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The Auditors Assessment of Going Concern as an Integral Part of Financial Statements Audit

Transparent financial reporting is one of the most important internal mechanisms of corporate governance from the perspective of present and future investors, as it represents the image of the behavior and efficiency of company's management. According to the international accounting standards, financial statements are generally prepared on a going concern basis. This means that the management assumes that the company will continue to operate in the foreseeable future. Due to the potential conflict of interest and opportunistic behavior of management, different forms of control over financial reporting are necessary to increase the credibility of the financial information presented. An audit of financial statements conducted by an external and independent expert is one possible way to accomplish this goal. Accordingly, one of the important tasks of the external auditor is to assess if there is a material uncertainty about the company's ability to continue as a going concern. This chapter will cover the role of external auditors in predicting company's bankruptcy, the procedures and activities they use in doing so, the inevitable limitations of the audit process and the implications of the going concern uncertainty on the auditor's report. Additionally, the potential of the going-concern reporting to become as a self-fulfilling prophecy will be discussed in terms of the possible explanation why audit firms are especially careful when modifying opinion due to the going concern issues. On the other hand, issuing a clean audit opinion to a company that goes bankrupt in the next period can be considered as an audit failure. That is why the auditor's propensity to issue a modified opinion because of the going concern uncertainty is commonly used as a direct measure of the unobservable audit quality.

financial statement audit, going concern, financial reporting, auditing reporting, audit quality

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