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PCAOB Urges Auditors to Follow Standards on Going Concern

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Sep 22nd 2014
Staff Writer and Editor AccountingWEB
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The Public Company Accounting Oversight Board (PCAOB) on Monday reminded auditors that they should continue adhering to the board’s existing standards when considering an organization’s ability to operate as a going concern.

In Staff Audit Practice Alert No. 13, Matters Related to the Auditor’s Consideration of a Company’s Ability to Continue as a Going Concern, the PCAOB emphasized that auditors should look to the applicable financial reporting framework – whether US Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS) – to assess management’s going concern evaluation and the related financial statement disclosures.

The US audit regulator issued the alert in response to an Accounting Standards Update by the Financial Accounting Standards Board (FASB) on Aug. 27 that defines management’s responsibility to evaluate whether there is a substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures.

The FASB update to US GAAP provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes.

“An auditor’s responsibility to evaluate a company’s ability to continue as a going concern is an important part of the audit,” Martin Baumann, PCAOB chief auditor and director of professional standards, said in a written statement. “With the recent changes to US GAAP, the staff is issuing this alert to make clear that current auditing standards remain in effect.

The alert also says that auditors should refer to the existing requirements of the board’s going concern standard, AU Section 341, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, when evaluating whether the auditor's report requires an explanatory paragraph disclosing the auditor's substantial doubt about a company's ability to function as a going concern. It also notes that the auditor's evaluation is qualitative based on the relevant events and conditions and other considerations set forth in AU Sec. 341.

A determination that no disclosure is required under US GAAP or IFRS, as applicable, is not conclusive as to whether an explanatory paragraph is required under AU Sec. 341. Auditors should make a separate evaluation of the need for disclosure in the auditor's report in accordance with the standard’s requirements, according to the PCAOB.

The PCAOB's standard-setting agenda includes a project to consider potential revisions to AU Sec. 341.

The PCAOB publishes staff audit practice alerts to highlight new, emerging, or otherwise noteworthy circumstances that may affect how auditors conduct audits under the existing requirements of board standards and relevant laws.

The board recently issued an alert warning auditors about “significant audit deficiencies” in the area of revenue that have frequently been spotted during PCAOB inspections.

Related articles:

FASB Puts Onus on Management for Going Concern Disclosures
Frequent Deficiencies in Auditing Revenue Focus of PCAOB Alert

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