASB issued SAS

No. 59, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern. SAS No. 59

obligates auditors to perform an explicit evaluation of an entity's continued viability in every audit. If the auditor

concludes there is substantial doubt about the entity's ability to continue as a going concern for a reasonable

period of time (defined in the SAS as a period “not to exceed one year from the balance-sheet date”), the

auditor should gather audit evidence about management's plans and consider the effect on the financial

statements and the adequacy of disclosures in such statements. When the auditor concludes there is

substantial doubt about the entity's ability to continue as a going concern, SAS No. 59 indicates the auditor

should include an explanatory paragraph describing the going concern uncertainty in his or her report.

101.7 The auditor should also document in the workpapers the conditions or events that lead him or her to

believe there is substantial doubt about an entity's ability to continue as a going concern. The auditor's

documentation should include:

a. the elements of management's plans most significant to overcoming the adverse effects of the

conditions or events;

b. the procedures performed to evaluate management's plans; and

c. the auditor's conclusion about whether substantial doubt remains or is alleviated and the possible

effects on the financial statements and related disclosures.



101.8 In 1998, concerns over SAS No. 59 caused the ASB to undertake a project to revise SAS No. 59 to

improve its effectiveness. However, the ASB concluded that the underlying problem with SAS No. 59 is that

there is a lack of reporting criteria regarding financial capability (i.e., going concern) in generally accepted

accounting principles (GAAP). The disclosure guidance in SAS No. 59 is applicable to auditors—not to

financial statement preparers. In fact, with the limited exception of entities filing for protection under Chapter

11 of the Bankruptcy Code, there is no guidance in GAAP for accounting and disclosure regarding an entity's

financial capability.

101.9 In 1998, at the urging of the Auditing Standards Board, the Financial Capability Working Group (the

Group) was formed. The Financial Capability Working Group, composed of representatives of the Financial

Accounting Standards Board (FASB), the Auditing Standards Board (ASB), and the AICPA's Accounting

Standards Executive Committee (ACSEC), was formed to evaluate whether accounting and auditing

standards setters should undertake a project to address financial reporting and auditing issues on the topic of

financial capability. The objective of such a project would be to improve the quality and usefulness of

information made available to financial statements users through disclosures therein. However, the Group

concluded that further work on the project was unnecessary because the financial statement users with whom

they spoke did not support it as a priority.

101.10 In that same year, the Public Oversight Board established the Panel on Audit Effectiveness (the

Panel) in response to a request by the Securities and Exchange Commission (SEC). The Panel conducted a

comprehensive review and evaluation of the way independent audits of financial statements of publicly traded

companies were performed and assessed the effects of recent trends in auditing on the quality of audits and

on the public interest. As part of its work, the Panel reviewed a sample of audits of public companies to gather

empirical data on the quality of auditing and conducted a survey on audit effectiveness, seeking the views of

many interested in financial reporting. In its final report, the Panel recommended that “the ASB provide

expanded guidance and specific examples of the auditing procedures to be performed and the audit evidence

to be obtained when considering management's plans for mitigating the adverse effects of conditions and

events that raised the auditor's substantial doubt about the entity's ability to continue as a going concern” and

that audit firms provide specific guidance and practice aids for considering management's plans. Their most

controversial recommendation was that the Financial Accounting Standards Board (FASB) codify a definition

of the going concern concept. The panel's opinion was that management has a responsibility to evaluate and

report on the entity's ability to remain a going concern, similar to that stated in the international accounting

standards. 2 This recommendation shifted the focus from going concern being an auditing issue to it being an

accounting issue. 3

101.11 In 2008, the Governmental Accounting Standards Board (GASB) issued Statement No. 56,

Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statement on Auditing

Standards. GASBS No. 56 moved the going concern financial reporting guidance for governments from the

auditing standards to the accounting standards. Similar to the proposed SFAS, GASBS No. 56 shifts the

going concern assessment responsibility to the financial statement preparer and extends the going concern

consideration past the 12-month post financial statement period, though only shortly past. See the discussion

of GASBS No. 56 at paragraph 103.37.



New Going Concern Accounting Guidance

101.12 In 2008, the Financial Accounting Standards Board (FASB) proposed a new Statement of Financial

Accounting Standards (SFAS) titled Going Concern, which would require management to evaluate and report

on the entity's ability to continue as a going concern. The proposed SFAS would among other things, move to

the accounting standards the guidance on financial statement disclosure of going concern matters that

currently resides only in the auditing standards (SAS No. 59). It would also (a) change the time horizon for

evaluation from a reasonable period of time (that is, one year from the end of the period being reported on) to

a period that is “at least, but not limited to, 12 months” from the end of the reporting period, and (b) add

disclosure requirements when financial statements are not prepared on a going concern basis. When issued,

the guidance provided in the proposed SFAS will be considered “GAAP” for all financial statements,

regardless of the level of service the practitioner is providing in connection with such statements. In other

words, it will be GAAP for audited, reviewed, and compiled financial statements when there are going concern

uncertainties.

101.13 In 2010, the Financial Accounting Standards Board decided to make changes to the proposed new

statement adopting and applying the liquidation basis of accounting. The proposed SFAS (Update) is

discussed further at paragraph 203.1.

101.14 In December 2009, the Governmental Accounting Standards Board issued Statement No. 58,

Accounting and Financial Reporting for Chapter 9 Bankruptcies. The Statement is effective for state and local

governments with reporting periods beginning after June 15, 2009.

New Going Concern Auditing Guidance

101.15 The ASB, as part of its clarity project, is in the process of redrafting the guidance in SAS No. 59 to

converge with the guidance in the new SFAS and with the international auditing standard on the same topic.

The changes proposed to SAS No. 59 are discussed further beginning at paragraph 103.5.

