AG ISA (NZ) 570 THE AUDITOR-GENERAL S STATEMENT ON GOING CONCERN. Contents

Transcription

1 AG ISA (Z) 570 THE AUDITOR-GEERAL S STATEMET O GOIG COCER Contents Page Introduction Scope of this Statement Application Objectives Definitions Requirements Going concern assessments Forming the audit opinion Making submissions to the Opinions Review Committee on going concern issues Management reporting Application and Other Explanatory Material Going concern assessments Making submissions to the Opinions Review Committee on going concern issues Appendix 1 - Going concern decision tree Issued 03/14 Office of the Auditor-General

2 Introduction Scope of this Statement 1. This Auditor-General s Auditing Statement: (a) establishes the Auditor-General s requirements in relation to ISA (Z) 570: Going Concern 1 ; and (b) provides additional guidance to reflect the public sector perspective. Application 2. Compliance with this Statement is mandatory for Appointed Auditors who carry out annual audits on behalf of the Auditor-General. 3. This Statement applies to all annual audits with reporting periods beginning on or after 1 July 2013, although earlier application is encouraged. Objectives 4. The objectives of the Appointed Auditor are to: (a) obtain sufficient appropriate audit evidence about the appropriateness of the use of the going concern assumption in the preparation and presentation of the financial and non-financial information; (b) conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the public entity s ability to continue as a going concern; and (c) determine the implications for the audit report. Definitions 5. For the purpose of this Auditor-General s auditing statement the defined terms have the meanings attributed: (a) in the Glossary of Terms issued by the ew Zealand Auditing and Assurance Standards Board (the ZAuASB glossary) of the External Reporting Board (although where a term with a specific meaning in the ew Zealand public sector differs from the ZAuASB glossary, the ew Zealand public sector definition shall prevail); and 1 The ISA (Z) auditing standards are scoped so that they apply to audits of historical financial information. However, for the purposes of the Auditor-General s auditing standards and statements, all references to historical financial information should be read as the audit of historical financial and historical non-financial information. Issued 03/14 Office of the Auditor-General

3 (b) in the Auditor-General s Glossary of Terms. Requirements Going concern assessments 6. In assessing the validity of the going concern assumption, the Appointed Auditor shall consider whether the entity is operating within its means and whether or not it is likely that it will be able to continue operating, without additional government support, for at least one year (or for the foreseeable future) from the date of the approval of the financial statements. (Ref: Para. A1 - A5) Forming the audit opinion 2 7. Where the financial statements have been prepared on a basis other than on a going concern basis, the Appointed Auditor shall consider if the other basis is appropriate in the specific circumstances, and if the financial statements contain the necessary disclosures. In these circumstances the Appointed Auditor shall not issue a modified opinion. However, the audit report shall include, when setting out the basis of the opinion, an emphasis of matter paragraph that describes the other basis of preparation and shall refer to the relevant disclosures in the financial statements. Where there are material errors in application of the other basis, the Appointed Auditor shall refer the recommended opinion to the OAG Accounting and Auditing Policy Group for guidance. An example of such an error would be if the valuation of assets and/or liabilities in financial statements prepared on a realisation basis were materially misstated. 8. Where the Appointed Auditor disagrees with the use of the going concern assumption, or inadequate disclosures have been made, an adverse opinion shall be issued. In these circumstances, the audit report shall be referred to the Auditor- General s Opinions Review Committee (the ORC) in keeping with AG ISA (Z) Where the Appointed Auditor identifies a limitation in scope over the use of the going concern assumption, the Appointed Auditor shall consult with the OAG Accounting and Auditing Policy Group before issuing the audit report. 10. Where the Appointed Auditor is able to obtain sufficient audit evidence to support the use of the going concern assumption, but there is a matter outside the control of 2 Appendix 1 is a decision tree for forming the audit opinion. Issued 03/14 Office of the Auditor-General

4 management and those charged with governance that is adequately disclosed in the financial statements, the audit report shall include an emphasis of matter paragraph that describes the uncertainties and refers to the relevant disclosures in the financial statements. In these circumstances, the audit report shall be referred to the ORC in keeping with AG ISA (Z) 700. In this situation, the Appointed Auditor shall ensure that the written representation letter contains representations from those charged with governance, outlining why they believe the use of the going concern assumption is appropriate. An illustrative example of such representations is contained in Appendix 4 of AG ISA (Z) 580: Written representations. 11. Where the Appointed Auditor is able to obtain sufficient audit evidence to support the use of the going concern assumption, because the entity has obtained a letter of support, the audit report shall be referred to the ORC, in keeping with AG ISA (Z) 700, unless the OAG has issued other instructions. In this situation, the Appointed Auditor shall ensure that the written representation letter contains representations from those charged with governance, outlining why they believe the use of the going concern assumption is appropriate. An illustrative example of such representations is contained in Appendix 4 of AG ISA (Z) 580: Written representations. Making submissions to the Opinions Review Committee on going concern issues 12. The Appointed Auditor shall prepare a submission for the ORC, before signing the audit report, in keeping with the requirements for ORC submissions that are outlined in AG ISA (Z) 700, if: - they seriously consider the validity of the going concern assumption (Ref: Para. A6); - there are inadequate disclosures about going concern; or - the circumstances outlined in paragraphs 10 and 11 above exist. Management reporting 13. If the Appointed Auditor has seriously considered the validity of the going concern assumption, the issue shall be addressed in the management letter to those charged with governance. *** Issued 03/14 Office of the Auditor-General

