How does SA 570 define the concept of going concern?
The going concern principle is the assumption that an entity will remain in business for the foreseeable future. Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices. By making this assumption, the accountant is justified in deferring the recognition of certain expenses until a later period, when the entity will presumably still be in business and using its assets in the most effective manner possible.
An entity is assumed to be a going concern in the absence of significant information to the contrary. An example of such contrary information is an entitys inability to meet its obligations as they come due without substantial asset sales or debt restructurings. If such were not the case, an entity would essentially be acquiring assets with the intention of closing its operations and reselling the assets to another party
An entitys continuance as a going concern for the foreseeable future is assumed in the preparation of financial statements in the absence of information to the contrary.
Accordingly, assets and liabilities are recorded on the basis that the entity will be able to realise its assets and discharge its liabilities in the normal course of business. If this assumption is unjustified then entity may not be able to realize its assets at the recorded 3 months and there may be changes in the amounts and maturity dates of liabilities..
As per S.A. 570, while planning and performing audit procedures and evaluating thereof, the auditor should consider the appropriateness of the going concern assumption. When a question arises regarding the appropriateness of the going concern assumption, the auditor should gather sufficient appropriate audit evidence to attempt to resolve, to the auditors satisfaction, the question regarding the entitys ability to continue in operation for the foreseeable future.
The statement clarifies that auditors report is not a guarantee as to the future viability of the entity. The responsibility of the auditor is to judge the entitys continuance as a going concern for the foreseeable future. Foreseeable future is generally a period not exceeding one year after the Balance Sheet date in the absence of information. If the going concern is not valid, the assets will be recorded at its disposal value and liabilities at its payment value.