101.16 In 2010, the PCAOB issued a proposed Auditing Standard, Communications with Audit Committees,

which would supersede AU 380, Communications with Audit Committees, and AU 310, Appointment of the

Independent Auditor, and amend certain other PCAOB auditing standards. The proposed standard would

significantly expand existing requirements concerning communications with the audit committee. Among other

things, the proposed standard would require the auditor to communicate the following matters to the audit

committee relating to the evaluation of a company's ability to continue as a going concern:

• If the auditor's doubt regarding the company's ability to continue as a going concern for a reasonable

period of time is mitigated, the conditions and events that indicated that there could be substantial doubt

and the information that mitigated the doubt.

• Where there is substantial doubt about the company's ability to continue as a going concern, (1) the

auditor's assessment of management's plan to overcome the conditions and events and ability to



implement such plans, (2) the effects on the financial statements and the adequacy of the disclosures,

and (3) the effects on the auditor's report.

The comment period for the proposed standard ended in October 2010. Any final standard the PCAOB

adopts will be submitted to the SEC for approval and will be effective after approval by the SEC.

1 SSARS No. 1 and No. 17 were superceded with the issuance of SSARS 19.

2IAS 1, Presentation of Financial Statements, requires that management assess the entity's ability to

continue as a going concern. If the fundamental assumption of going concern is not sustainable, it requires

management to disclose the events and conditions giving rise to the material uncertainties. IAS 570, Going

Concern, requires the auditor to evaluate management's assessment and the adequacy of the disclosures.

3As discussed in paragraph 203.1, the FASB has issued an exposure draft of a proposed SFAS what would

require management to make and report on such an evaluation.


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102 Overview of This Guide

102 Overview of This Guide

How to Use This Guide

102.1 This Guide is designed for practitioners who audit, review, or compile financial statements when there

is an uncertainty about an entity's ability to continue as a going concern. It addresses going concern guidance

that applies to nonpublic entities as well as public companies. This Guide is designed as a package of tools—

technical guidance, best practices, and practice aids—developed to give firms everything necessary to apply

guidance related to going concern uncertainties in an audit, review, or compilation of financial statements.

102.2 The Guide can be used in a variety of ways. For example, a firm may use the Guide as a quick

reference tool to help practitioners understand the professional standards related to going concern that apply

when auditing, reviewing, or compiling financial statements when there are going concern matters. With its

detailed guidance on reporting on such financial statements and its numerous reporting examples, the Guide

also may be used when drafting reports. In addition, practitioners can refer to the sample disclosures of going

concern matters when assisting the client with financial statement preparation (in a compilation engagement)

or when considering the adequacy of note disclosures in any engagement.

102.3 The Guide contains the following chapters and appendix:

• Chapter 1—Going Concern—Introduction and Overview

• Chapter 2—Presentation and Disclosure Considerations

• Chapter 3—Practitioner's Responsibility for Going Concern

• Chapter 4—Reporting on Financial Statements



• Appendix A—Going Concern Case Studies

Overview of Professional Standards

102.4 The remainder of this chapter presents an overview of professional standards. Section 103 describes

standards applicable to audited financial statements affected by going concern uncertainties, while section

104 describes standards applicable to compilations and reviews of such statements. Appendix 1A presents a

glossary of terms related to going concern that practitioners may find helpful.

Presentation and Disclosure Considerations

102.5 Chapter 2 of this Guide provides guidance on financial statement presentation and disclosure

considerations related to going concern issues. Section 201 discusses financial statement disclosures that

may be necessary when there is substantial doubt about an entity's ability to continue as a going concern, as

well as those that may be appropriate when such doubt has been alleviated. It also describes additional

disclosures about going concern matters that practitioners should consider during these difficult economic

times.

102.6 The relationship between financial statement disclosures in SAS No. 59 and those in FASB ASC 275-

10 is discussed in section 202, while section 203 discusses a proposed SFAS, Going Concern, which would

move to the accounting standards the going concern disclosure guidance that currently resides only in SAS

No. 59.

102.7 Because the economic recession has adversely impacted so many entities, section 204 discusses

when the liquidation basis should be used to prepare financial statements and presentation and disclosure

issues related to such statements. section 205 addresses presentation and disclosure considerations of

financial statements prepared by an entity in a Chapter 11 reorganization, including a discussion of when

fresh-start reporting may be appropriate. Presentation and disclosure considerations for OCBOA financial

statements are discussed in section 206, while section 207 discusses presentation and disclosure

considerations related to financial statements of development-stage entities.

102.8 Appendixes 2A-2F contain a number of sample going concern note disclosures that practitioners may

find helpful when evaluating whether the disclosures in a client's financial statements are adequate.

Practitioner's Responsibility for Going Concern

102.9 Chapter 3 of this Guide discusses the practitioner's responsibilities relating to going concern in audits,

compilation, and review engagements. Section 301 provides an overview of the auditor's responsibilities in an

audit engagement in accordance with SAS No. 59 (AU 341), The Auditor's Consideration of an Entity's Ability

to Continue as a Going Concern. Sections 302 through 306 discuss the auditor's procedures that might

provide evidence about conditions and events that might raise doubts about the entity's ability to continue as

a going concern; the auditor's consideration of management's plans when there is doubt about the entity's



continued existence; the auditor's consideration of the adequacy of financial statement disclosures related to

going concern considerations; the auditor's documentation requirements; and the auditor's communications

related to going concern issues to those charged with governance. Section 307 describes the auditor's

procedures when he or she is asked to reissue a report to eliminate a going concern uncertainty paragraph,

and section 308 discusses additional considerations for auditors of public companies.

102.10 The accountant's responsibilities for going concern in a compilation or review engagement are

discussed in section 309. Section 310 discusses other issues related to going concern, including its

applicability to OCBOA financial statements, other types of financial presentations, and other types of

engagements. It also addresses going concern considerations for financial statements of entities within

specific industries. Finally, Appendix 3A contains a checklist that auditors may find helpful when conditions

and events have raised doubt about an entity's ability to continue as a going concern.

