The analysis of influencing factors on the going concern audit opinion a study in manufacturing firms in Indonesia

Geiger et al. (2014) examine only type II going concern misclassification and suggest that future research should also examine type I misclassification around the GFC. Therefore, this study attempts to validate the type II misclassification documented by Geiger et al. (2014) and extend the examination to type I misclassification. Furthermore, this study examines a sample of publicly listed companies in the U.S., which was the origin of the GFC and the effects of the crisis were more acute there than in other countries (Pinnuck, 2012). Xu et al. (2013) use a sample of Australian listed companies to investigate auditor going concern modifications in the pre-GFC and GFC periods but do not consider the post-GFC period. Although Xu et al. (2013) find that the likelihood of issuing going concern audit reports is higher during the GFC compared with the pre-GFC period, it remains unclear whether auditors have sustained greater accuracy in their going concern reporting behavior.

Once an auditor examines a company’s financial statements to see if the operating conditions of the entity are suitable for the long-term continuity of the business, they will issue a certificate accordingly. Some of the conditions that create substantial doubts for the principle of going concern are defaults on loans, lawsuits, company plans to declare bankruptcy, continued losses year over year, etc. It may be necessary to obtain additional information about such conditions and events, as well as the appropriate evidential matter to support information that mitigates the auditor’s doubt. Leverage can be an indicator to determine the company’s ability to meet both short- and long-term financial obligations.

Free Financial Statements Cheat Sheet

Xu et al., 2013, Geiger et al., 2014 use traditional method to interpret the main effects and moderating effects from the coefficients of normal terms and interaction terms and the Big 4 and non-Big 4 subsamples. However, the interpretation of interaction terms in non-linear models, including a logit model, is different from the straightforward interpretation of linear models (Ai going concern and Norton, 2003, Greene, 2010, Karaca-Mandic et al., 2012, Norton et al., 2004). The more refined methodology shows different findings compared with those documented by Xu et al., 2013, Geiger et al., 2014. If management does have a plan to sell assets, seek additional financing, start selling a new gizmo, or raise money with new stock issuances, you’ll need to evaluate it.

The going concern assumption is essential in establishing the value of an entity’s assets and liabilities. The length of the forward-looking period matters because financial statements lose their relevance when updated audited financial statements become available. The Exhibit compares the various forward-looking periods under the different standards for evaluating continued existence (paraphrasing the actual standards that need to be consulted in making the determination).

Free Accounting Courses

Had the auditors done so, the trustee alleged, the acquisition would never have gone forward. If an auditor issues a negative going concern opinion in the annual report, investors may have second thoughts about holding the stock of the company. A business valuation may be performed on the business in order to determine what it is actually worth. Continuation of an entity as a going concern is presumed as the basis for financial reporting unless and until the entity’s liquidation becomes imminent.

An analyst values the business after looking at the recent trend of the business and the company’s potential to earn profits. A going concern will be valued according to operational efficiency, market share, the ability to influence the market, technology advantages, and so on. It may be valued using the discounted cash flow (DCF) method, with the assumption of future profitability.

Auditor litigation and modified reporting on bankrupt clients

When an auditor issues a going concern qualification, the way their opinion is disclosed depends on the structure of the business. It’s given when the auditor has doubts about the company and the assumption that it is a going concern. It is possible for a company to mitigate an auditor’s view of its going concern status by having a third party guarantee the debts of the business or agree to provide additional funds as needed.

If the management plan is likely to be effective to execute, the auditors should adequately disclose the nature, effects of conditions and events that originally led them to put doubts about continuity of a business entity. In this case, they will express unqualified opinion with modified going concern, which means that the auditors raise doubts about the entity’s ability to survive. Jensen and Meckling (1976) stated that the agency theory deals with incongruence between the interests of principals and their agents.

If the auditor concludes that substantial doubt does not exist, he should consider the need for disclosure. Liquidity ratio represents the ability of companies to meet their short-term financial obligations with their current asset. Companies with high liquidity have a good financial condition and are able to ensure payment on short-term debts so that stakeholders are convinced with their continuity. By contrast, according to Simamora and Hendarjatno (2019), a smaller liquidity indicates that the companies have financial difficulties to pay their short-term debts, and this should be highly regarded by the auditor in issuing https://www.bookstime.com/ audit opinion on their financial reports. The audit report with a modified going concern is an indication that from the auditor’s assessment, there is a risk that the company will not survive in its business. The Public Accountant Professional Standards (SPAP), section 341 (Ikatan Akuntan Indonesia, 2001) states that if auditors are not convinced with the ability of a business entity to maintain its survival in the long run, they are obliged to evaluate the management plan.

• This influences which products we write about and where and how the product appears on a page.
• Once a business goes bankrupt or otherwise liquidates, it is no longer considered a going concern.
• The auditors moved for summary judgment after discovery, arguing that the acquirers were fully aware of the shipping entity’s dire financial condition and a going concern disclosure would not have told them anything they did not already know.
• They may require significant revision – e.g. for forecast sales, gross margins and changes in working capital – to be able to support management’s assessment in the unpredictable environment.
• This will include a business valuation to attempt to value the company as a going concern and to value the assets at liquidation value.

These results are robust to controlling for the potential endogeneity of CoCo issuance and for asset risk-shifting incentives. Importantly, these regulatory capital and discretionary triggers in the Basel standards differ from those envisioned by many of the original proposals for CoCos. Flannery (2005) recommended that CoCos be triggered when the bank’s stock price (or its market value of equity) declined below a pre-specified threshold. Several other academic studies, including Bulow and Klemperer, 2015, Calomiris and Herring, 2013, McDonald, 2013, and Pennacchi et al. (2014) have recommended various types of CoCos with market price triggers.

Related Publications

Conditions that lead to substantial doubt about a going concern include negative trends in operating results, continuous losses from one period to the next, loan defaults, lawsuits against a company, and denial of credit by suppliers. First, this study investigates how auditor reporting practices responded to the GFC, the most significant economic event of financial instability in recent times. Although prior studies have investigated whether auditors change their reporting behavior in response to Enron crises or large accounting scandals, the GFC was unprecedented and, as yet, not thoroughly researched. Fargher and Jiang (2008) highlight the need for future studies to consider audit reporting responses that are not primarily related to the Sarbanes-Oxley Act (2002), but are more directly related to a rational adjustment of audit reporting in response to changes in specific economic factors.