5 Smithson Co provides scientific services to a wide range of clients. Typical assignments range from testing food for
illegal additives to providing forensic analysis on items used to commit crimes to assist law enforcement officers.
The annual audit is nearly complete. As audit senior you have reported to the engagement partner that Smithson is
having some financial difficulties. Income has fallen due to the adverse effect of two high-profile court cases, where
Smithson’s services to assist the prosecution were found to be in error. Not only did this provide adverse publicity for
Smithson, but a number of clients withdrew their contracts. A senior employee then left Smithson, stating lack of
investment in new analysis machines was increasing the risk of incorrect information being provided by the company.
A cash flow forecast prepared internally shows Smithson requiring significant additional cash within the next
12 months to maintain even the current level of services. Smithson’s auditors have been asked to provide a negative
assurance report on this forecast.
Required:
(a) Define ‘going concern’ and discuss the auditor’s responsibilities in respect of going concern. (4 marks)
(b) State the audit procedures that may be carried out to try to determine whether or not Smithson Co is a going
concern. (8 marks)
(c) Explain the audit procedures the auditor may take where the auditor has decided that Smithson Co is unlikely
to be a going concern. (4 marks)
(d) In the context of the cash flow forecast, define the term ‘negative assurance’ and explain how this differs
from the assurance provided by an audit report on statutory financial statements. (4 marks)
(20 marks)

5 (a) Going concern
Going concern means that the enterprise will continue in operational existence for the foreseeable future without the intention
or necessity of liquidation or otherwise ceasing trade. It is one of the fundamental accounting concepts used by auditors and
stated in IAS 1 Presentation of Financial Statements.
The auditor’s responsibility in respect of going concern is explained in ISA 570 Going Concern. The ISA states ‘when planning
and performing audit procedures and in evaluating the results thereof, the auditor should consider the appropriateness of
management’s use of the going concern assumption in the preparation of the financial statements’.
The auditor’s responsibility therefore falls into three areas:
(i) To carry out appropriate audit procedures that will identify whether or not an organisation can continue as a going
concern.
(ii) To ensure that the organisation’s management have been realistic in their use of the going concern assumption when
preparing the financial statements.

(iii) To report to the members where they consider that the going concern assumption has been used inappropriately, for
example, when the financial statements indicate that the organisation is a going concern, but audit procedures indicate
this may not be the case.
(b) Audit procedures regarding going concern
– Obtain a copy of the cash flow forecast and discuss the results of this with the directors.
– Discuss with the directors their view on whether Smithson can continue as a going concern. Ask for their reasons and
try and determine whether these are accurate.
– Enquire of the directors whether they have considered any other forms of finance for Smithson to make up the cash
shortfall identified in the cash flow forecast.
– Obtain a copy of any interim financial statements of Smithson to determine the level of sales/income after the year-end
and whether this matches the cash flow forecast.
– Enquire about the possible lack of capital investment within Smithson identified by the employee leaving. Review current
levels of non-current assets with similar companies and review purchase policy with the directors.
– Consider the extent to which Smithson relied on the senior employee who recently left the company. Ask the human
resources department whether the employee will be replaced and if so how soon.
– Obtain a solicitor’s letter and review to identify any legal claims against Smithson related to below standard services
being provided to clients. Where possible, consider the financial impact on Smithson and whether insurance is available
to mitigate any claims.
– Review Smithson’s order book and client lists to try and determine the value of future orders compared to previous years.
– Review the bank letter to determine the extent of any bank loans and whether repayments due in the next 12 months
can be made without further borrowing.
– Review other events after the end of the financial year and determine whether these have an impact on Smithson.
– Obtain a letter of representation point confirming the directors’ opinion that Smithson is a going concern.
(c) Audit procedures if Smithson is not considered to be a going concern
– Discuss the situation again with the directors. Consider whether additional disclosures are required in the financial
statements or whether the financial statements should be prepared on a ‘break up’ basis.
– Explain to the directors that if additional disclosure or restatement of the financial statements is not made then the
auditor will have to modify the audit report.
– Consider how the audit report should be modified. Where the directors provide adequate disclosure of the going concern
situation of Smithson, then an emphasis of matter paragraph is likely to be appropriate to draw attention to the going
concern disclosures.
– Where the directors do not make adequate disclosure of the going concern situation then qualify the audit report making
reference to the going concern problem. The qualification will be an ‘except for’ opinion or an adverse opinion depending
on the auditor’s opinion of the situation.
(d) Negative assurance
Negative assurance means that nothing has come to the attention of an auditor which indicates that the cash flow forecast
contains any material errors. The assurance is therefore given on the absence of any indication to the contrary.
In contrast, the audit report on statutory financial statements provides positive or reasonable assurance; that is the financial
statements do show a true and fair view.
Using negative assurance, the auditor is warning users that the cash flow forecast may be inaccurate. Less reliance can
therefore be placed on the forecast than the financial statements, where the positive assurance was given.
With negative assurance, the auditor is also warning that there were limited audit procedures that could be used; the cash
flow relates to the future and therefore the auditor cannot obtain all the evidence to guarantee its accuracy. Financial
statements relate to the past, and so the auditor should be able to obtain the information to confirm they are correct; hence
the use of positive assurance.

谢谢