Reporting on Financial Statements When There Are Going Concern Uncertainties

102.11 Chapter 4 discusses reporting on financial statements when there is doubt about an entity's ability to

continue as a going concern for a reasonable period of time. Section 401 provides an overview of the audit

reporting requirements of SAS Nos. 58 and 59 in section 401, and section 402 then describes how an auditor

should modify the standard audit report (which contains an unqualified opinion on the financial statements) by

adding an explanatory paragraph to the report because of a going concern uncertainty. Section 403 discusses

modifying an auditor's report when financial statement disclosures about going concern uncertainties are

considered inadequate, while section 404 discusses issuing a disclaimer of opinion on the financial

statements when there are going concern uncertainties.

102.12 Section 405 discusses a variety of unique audit reporting situations that might be affected by going

concern uncertainties including: (a) reporting on comparative financial statements when substantial doubt

exists in only one period; (b) reporting on additional information accompanying the basic financial statements,

(c) reissuing an audit report to eliminate a going concern uncertainty paragraph; (d) reporting on the financial

statements of a development-stage entity; and (e) reporting on the financial statements of an entity with a

limited life. Section 406 discusses when the liquidation accounting should be used to prepare an entity's

financial statements and how to report on such statements, while section 407 discusses the accounting basis

that should be used by an entity in reorganization under the bankruptcy code. Section 408 discusses

reporting on a review of interim financial information when there are going concern uncertainties.

102.13 Section 409 addresses a number of practice issues related to reporting on going concern

uncertainties. Specifically, it describes reporting when events raising doubt about an entity's ability to continue

as a going concern will not take place until after the 12-month window described in SAS No. 59. It also

addresses the practice of “holding” the auditor's report until the issues giving rise to the going concern matter

are resolved. Finally, it discusses how going concerns matters related to a parent company might affect the

auditor's report on the financial statements of its subsidiaries, as well as the effect of the collapse of major

customer/suppliers on entities with which they are associated.

102.14 Section 410 discusses audit, compilation, and review reports on OCBOA financial statements when

there are uncertainties about an entity's ability to continue as a going concern. Finally, Appendixes 4A-4I



provide dozens of illustrations of audit, compilation, and review reports a practitioner may find helpful when

reporting on audited, reviewed, or compiled financial statements affected by going concern uncertainties.

Appendix A—Going Concern Case Studies

102.15 Appendix A to the Guide contains a number of case studies illustrating how the auditor evaluated an

entity's ability to continue as a going concern in a variety of hypothetical situations and another case study

that illustrates the accountant's consideration of going concern in a review engagement. The case studies

also illustrate the practitioner's consideration of management's plans for dealing with the adverse affects of

conditions and events that raise doubt about the entity's viability, as well as the practitioner's conclusion in

each hypothetical situation. In addition, each case study illustrates how the practitioner modified the

audit/review reports for the going concern matter, as well as the note disclosure deemed appropriate in the

circumstances.


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103 Overview of Auditing Standards

103 Overview of Auditing Standards

SAS No. 59

103.1 SAS No. 59 (AU 341), The Auditor's Consideration of an Entity's Ability to Continue as a Going

Concern, establishes the auditor's responsibility to evaluate whether there is substantial doubt about the

client's ability to continue as a going concern for a reasonable period of time, not to exceed one year from the

balance-sheet date. An auditor who has substantial doubt is required to state that doubt in the audit report.

The evaluation is based on knowledge of relevant conditions and events that exist at or have occurred prior to

the date of the auditor's report. Information about those conditions or events is obtained from applying audit

procedures that were planned and performed to achieve audit objectives related to management's assertions

embodied in the financial statements.

103.2 If the auditor believes there may be substantial doubt, the auditor should (a) obtain information about

management's plans to mitigate the effect of such conditions or events and (b) assess the likelihood that such

plans can be effectively implemented. If the auditor concludes 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, including the adequacy of financial statement disclosure. (In fact, the auditor should consider

these factors even in situations in which he or she concludes that substantial doubt has been alleviated.) The

auditor should also include an explanatory paragraph describing the going concern uncertainty in the audit

report and communicate certain information about the going concern uncertainty with those charged with

governance. Finally, the auditor should document in the workpapers (a) the conditions or events that caused

the substantial doubt, (b) the work performed to evaluate the doubt, (c) the conclusion reached about the

doubt, and (d) the consideration of the effect of the conclusion on the financial statements, disclosures, and

audit report.

103.3 SAS No. 59 applies to audits of all financial statements, regardless of the basis of accounting on which

they are prepared. Accordingly, the auditor should also evaluate an entity's ability to continue as a going

concern for a reasonable period of time when auditing OCBOA financial statements (that is, financial

statements prepared in accordance with an other comprehensive basis of accounting, such as the cash basis

or the income tax basis.) In addition, the auditor of a specified element, account, or item of a financial



statement also has to consider SAS No. 59 during the audit. Chapter 3 discusses the auditor's responsibilities

for going concern in further detail.

103.4 SAS No. 59 does not apply when the going concern assumption does not apply. Thus, it does not apply

to financial statements prepared on the liquidation basis of accounting. The liquidation basis of accounting is

discussed beginning at paragraph 204.1.

Proposed Changes to SAS No. 59

103.5 In response to growing concerns concerning the complexity of auditing standards and to harmonize

auditing standards generally accepted in the United States with International Standards on Auditing, the

Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants began a large-scale

project, known as the Clarity Project, to revise all existing standards and to design a format under which all

new standards will be issued. In March 2007, the ASB issued a discussion paper titled Improving the Clarity

of ASB Standards, outlining its plans to revise the format, structure, and style of the professional standards

issued by the ASB. The discussion paper is available at

www.aicpa.org/download/auditstd/Clarity_of_ASB_Standards_Discussion_Memo.pdf.

103.6 The Clarity Project seeks to—

• Establish objectives for each standard to help the auditor understand what he or she is trying to

accomplish.

