The report wording follows from two conclusions: whether substantial doubt remains after management's plans, and whether the disclosure is adequate. If doubt remains and disclosure is adequate, AU-C 570.24 requires a separate section headed "Substantial Doubt About the Entity's Ability to Continue as a Going Concern" and a statement that the opinion is not modified. If disclosure is inadequate, the opinion is qualified or adverse. If doubt was alleviated, the auditor may add an emphasis-of-matter paragraph.
This post covers the report mechanics. The evaluation itself is in our going concern assessment guide, and the PCAOB format is compared in AS 2415 versus AU-C 570.
Which outcome do I have?
| Substantial doubt after plans | Disclosure | Report effect | Authority |
|---|---|---|---|
| Remains | Adequate | Unmodified opinion plus a "Substantial Doubt" section | AU-C 570.24 |
| Remains | Inadequate | Qualified or adverse opinion | AU-C 570.26, AU-C 705 |
| Alleviated | Adequate | Unmodified opinion; optional emphasis-of-matter paragraph | AU-C 570.A54, AU-C 706 |
| Alleviated | Inadequate | Qualified or adverse opinion | AU-C 570.26b(ii) |
| Going concern basis inappropriate | Any | Adverse opinion | AU-C 570.23 |
What must the substantial doubt section say?
Paragraph .24 requires a separate section in the auditor's report, with the heading "Substantial Doubt About the Entity's Ability to Continue as a Going Concern," that does two things:
- Draws attention to the note that discloses the conditions or events identified and management's plans, and that these conditions or events indicate substantial doubt exists.
- States that the auditor's opinion is not modified with respect to the matter.
The standard's own illustration, for a FASB ASC reporter, reads:
Substantial Doubt About the Company's Ability to Continue as a Going Concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note X to the financial statements, the Company has suffered recurring losses from operations, has a net capital deficiency, and has stated that substantial doubt exists about the Company's ability to continue as a going concern. Management's evaluation of the events and conditions and management's plans regarding these matters are also described in Note X. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to this matter.
The illustration places the section immediately after "Basis for Opinion," presented that way "for illustrative purposes." Paragraph .A51 explains why a separate headed section is used: it alerts users that substantial doubt exists.
Which words are required, and which are banned?
Paragraph .25 requires terms consistent with the applicable framework and bars conditional language. For FASB ASC and GASB reporters, paragraph .A53 says the conclusion is expressed through the phrase "substantial doubt about its (the entity's) ability to continue as a going concern." The standard gives two examples of wording that fails:
- "If the Company continues to suffer recurring losses from operations and continues to have a net capital deficiency, there may be substantial doubt about its ability to continue as a going concern."
- "The Company has been unable to renegotiate its expiring credit agreements. Unless the Company is able to obtain financial support, there is substantial doubt about its ability to continue as a going concern."
The test is simple. If the sentence says doubt exists, state it. If the sentence says doubt might exist, the auditor has not reached a conclusion, and the report cannot be issued that way.
What if disclosure is inadequate?
Paragraph .26 requires a qualified or adverse opinion under AU-C 705, and the basis section must state one of two things:
- substantial doubt exists and the financial statements do not adequately disclose the matter, or
- substantial doubt has been alleviated by management's plans but the financial statements do not adequately disclose the matter.
Under AU-C 705.17 and .21, the opinion heading becomes "Qualified Opinion" or "Adverse Opinion," and the basis heading becomes "Basis for Qualified Opinion" or "Basis for Adverse Opinion," with a description of the matter giving rise to the modification. AU-C 705.08 and .09 draw the line between the two: a qualified opinion when misstatements are material but not pervasive, an adverse opinion when they are material and pervasive.
What does adequate look like? Paragraph .A42 says that under FASB ASC, when substantial doubt is not alleviated, the notes must include a statement that substantial doubt exists within one year after the date the financial statements are issued, and information that lets users understand the principal conditions or events, management's evaluation of their significance, and management's plans. Paragraph .A45 lists the three items required when doubt is alleviated: the principal conditions, management's evaluation of their significance, and the plans that alleviated doubt. Our guides to management's plans under ASC 205-40 and going concern note examples cover the disclosure side.
When is an emphasis-of-matter paragraph allowed?
Only when doubt was alleviated and disclosure is adequate. Paragraph .A54 says the auditor may include an emphasis-of-matter paragraph under AU-C 706 that refers to management's disclosures of the conditions and events and management's plans. It is distinguished from the case where doubt remains, which requires the separate section.
Under AU-C 706.08 an emphasis-of-matter paragraph is not available if the opinion must be modified for the matter, or if the matter has been determined to be a key audit matter when AU-C 701 applies (repeated at .A55). Under AU-C 706.09, the paragraph sits in a separate section with an appropriate heading, refers to the matter and to where the disclosure is, refers only to information in the financial statements, and says the opinion is not modified. The standard's model for the alleviated case is:
Emphasis-of-Matter. As discussed in Note X to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency. Management's evaluation of the events and conditions and management's plans to mitigate these matters are also described in Note X. Our opinion is not modified with respect to this matter.
Note what is absent: the words "substantial doubt." The alleviated case does not tell users that substantial doubt exists, because management concluded it does not.
For more on the mechanics of these paragraphs, see our post on key audit matters under AU-C 701 and the types of audit opinions.
What about a prior year that carried the section?
If substantial doubt existed at the prior period date presented on a comparative basis and has been removed in the current period, the going concern section in the prior-period report is not repeated (paragraph .29). Doubt that arose in the current period does not imply it existed in the prior period and does not change the prior-period report (paragraph .A60).
Management asks us to remove the section from a reissued report
An auditor has no obligation to reissue. If the auditor decides to, paragraph .30 requires reassessment: procedures on the events that prompted the request, the AU-C 560 subsequent events procedures at or near the reissuance date, the matters in paragraphs .16 to .18 at that date, and the effect on the report under AU-C 560. Paragraph .A62 gives an example: financing obtained after the original report date.
Management will not make or extend its evaluation
Paragraph .27 requires the auditor to consider the implications for the report. Paragraph .A59 explains that if management's conclusion is not adequately supported, a qualified or adverse opinion for a departure from the framework may be appropriate, and the refusal may also be a deficiency in internal control to evaluate under AU-C 265.
Frequently asked questions
Does a going concern section mean the opinion is qualified?
No. The section states that the opinion is not modified with respect to the matter (AU-C 570.24b). The opinion is modified only when disclosure is inadequate or the going concern basis is inappropriate.
Can I use "may" or "could" in the section?
No. Paragraph .25 bars conditional language, and paragraph .A57 gives examples.
Is the section required if management's plans alleviated the doubt?
No. Paragraph .A54 makes an emphasis-of-matter paragraph optional in that case.
Sources
- AICPA, AU-C Section 570, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern (paragraphs .21 to .30, .A41 to .A62 and the exhibit illustrations): https://www.aicpa-cima.com/resources/landing/aicpa-professional-standards
- AICPA, AU-C Section 705, Modifications to the Opinion in the Independent Auditor's Report (paragraphs .07 to .09, .17 and .21), and AU-C Section 706, Emphasis-of-Matter Paragraphs and Other-Matter Paragraphs (paragraphs .08 and .09): https://www.aicpa-cima.com/resources/landing/aicpa-professional-standards
- PCAOB, AS 2415, for the comparison of explanatory paragraph treatment: https://pcaobus.org/oversight/standards/auditing-standards/details/AS2415
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