5 Application and other explanatory material Going concern assessments (Ref: Para. 6) A1. The Auditor-General considers that the period of assessment should be a minimum of one year from the date those charged with governance approve the financial and non-financial information, as this is consistent with the objectives of the OAG to provide as much assurance as possible on the financial and non-financial information. The Appointed Auditor may need to request that those charged with governance extend their period of assessment beyond one year from the approval date if there are circumstances that could affect the validity of the going concern assumption. A2. The Appointed Auditor should not assume that, because an entity is operating in the public sector, the government will automatically support the entity should it run into financial difficulties. When assessing the validity of the going concern assumption in relation to a public entity, the Appointed Auditor needs to ask the question: Without government or other external assistance over and above that provided to fund normal operations (including the need to invoke statutory processes to amend an entity s ability to levy or rate), and without significant curtailment of activities, will the entity be able to continue operating for at least one year (or for the foreseeable future) from the date of the approval of the financial statements? A3. From time to time public entities run into financial difficulties. Such difficulties usually mean that, without government support over and above that provided for the delivery of outputs, the entity would have to cease operating or significantly curtail its operations. A4. While it may be unlikely that the Government would allow a public entity to fail financially, it is not the Appointed Auditor s role to anticipate the Government s response to a public entity in financial trouble. A5. It is not uncommon for a public entity to receive a letter of support that removes a fundamental uncertainty over the use of the going concern assumption (for example, a letter of support from Ministers to a District Health Board in financial difficulties). In such circumstances it may be in the public interest for the audit report to draw readers attention to the existence of the letter of support even though the use of the going concern assumption is considered appropriate. Issued 03/14 Office of the Auditor-General

6 Making submissions to the Opinions Review Committee on going concern issues (Ref: Para. 12) A6. The submission to the ORC, with respect to going concern issues, should consider the following (by reference to the latest information available): - Financial statements: trends over time; whether the financial statements adequately reflect all expenses and obligations of the entity. - Public equity and working capital: adequacy and levels of equity and working capital; reasons for current levels/trends; and existence of disturbing trends. - Cash flows: ability of the entity to pay its debts as they fall due; and evidence of out of the ordinary measures taken to manage cash or other liquid assets to meet financial obligations. - Commitments: existence of any capital expenditure or other financial commitments; and the flexibility of these commitments. - Budget: existence of a budget for the next 12 months and expected position at the end of those 12 months; recognition of non cash-items in the budget (for example, depreciation); and current and past performance against budget. - External funding: capacity of the entity to raise significant levels of external funds and the reasonableness of the level of external funding as projected in the budget. - Those charged with governance: attitude of those charged with governance with respect to the financial management of the entity (proactive versus reactive); acknowledgement of the seriousness of the financial situation; action taken to redress the situation; evidence that action is being taken; time frame for rectification; and reaction to the Appointed Auditor s decision to refer the matter to the OAG. - on-financial performance information: where relevant to the going concern issue. Issued 03/14 Office of the Auditor-General

7 Appendix 1 - Going concern decision tree START Have the financial statements been prepared using the going concern basis? Is the other basis appropriate and do the financial statements include adequate disclosure? UMODIFIED OPIIO WITH A EMPHASIS OF MATTER PARAGRAPH Example in AG ISA (Z) 706 This situation w ould arise where a decision has been made to disestablish the entity and accordingly the entity has prepared its financial statements on a basis other than the going concern basis and has included adequate disclosure that the entity is not a going concern. The emphasis of matter paragraph in the audit report w ill outline the decision to disestablish the entity and w ill refer to the disclosures in the financial statements. Where the Appointed Auditor identifies material errors in the application of the other basis they should consult w ith the OAG Accounting and Auditing Policy Team. ED The Appointed Auditor shall consult with the OAG Accounting and Auditing Policy Group on the appropriate audit report that should be issued in this situation. Has sufficient and appropriate evidence been obtained which will provide reasonable assurance that the entity is a going concern? ADVERSE OPIIO Example in AG ISA (Z) 705 This situation w ould arise where a decision has been made to disestablish the entity but the financial statements have inappropriately been prepared on a going concern basis or that the disclosures in the financial statements are inadequate. The opinion paragraph w ill explain w hy there is a disagreement over the use of the going concern basis and/or the accompanying disclosures. COTIUE AT A1 AUDIT REPORT TO BE APPROVED B ORC Issued 03/14 Office of the Auditor-General

8 COTIUE FROM A1 Has all evidence that supports the preparation of the financial statements on a going concern basis that is reasonably expected to be available, been obtained? Are there inherent uncertainities over the appropriateness of the going concern assumption? The Appointed Auditor shall consult with the OAG Accounting and Auditing Policy Group on the appropriate audit report that should be issued in this situation. Has the public entity obtained a letter of support to confirm that the use of the going concern basis is appropriate? AUDIT REPORT TO BE APPROVED B ORC UMODIFIED OPIIO This situation w ould arise where the Appointed Auditor is able to obtain sufficient evidence that the use of the going concern basis is appropriate. ED Do the financial statements include adequate disclosure of the matters giving rise to the uncertainties? UMODIFIED OPIIO WITH A EMPHASIS OF MATTER PARAGRAPH Example in AG ISA (Z) 706 This situation w ould arise where the Appointed Auditor is able to obtain sufficient audit evidence to support the use of the going concern basis, although, there is a matter outside the control of management and those charged w ith governance, which is adequately disclosed in the financial statements. The emphasis of matter paragraph in the audit report w ould need to outline the reasons for the uncertainity and refer to the disclosures in the financial statements. The Appointed Auditor shall consult with the OAG Accounting and Auditing Policy Group on the appropriate audit report that should be issued in this situation. AUDIT REPORT TO BE APPROVED B ORC Issued 03/14 Office of the Auditor-General