• Make structural and drafting improvements to standards so the auditor can identify the standard's

requirements more easily.

• Include special considerations for auditors of public and small entities.

• Provide a glossary of terms used in the standards.

103.7 The ASB has considered comments from respondents on the discussion paper and continues to

deliberate issues relating to the Clarity Project. The ASB estimates that the project will take several years to

complete, and during this time the ASB does not plan to issue any new auditing standards in the “old” format,

except to complete projects that are already near finalization, or as necessary to address urgent issues. All

“clarified” standards will carry the same effective date, which is currently expected to apply to audits of

financial statements for periods ending on or after December 15, 2012. This proposed effective date may be

extended if there is not sufficient time to allow firms to update their methodologies and training programs.

Auditors can monitor the status of the Clarity Project at www.aicpa.org.



103.8 As part of the ASB's clarity project, an ASB task force is in the process of redrafting SAS No. 59 (AU

341), The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern, to:

• Apply the ASB's clarity drafting conventions. [These conventions are described in detail in the AICPA

Auditing Standards Board's paper titled Clarification and Convergence, which is located at

www.aicpa.org/download/auditstd/ASB_Clarity_%20and_Convergence_(8.5x11).pdf];

• Converge with ISA 570, Going Concern. The auditing guidance in ISA 570, which is based on

International Accounting Standard 1, Presentation of Financial Statements, requires management to

assess an entity's ability to continue as a going concern. Currently, accounting principles generally

accepted in the U.S. do not contain a parallel requirement; thus, it is the auditor, rather than

management, who is responsible for considering an entity's ability to continue as a going concern.

• Converge with the proposed SFAS, Going Concern, as discussed in section 203. The proposed SFAS

would: (a) provide guidance on the preparation of financial statements as a going concern and on

management's responsibility to evaluate an entity's ability to continue as a going concern; (b) require

certain disclosures when financial statements are not prepared on a going concern basis or when there is

substantial doubt about an entity's ability to continue as a going concern; and (c) change the time frame

for management's evaluation to a period that is “at least, but not limited to, 12 months” from year-end.

103.9 In addition, upon issuance of the proposed SFAS, the ASB plans to eliminate the accounting guidance

in SAS No. 59 and replace it with a reference to the SFAS. The ASB is working to complete the project

sometime during the first half of 2011, with the possible exception of the following two AU sections:

• AU section 341, The Auditor's Consideration of the Entity's Ability to Continue as a Going Concern,

redraft and revisions are being delayed in order to enable the proposed SAS to align with expected U.S.

accounting standards, and

• AU section 532, Restricting the Use of an Auditor's Report, redraft and revisions are incorporated in the

proposed SAS Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent

Auditor's Report. However, due to an issue that has arisen, an ASB task force has been formed to

consider a new standard addressing restricted-use reports.

Subsequent editions of this Guide will be updated for the redrafted SAS.

SAS No. 58



103.10 The auditor's standard report on audited financial statements identifies the financial statements

audited in an opening (introductory) paragraph, describes the nature of an audit in a scope paragraph, and

expresses the auditor's opinion in a separate opinion paragraph. SAS No. 58 (AU 508), Reports on Audited

Financial Statements, lists the basic elements of the standard report and provides a number of illustrative

reports. In addition, it describes certain circumstances that, while not affecting the auditor's unqualified

opinion on the financial statements, may require the auditor to add an explanatory paragraph to that standard

report. One of these circumstances occurs when there is substantial doubt about the entity's ability to

continue as a going concern. While this Guide discusses in Chapter 4 how to report on audited financial

statements when there is a going concern uncertainty, a complete discussion of the reporting requirements of

SAS No. 58 is beyond the scope of this Guide. However, PPC's Guide to Auditor's Reports provides detailed

guidance on drafting auditors' reports in a number of reporting situations. The Guide may be ordered by

calling your Thomson Reuters representative at (800) 431-9025 or from the PPC website at

ppc.thomsonreuters.com.)

AICPA and PCAOB Audit Alerts on the Current Economic Crisis

103.11 The economic recession has affected many clients' operations, risks, and financial reporting. In turn,

an auditor's responsibilities when providing accounting and auditing services to clients may also be affected.

In particular, the financial crisis may affect an auditor's considerations of an entity's ability to continue as a

going concern for a reasonable period of time.

103.12 In December 2008, the PCAOB issued a practice alert titled Audit Considerations in the Current

Economic Environment (PCAOB Alert). The PCAOB Alert describes recent events in the current economic

environment that can affect an entity's operations and financial reporting and thereby also affect the way the

auditor conducts the financial statement audit. It warns auditors to pay particular attention to audit areas with

a high risk for fraud and errors in the midst of the current economic downturn.

103.13 The AICPA also issued an Alert titled Current Economic Crisis: Accounting and Auditing

Considerations—2009 (AICPA Alert). Both Alerts were designed to help auditors identify and respond to

accounting and audit issues related to the current economic environment. Both Alerts note that previously

identified audit risks may become more significant or new risks may exist due to current events affecting the

economy, credit, and liquidity. Each also briefly discusses the possible effects of current conditions and

events on an entity's ability to continue as a going concern. For instance, the PCAOB Alert notes that the

current economic environment may threaten an entity's ability to continue as a going concern. Particularly

relevant threats include strained sources of liquidity because of reduced availability of lines and letters of

credit or limited access to the commercial paper markets; a decrease in valuation of collateral; difficulty

restructuring loans; and delays in payment from customers.

