Going Concern and a Subsequent Event After the Audit Report Date
Greenfield Manufacturing has a current ratio of 0.8, a P50 million loan due in 9 months, and a covenant breach at year-end. Management has a non-binding letter of intent from a bank for refinancing dated 15 days after year-end and a signed contract to sell a warehouse for P20 million, expected to close in 4 months. The financial statements are approved for issue on March 20. On March 28, before the audit report is issued, the warehouse buyer withdraws. The auditor's report is dated March 25. The auditor had already evaluated going concern as appropriate based on the refinancing and sale. The CFO argues the subsequent withdrawal is a non-adjusting event and no action is needed.
1. What should the auditor do upon learning of the buyer's withdrawal on March 28, given the audit report is dated March 25 but not yet issued?
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Under PSA 560, the auditor has no obligation to perform procedures after the date of the auditor's report. But if the auditor becomes aware of a fact that may have caused the report to be different, the auditor must act. The withdrawal undermines a key mitigating factor for going concern. The auditor should discuss the matter with management and those charged with governance, request a reassessment of going concern, and determine whether the financial statements need amendment. If management amends, the auditor performs the necessary procedures and extends the report date. If management refuses, the auditor should take action to prevent reliance on the report, such as notifying the board and regulators and seeking legal advice. The CFO's 'non-adjusting event' argument does not relieve the auditor of this responsibility.
2. Assume management refuses to amend. What are the auditor's options regarding the audit report?
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Because the report has not been issued, the auditor should not issue the previously dated report. If the going concern basis is no longer appropriate, the auditor should issue an adverse opinion. If a material uncertainty exists but the going concern basis remains appropriate, the auditor should include a separate 'Material Uncertainty Related to Going Concern' section. If management refuses to amend and the financial statements are materially misstated, the auditor should consider withdrawing from the engagement and notifying those charged with governance and regulators. The auditor cannot simply change the report date without management's amendment; the auditor must have a basis for the report. The auditor should document the discussions and the rationale.
3. What if the event had occurred before the audit report date but after the financial statements were approved? How would that change the analysis?
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If the withdrawal occurred before the report date, the auditor would have an active duty to evaluate it as a subsequent event under PAS 10 and PSA 560. The auditor would assess whether it is an adjusting or non-adjusting event. The withdrawal likely provides evidence about conditions that did not exist at year-end (the buyer's change of mind), so it may be non-adjusting for the financial statements. However, for going concern, the auditor must consider all information available up to the report date. The withdrawal would likely mean the going concern assumption is inappropriate, or at least a material uncertainty exists, and the auditor would modify the report accordingly. The key difference is that before the report date, the auditor has a duty to discover and evaluate the event; after the report date, the auditor's duty is reactive.