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Going, Going, Gone
Transcript of Going, Going, Gone
Lindsey Carter First Class Telecommunications, Inc. First Class Telecommunications Inc. (FTC) is a leading regional wireless telecommunications service provider in the US.
Approximately 3 million wireless customers in small cities and rural areas in seven states.
Two operating segments:
Retail - sale of cell phones
Services - providing wireless service A "going concern" is the assumption that a company will continue to operate in the foreseeable future. “The auditor has a responsibility to evaluate whether there is substantial doubt about a company's ability to continue as a going concern during the ensuing fiscal year.” - Section 10A(a)(3) of the Securities
Exchange Act of 1934 "The current definition of 'going concern' means you're pretty much over the edge of the cliff - it's almost too late to do anything.” - Anne Simpson
Head of Corporate Governance at the California Public Employees' Retirement System
(the biggest U.S. public pension fund) What is a "going concern"? This standard provides guidance when evaluating whether there is substantial doubt about the entity's ability to continue as a going concern.
Continuation of an entity as a going concern is assumed in the absence of significant information to prove otherwise.
Information that contradicts the going concern assumption relates to the entity's inability to continue to meet its obligations as they become due without substantial disposition of assets.
The auditor has a responsibility to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited.
The auditor is not responsible for predicting future conditions or events. AU 341 The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern AU 508 Reports on Audited Financial Statements The Professional Standards Question #1 Review the information in Appendixes A through C. What events or conditions may cause substantial doubt about the entity's ability to continue as going concern? For example: recurring operating losses, working capital deficiencies, negative cash flows from operating activities, & adverse key financial ratios Negative Trends Recurring Operating Losses Current Ratio Debt Ratio An agreement has not been reached with the supplier and credit negotiations.
The effects of the current recession and downturn in the economy.
Substantial debt obligations and restrictive covenants
An event that may trigger the material adverse change clause.
Downturn in the joint venture operations during 2011. Other indications of financial
difficulties include: Question #2 Assuming the events or conditions identified in Question 1 cause the audit team to have substantial doubt about FCT’s ability to continue as a going concern, what are the next steps the audit team needs to perform? Obtain information about management's plans that are intended to mitigate the effect of such conditions or events.
Assess the likelihood that such plans can be effectively implemented. Going, Going,
Gone. Consider the adequacy of disclosure about the company's possible inability to continue as a going concern for a reasonable period of time.
Include an explanatory paragraph (following the opinion paragraph) in the audit report to reflect the auditor's conclusion. If the auditor believes
there is substantial doubt,
the auditor should: If the auditor concludes
there is substantial doubt,
the auditor should: Question #3 Upon completing the steps in (2) above, the engagement team obtained additional information from management included in Appendix D.
Review the information and determine what type of audit evidence may the audit team consider, or what type of audit procedures it may perform, to confirm or dispel whether there is substantial doubt about FCT’s ability to continue as going concern? Analytical procedures
Review of subsequent events
Review of compliance with the terms of debt and loan agreements
Reading of minutes of meetings of stockholders, board of directors, and important committees of the board
Inquiry of an entity's legal counsel about litigation, claims, and assessments
Confirmation with related and third parties of the details of arrangements to provide or maintain financial support Procedures that identify
conditions & events for determining a firm's ability to continue as a going concern: Question #4 Assume that the audit team concluded that as of December 31, 2011, there Is not substantial doubt about FCT’s ability to continue as going concern for a reasonable period.
What are the audit team’s responsibilities regarding the Company’s ability to continue as a going concern during its review of the Company’s interim financial information for the three months ended March 31, 2012? Questions? Applies to auditors' reports issued in connection with audits of historical financial statements that are intended to present financial position, results of operations, and cash flows in conformity with generally accepted accounting principles.
This standard distinguishes the types of reports, describes the circumstances in which each is appropriate, and provides example reports.
If there is substantial doubt about the entity's ability to continue as a going concern, the auditor may be required to add an explanatory paragraph to the standard report AU 722 Interim Financial Information The purpose of this section is to establish standards and provide guidance on the nature, timing, and extent of the procedures to be performed by an independent accountant when conducting a review of interim financial information.
Interim financial information means financial information or statements covering a period less than a full year or for a 12-month period ending on a date other than the entity's fiscal year end.
A review of interim financial information is not designed to identify conditions or events that may indicate substantial doubt about an entity’s ability to continue as a going concern. AU 341: AU 341: AU 722: The Audit Team's Responsibilities: If the audit team discovers any conditions or events that may indicative of FTC's inability to continue as a going concern, they would:
Inquire of management as to its plans for dealing with the adverse effects of the conditions and events.
Consider the adequacy of the disclosure about such matters in the interim financial information. AU 722: Modification of the
Accountant's Review Report: The audit team is not required to modify the interim review report. They may add an explanatory paragraph to emphasize any conditions or events that were discovered during the interim review, that may indicative of FTC's possible inability to continue as a going concern. AU 341