103.14 The AICPA Alert begins with an extensive review of the economic and financial events that led to the

financial crisis and resulting legislative and regulatory actions. It includes a discussion of how liquidity

restrictions can affect an entity's ability to continue as a going concern, as well as a more detailed discussion

of how the current economic climate can affect the going concern evaluation. The AICPA Alert notes that

many factors related to the current uncertain economy—such as the industry and geographic area in which

the entity operates, the financial condition of the entity's customers, suppliers, and lenders—may affect the



entity's ability to continue as a going concern. Accordingly, it warns that it is more critical than ever for an

auditor to carefully consider going concern issues related to each entity. It also lists threats that may exist if

lenders are looking for ways to get out of lending relationships; financial support from a related party isn't a

feasible mitigating factor due to the party's poor financial health; or an entity's financial health is significantly

weakened because its suppliers or customers have been strongly affected by the economic crisis.

Specifically, the AICPA Alert lists the following as risks related to the current economic condition that might

affect an auditor's consideration of an entity's financial health:

a. Lenders concerned about their own financial health may be looking for ways to get out of the lending

relationship.

b. Depending on a related party's financial health, its financial support may not be a relevant mitigating

factor.

c. An entity's significant suppliers or customers are experiencing their own financial troubles, which may

dramatically affect an entity's cost of sales or revenues.

d. Forecasts and budgets that use assumptions based on historical data may not be reliable future

predictions.

e. The hesitation of some entities to include informative and transparent financial statement disclosures

relating to going concern.

103.15 The AICPA Alert also lists the following as possible audit responses for each of those respective risks:

a. Discuss with management its relationship with the lender; thoroughly review loan agreements.

b. Determine the viability of the related parties providing financial support to the entity; review

documentation describing the terms of the financial support.

c. Obtain an understanding of the financial health of the entity's significant customers and suppliers;

consider reviewing data supporting their financial health.



d. Perform a detailed review of the entity's forecasts and budgets; consider whether they are reasonable

based upon the current economic conditions.

e. Consider whether the majority of users of the entity's financial statements would consider disclosures

(particularly those related to going concern issues) informative and complete.

103.16 The Alerts also address how the current economic situation might affect an audit engagement,

including certain accounting measurement and disclosure issues related to the financial statements being

audited. Because those issues may affect an entity's viability, and thus the auditor's ongoing evaluation, they

are summarized in the remainder of this section.

103.17 General Audit and Attestation Considerations

A characteristic of the current environment is the high volatility and rapidity of changing conditions. The

AICPA Alert notes that the rapidly changing economic environment complicates the auditor's responsibility to

obtain a sufficient understanding of the entity and its environment (including the industry, regulatory, and

other external factors) in order to assess the risks of material misstatement of the financial statements and to

design responsive audit procedures. The PCAOB Alert notes that changed conditions may require the auditor

to update his or her understanding of how the current economic environment affects the entity, to reassess

audit risks, and to modify planned audit procedures as the audit progresses. The PCAOB Alert also notes that

the current economic environment may require additional audit attention be given to internal controls,

including entity-level controls such as controls related to the control environment and the entity's risk

assessment process.

103.18 Fraud Risks

Unexpected losses or other financial difficulties may provide additional incentives and opportunities for

management to fraudulently misstate the financial statements to meet earnings expectations or debt

covenants. Both Alerts emphasize that the responsibility to consider fraud in all audits is especially important

in the current economic environment. The PCAOB Alert states that the auditor's assessment of the risk of

material misstatement due to fraud should be ongoing throughout the audit. In an integrated audit required of

certain public companies, the audit of internal control should include an evaluation of whether the controls

sufficiently address the identified risks of material misstatement due to fraud. In addition, both Alerts discuss

the effect of the current economic conditions on communications with the audit committee or those charged

with governance.

103.19 Fair Value Accounting

One hallmark of the financial crisis has been illiquid and inactive markets for financial instruments. The

Emergency Economic Stabilization Act of 2008 included a requirement for the SEC to study the impact of



FASB ASC 820-10 (formerly SFAS No. 157, Fair Value Measurements) on the financial markets and whether

the accounting standard should be suspended. The AICPA Alert summarizes the SEC study and resulting

recommendation that fair value accounting be improved but not suspended. The PCAOB Alert identifies

investments for which valuation may be complex and difficult, including auction rate securities, commercial

paper, mortgage-backed or other asset-backed securities, and alternative investments (such as hedge funds,

private equity investments, funds of funds, etc.). The AICPA Alert provides a lengthy summary of the

provisions of FASB ASC 820-10 (formerly SFAS No. 157) and related FASB and SEC pronouncements.

103.20 The AICPA Alert also discusses means of auditing fair value, including procedures to perform when

an observable market price isn't available. Such procedures include testing management's valuation model,

assumptions, and underlying data; developing an independent fair-value estimate to compare to

management's estimate; and reviewing subsequent transactions and events. It also discusses considerations

when valuations are obtained from a broker or pricing service.

103.21 The PCAOB Alert identifies particularly important matters for consideration when auditing fair-value

estimates, including the choice and complexity of valuation techniques and models; judgments concerning

significant assumptions; considerations in using the work of a specialist or pricing service; and the extent of

financial statement disclosure about measurement methods and uncertainty.

103.22 Asset Impairment

The financial crisis has resulted in significant declines in the fair value of debt and equity securities. In

auditing fair value, the auditor should consider the possibility that the declines are other than temporary and

require recognition of a loss. The PCAOB Alert refers to the SEC's SAB 59, Accounting for Noncurrent

Marketable Equity Securities, which identifies factors to consider, including the length of the time and the

extent to which the market value has been less than cost; the issuer's financial condition and near-term

prospects; and the intent and ability of the holder to retain its investment in the issuer for a period of time

sufficient to allow for any anticipated recovery in market value.

103.23 Other Accounting Estimates

In addition to fair value estimates, other estimates require careful consideration in light of the current

economic environment. These include the allowance for uncollectible accounts receivable, the impairment

analysis and estimated useful lives of long-lived assets, the valuation allowance for deferred tax assets, and

actuarial assumptions used in determining pension and other postretirement benefit costs.

103.24 The PCAOB Alert points out that considerations in auditing accounting estimates include the

company's historical experience in making past estimates, as well as the auditor's experience in the industry.

