A client is experiencing significant recurring operating losses and negative cash flows from operations, raising substantial doubt about its ability to continue as a going concern. Management has developed a plan to mitigate these conditions, which includes selling a non-core business segment. Which of the following audit procedures would be most appropriate for evaluating the feasibility of management's plan?
- AReviewing market analyses and comparable transactions to assess the likelihood and timing of the sale.
- BConfirming the existence of the non-core business segment's assets with third-party custodians.
- CObtaining management's written representations confirming their intent to sell the segment.
- DPerforming analytical procedures on historical trends of the non-core business segment's profitability.
Show answer & explanationAnswer & explanation
Correct answer: A. Reviewing market analyses and comparable transactions to assess the likelihood and timing of the sale.
To evaluate the feasibility of selling a non-core business segment as a going concern mitigation plan, the auditor needs objective, external evidence about the market for such a sale. Reviewing market analyses and comparable transactions provides insight into the realistic sale price, potential buyers, and the timeline, directly assessing the plan's viability.
Why the other options are wrong
- B. Confirming asset existence addresses the existence assertion for those assets, but not the feasibility of selling the business segment as a going concern mitigation.
- C. Written representations provide management's intent but do not provide objective evidence about the feasibility or likelihood of the sale.
- D. Analyzing historical profitability of the segment is useful for understanding its value but doesn't directly assess the feasibility or timing of its sale to a third party.
Auditing Going Concern Mitigation Plans
When substantial doubt about a client's ability to continue as a going concern exists, the auditor must evaluate management's plans to mitigate these conditions. This involves assessing the feasibility and effectiveness of those plans, including their likelihood of success and timely implementation.
- Management's plans often include asset disposals, debt restructuring, cost reductions, or capital raising.
- Auditors need to obtain sufficient appropriate evidence to corroborate the feasibility of each significant element of the plan.
- Evidence should be objective and, where possible, external (e.g., loan agreements, market studies, contracts).
Memory trick: To TRUST the PLAN, auditors need MARKET EVIDENCE, not just words.