Going Concern PART 2

The risks of auditing factually insolvent entities

In South Africa, it is not uncommon for an entity's liabilities to exceed its assets. Although there is no prohibition against an entity continuing to trade while factually insolvent, doing so raises the risk of potential reckless trading or fraud, particularly where liabilities are incurred despite the entity's inability to repay them.

Trading while factually insolvent can have significant legal, financial, and ethical implications. Directors may face personal liability, creditors could suffer losses, and stakeholders may be misled about the entity's true financial position.

As an auditor, you play a critical role in assessing the going concern status of the entity and providing stakeholders with an appropriate opinion. However, audit regulators have identified going concern as a common deficiency during engagement inspections, indicating that auditors do not always perform sufficient audit work on financially distressed entities.

Relying too heavily on management's assumptions without applying sufficient professional scepticism can leave gaps in identifying potential misstatements, fraudulent practices, and other risks affecting the financial statements.

This course provides a practical understanding of the audit risks associated with trading while factually insolvent and the audit procedures you can perform to address these risks. You'll learn how to apply additional scrutiny, evaluate going concern assessments, consider reportable irregularities, and determine the appropriate impact on the audit report.

What you'll be able to do after this course

• Identify potential audit risks associated with trading while factually insolvent.
• Understand the responsibilities of auditors and independent reviewers in these circumstances.
• Identify possible audit procedures to address risks and reduce audit risk to an acceptable level.
• Recognise circumstances that may give rise to reportable irregularities.
• Evaluate the going concern implications of factual insolvency.
• Consider the impact of identified risks and audit findings on the audit report.
• Strengthen your professional scepticism and audit documentation when dealing with financially distressed entities.

Strengthen your approach to high-risk audit engagements

When auditing an entity that is factually insolvent, you need to go beyond relying on management's assessment. Apply appropriate audit procedures, critically evaluate the available evidence, and ensure that your audit conclusions and reporting address the risks identified.

Build your understanding of the responsibilities and procedures required to audit financially distressed entities and provide stakeholders with reliable and transparent financial information.

Self-paced · 1 Hour · 7 missions · 1 final quiz · 1-Hour Verifiable Bronze LEAF CPD Certificate

First mission video completely free.

$26.00