It adds that recent changes in the economy and the financial markets increase the likelihood that changes in

facts, circumstances, or a company's procedures may cause different factors from those considered in the

past to become significant to the accounting estimate. The AICPA Alert also stresses the need to consider

whether historical patterns remain relevant in the current environment or whether the environment may cause

new patterns to emerge.



103.25 The AICPA Alert notes that in auditing the reasonableness of management's estimate and any

difference from the auditor's estimate, the auditor should consider the possibility that management's estimate

may be biased due to increased pressure to meet earnings expectations. The PCAOB Alert explains that the

benefit of hindsight from a retrospective review of significant accounting estimates reflected in the financial

statements of the prior year can provide the auditor with additional information about whether there may be a

possible bias on the part of management in making the current year estimates.

103.26 Liquidity Restrictions

A number of money market or other investment funds have restrictions imposed on an entity's ability to

withdraw its balance from the fund. Such restrictions can have accounting and auditing implications that

should be considered, including whether any assets subject to the restrictions qualify as cash equivalents or

current assets; whether disclosures about the risks and uncertainties resulting from such restrictions should

be made in the financial statements or in an emphasis paragraph in the auditor's report; whether those

restrictions may trigger violations of debt covenants and, consequently, if that liability should be classified as

current; if the occurrence of such restriction occurs between the balance sheet date and the issuance date,

whether the financial statements need to be adjusted; and whether the restriction events call into question the

entity's ability to continue as a going concern. The AICPA Alert refers to the AICPA's Technical Practice Aid

TIS 1100.15, Liquidity Restrictions, which provides guidance on these issues.

103.27 Disclosures

The AICPA Alert points out the increased attention that regulators, investors, and others will give to financial

statement disclosures about matters such as liquidity and capital resources, material impairments, pension

plan assets, fair value determinations, critical accounting policies and estimates, risk factors, and

relationships with distressed businesses. Both Alerts refer to the disclosures related to certain significant

estimates and vulnerability due to concentrations required by FASB ASC 275-10 (formerly SOP 94-6,

Disclosure of Certain Significant Risks and Uncertainties.)

103.28 Other Considerations

The following are some of the other areas of particular concern in the current economic environment that the

PCAOB Alert discusses:

• Contingencies and Guarantees. The current economic environment may expose an entity to additional

contingencies and guarantees involving pending or threatened litigation, guarantees of indebtedness of

others, guarantees to repurchase property previously sold or otherwise assigned, and outstanding

purchase commitments at prices in excess of market values. The auditor needs to consider the risk that

there may be such unidentified or undisclosed contingencies.

• Debt Obligations. Companies may find it more difficult to refinance debt, or it may take longer to arrange

new financing in the current business environment, and compliance with debt covenants may also be



more challenging. Such circumstances can affect the risks of material misstatement and the necessary

audit procedures relating to debt obligations.

• Inventories. Current market conditions and the effect on consumer spending may result in excess or

obsolete inventory or inventory with carrying amounts in excess of market values. Also, there may be

losses on firm, uncancelable, and unhedged commitments to purchase inventory.

• Deferred Tax Assets. Under current economic conditions, an entity may need to record a valuation

allowance for deferred tax assets if available evidence indicates that there is more than a 50% chance

that some portion or all of the assets won't be realized. FASB ASC 740-10 (formerly SFAS 109,

Accounting for Income Taxes and FIN 48, Accounting for Uncertainty in Income Taxes), provide guidance

on the accounting issues. FASB ASC 740-10 (formerly FIN 48) is currently effective for public companies

and was effective for nonpublic companies for fiscal years beginning after December 15, 2008.

• Revenue Recognition. The presumed risk of material misstatement due to fraud relating to revenue

recognition is higher in the current economic environment. Companies faced with increased pressure to

meet revenue targets and analyst expectations may change business practices in ways that affect

revenue recognition and necessary audit procedures. Such practices may include rights of return, bill-and

-hold arrangements, change in payment terms, side agreements, and consignment arrangements.

103.29 The AICPA Alert includes comprehensive lists, sources, and summaries of recent accounting,

auditing, and attestation pronouncements and other guidance. It can be purchased on Checkpoint or at

www.cpa2biz.com. The PCAOB Alert can be downloaded at http://pcaobus.org/Standards/QandA/12-05-

2008_APA_3.pdf.

AICPA White Paper on Going Concern

103.30 The AICPA also issued a white paper titled “Current Economic Crisis: Going Concern

Considerations—2009.” The white paper, which is derived from the AICPA Alert discussed above, warns

auditors that it is critical to perform an individual analysis of going concern issues in every audit engagement.

The entire paper can be downloaded at

www.aicpa.org/Research/ecrc/Pages/CurrentEconomicCrisisGoingConcernConsiderations2009.aspx.

IAASB Alert

103.31 The International Auditing and Assurance Standards Board (IAASB) sets auditing, assurance, quality

control, and related services standards for use by accountants throughout the world. More than 100 countries

use or are in the process of adopting or incorporating International Standards on Auditing (ISAs), issued by



the IAASB, into their national auditing standards or using them as a basis for preparing national auditing

standards. ISAs are intended for use in all audits—publicly traded companies, private business of all sizes,

nonprofit organizations, and government entities at all levels.

103.32 In January 2009, the IAASB issued a staff audit practice alert titled Audit Considerations in Respect of

Going Concern in the Current Economic Environment (the IAASB Alert). The IAASB Alert provides guidance

on how the current economic environment might affect an auditor's consideration of an entity's ability to

continue as a going concern. Specifically, the IAASB Alert discusses how certain events of the past year and

the outlook for the future may change the way auditors consider certain conditions and events that may

contradict an entity's ability to continue as a going concern. The IAASB Alert acknowledges that the severity

and volatility of the current economic situation will make it harder than ever for auditors to evaluate whether

an entity will continue in existence. However, the situation does not change the auditor's responsibility for

going concern in a financial statement audit. It also cautions financial statement users that the absence of a

going concern uncertainty paragraph in an auditor's report should not be viewed as a guarantee that future

conditions or events will not result in the entity's failure.

103.33 While the IAASB Alert does not specifically apply to audits of financial statements prepared in

conformity with accounting principles generally accepted in the United States, the authors believe some of its

guidance is useful to all auditors. That guidance is summarized in the following paragraphs. (Furthermore,

specific considerations related to the current economic environment are summarized at the end of each

section in the chapter to which they relate.)

103.34 In the past, an auditor may not have felt it necessary to do a detailed going concern evaluation of an

entity that had a history of profitable operations and easy access to financial resources. However, such an

approach may no longer be viable for that entity, depending on the effects of the credit crisis and economic

downturn on its operations. In particular, liquidity and credit risk issues may have created new uncertainties

for such an entity, or may have increased any risks previously existing. Today, even an entity that has been

profitable in the past may find it difficult to obtain or renew financing at terms comparable with those obtained

in the past. Furthermore, an entity that has relied on year-end extensions of loan payments or waivers of loan

covenants may find that lenders are no longer able or willing to grant these waivers. The economic crisis may

make previous assumptions about profitability invalid. For some entities, the support of a wealthy owner may

be more pertinent than ever when assessing the entity's ability to continue as a going concern.

103.35 The IAASB Alert also describes how the past year's events and uncertainties surrounding the future

may present challenges it to an auditor when evaluating an entity's ability to continue as a going concern.

Specifically, it discusses the effect of the current economic environment on the auditor's consideration of (a)

credit and liquidity; (b) forecasts and budgets; and (c) financial statement disclosures. Chapter 3 discusses

issues relevant to each of these topics in further detail.

103.36 While an auditor should evaluate carefully how uncertainties surrounding current economic conditions

could affect each entity, the IAASB Alert acknowledges that an uncertainty about an entity's ability to continue

as a going concern does not automatically exist. In addition, it clarifies that financial statements that include

extensive disclosures about such uncertainties are not necessarily indicative of substantial doubt about an

entity's ability to continue as a going concern. In fact, one objective of financial statement disclosures in the



current environment may be to explain why the going concern issues that affect the entity do not give rise to a

significant doubt. The entire document may be downloaded at

http://web.ifac.org/download/IAASB_Staff_Audit_Practice_Alerts_2009_01.pdf. Also, see the

discussion beginning at paragraph 301.8.

GASBS No. 56

103.37 GASBS No. 56, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA

Statement on Auditing Standards, provides guidance on going concern considerations in audits of

governmental units. Like SAS No. 59, GASBS No. 56 states that continuation of a governmental entity as a

going concern is assumed in financial reporting in the absence of significant information to the contrary.

GASBS No. 56 specifies that the entity level is that of a legally separate governmental entity and not at the

reporting unit level.

103.38 It shifts the going concern assessment responsibility to the financial statement preparer and discusses

the time period over which the going concern evaluation should be made. While GASBS No. 56 provides for a

time horizon of 12 months past the financial statement date (similar to SAS No. 59), it also allows

consideration of information that is currently known to the government that may raise substantial doubt shortly

after the 12-month period. An additional three months is provided as an example. Related to timing, GASBS

No. 56 falls between the current SAS No. 59 timing requirements and the proposed SFAS requirements.

103.39 GASBS No. 56 carries forward from SAS No. 59 a discussion of the events and conditions that may

indicate a going concern problem and revises the examples for governmental entities. The Statement also

carries forward from SAS No. 59 the financial statement disclosure requirements when there is substantial

doubt about a governmental entity's ability to continue as a going concern. Finally, GASBS No. 56 indicates

that a discussion of going concern issues in the management's discussion and analysis may be necessary,

depending on the facts and circumstances.


END OF DOCUMENT -




Checkpoint Contents


Editorial Materials

Accounting Services

Going Concern


104 Overview of Standards for Accounting and Review Services

104 Overview of Standards for Accounting and Review

Services

Introduction

104.1 Guidance on going concern for compilations and reviews of financial statements is contained in the

following:

• SSARS No. 19 (AR 80.40-.43 and AR 90.47-.50).Complilation and Review Engagements—20094 .

SSARS No. 19 contains performance guidance related to going concern uncertainties for accounting and

review services.

• Interpretation No. 29. Interpretation No. 29 of SSARS No. 19, Reporting on an Uncertainty, Including an

Uncertainty About an Entity's Ability to Continue as a Going Concern (AR 9100.120-.129), discusses how

an accountant should report on compiled or reviewed financial statements when there are uncertainties,

including going concern uncertainties.

• SSARS Exhibit B. Exhibit B provides guidance with respect to considering an entity's ability to continue

as a going concern in a compilation or review engagement.

104.2 Throughout this Guide, the authors generally refer to the going concern guidance in AR 80.40-.43 and

AR 90.47-.50 as SSARS No. 19. The going concern guidance for accountants compiling or reviewing financial

statements is summarized below.

SSARS No. 19



104.3 SSARS No. 19 (AR 80.40-.43 and AR 90.47-.50) describes the accountant's responsibility to consider

going concern during the performance of a compilation or review engagement. SSARS No. 19 does not

require the accountant to perform specific procedures relative to an entity's ability to continue as a going

concern. Rather, it requires the accountant to consider going concern only when normal compilation or review

procedures performed during the engagement yielded information indicating that there may be uncertainty

about the entity's ability to continue as a going concern for a reasonable period of time. Therefore, while SAS

No. 59 requires an auditor to make a specific going concern assessment in every audit, SSARS No. 19 does

not require the accountant to consider going concern in every compilation and review engagement, only in

those in which conditions and events that may affect going concern are identified.

104.4 The term going concern is not defined in the accounting literature. However, most financial statement

users, analysts, and accountants agree that going concern refers to an entity's ability to continue functioning

in the normal course of business for the near term. Going concern assumes the entity's ability to continue in

operation for the foreseeable future with neither the intention nor the necessity of liquidation or otherwise

seeking protection from creditors pursuant to bankruptcy laws and regulations. Accordingly, unless use of the

going concern assumption is inappropriate in the entity's circumstances, it will prepare its financial statements

on a basis that assumes it will be able to realize its assets, discharge its liabilities, and obtain refinancing (if

necessary) in the normal course of business.

104.5 SSARS No. 19 uses the term uncertainty when describing situations in which there is doubt about the

ability of the reporting entity to continue as a going concern. In a compilation or review engagement, the

accountant's belief that an uncertainty exists is based on the limited procedures performed in a review or the

even more limited procedures performed in a compilation. (This is in contrast to the substantial doubt an

auditor may have in an audit engagement, derived from the auditing procedures that have been performed.)

104.6 SSARS No. 19 defines a reasonable period of time as a period “not to exceed one year beyond the

date of the financial statements being compiled or reviewed,” which is the same length of time an auditor

considers as described in SAS No. 59 (AU 341). In light of the FASB's proposed change to this time frame

(see paragraph 203.1), and because the ASB has discussed changing the time frame described in SAS No.

59 to that in the final SFAS, some accountants have questioned whether the time frame for the accountant's

consideration of going concern in a review or compilation engagement may also change. ARSC's intentions

are unknown at this time. Further developments, if any, will be described in future editions of this Guide.

104.7 SSARS No. 19 does not describe the types of conditions and events that might indicate uncertainty

about the entity's ability to continue as a going concern for a reasonable period of time. However, AR Exhibit

B, Going Concern Considerations, lists examples of circumstances that might cause the accountant to

question an entity's ability to continue as a going concern. These are essentially the same as the conditions

and events described in SAS No. 59.

104.8 When an accountant's review or compilation procedures have identified information that may contradict

the entity's use of the going concern assumption in the preparation of its financial statements, SSARS No. 19

requires the accountant to request that management consider the possible effects of the going concern

uncertainty on the financial statements, including the need for related disclosure.5

The accountant should

then consider the reasonableness of management's plans for dealing with the adverse information. (In the



context of SSARS No. 19, the authors interpret “reasonableness” to mean that management's plans are not

obviously incorrect, incomplete, or inconsistent with other information the accountant possesses.) If such

plans appear unreasonable, the accountants generally would conclude that there is a going concern

uncertainty that should be disclosed in the financial statements. Appendix A presents a variety of case studies

that illustrate how practitioners might evaluate going concern matters in audit and review engagements.

104.9 SSARS No. 19 allows, but does not require, the accountant to add an explanatory paragraph to the

compilation or review report because of a going concern uncertainty. Therefore, some accountants choose to

add an emphasis of a matter paragraph highlighting the going concern uncertainty to the compilation or

review report. These matters are discussed in more detail in section 410.

Interpretation No. 29 to SSARS No. 19

104.10 Interpretation No. 29, to SSARS No. 19 (AR 9100.120-.129), states that an accountant is not required

to include an explanatory paragraph in the compilation or review report if an uncertainty is appropriately

disclosed in the financial statements. The Interpretation further addresses those situations where the

accountant has compiled financial statements that omit substantially all disclosures. In those instances, the

disclosure of an uncertainty, including a going concern uncertainty, is not considered so significant that it can

never be omitted. The users of the financial statements are considered to be adequately warned of the

limitations by the following language, which is required to be included in the accountant's compilation report

when substantially all disclosures are omitted.

Management has elected to omit substantially all of the disclosures (and the

statement of cash flows) required by generally accepted accounting principles. If the omitted

disclosures were included in the financial statements, they might influence the user's

conclusions about the Company's financial position, results of operations, and cash flows.

Accordingly, these financial statements are not designed for those who are not informed about

such matters

104.11 The authors believe that, in many situations, the significance of a going concern uncertainty may

warrant such emphasis in the accountant's compilation or review report. Adding an emphasis of a matter

paragraph is discussed in more detail beginning at paragraph 410.5.

SSARS Exhibit B

104.12 Exhibit B to SSARS provides guidance with respect to considering an entity's ability to continue as a

going concern in a compilation or review engagement. The Exhibit provides disclosure guidance when there

is doubt about an entity's ability to continue as a going concern. According to Exhibit B, some of the

information that might be disclosed includes:

a. Pertinent conditions and events giving rise to the assessment of the uncertainty about the entity's

ability to continue as a going concern for a reasonable period of time.



b. The possible effects of such conditions and events.

c. Management's evaluation of the significance of those conditions and events and any mitigating factors.

d. Possible discontinuance of operations.

e. Management's plans (including relevant prospective financial information).

f. Information about the recoverability or classification of recorded asset amounts or classification of

liabilities.

104.13 Exhibit B, states that, even if the going concern question is alleviated by management's plans, (1) the

principal conditions and events that initially caused the concern, (2) the possible effects of such conditions

and events, and (3) mitigating factors (including management's plans) may need to be disclosed. These are

the same as those disclosure considerations described in SAS No. 59.

4 In December 2009, ARSC issued SSARS No. 19, Compilation and Review Engagements. SSARS No. 19

(AR 80 and AR 90) is the most significant change to the compilation and review standards since their

inception in 1978. It supersedes AR 20, AR 50, and AR 100, and is generally effective for compilations and

reviews of financial statements for periods ending on or after December 15, 2010. While the effect of SSARS

No. 19 are pervasive on compilation and review engagements, it did not change the performance guidance

related to going concern uncertainties. However, it did change the general reporting guidance, which has

been updated in Chapter 4.

5ARSC is not authorized to prescribe measurement or disclosure requirements. However, AR Exhibit B also

provides examples of information that might be disclosed. The types of disclosures described are the same as

those in SAS No. 59 and discussed in section 303.


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