1. Learning Objectives LO1 Understand the traditional approach to dealing with accounting uncertainty and going concern. LO2 Describe the main concepts of CAS 540 and its relevance for financial reporting. LO3 Demonstrate an ability to apply CAS 540 in a qualitative way. LO4 Explain the problems with existing standards. 1

2. Traditional Approach to Dealing with Accounting Uncertainty A good example of an accounting uncertainty is an accounting contingency:  A contingency is... an existing condition, or situation, involving uncertainty as to possible gain (“gain contingency”) or loss (“loss contingency”) to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. The problem is that it is impossible to obtain audit “evidence” about the future. LO1 2

3. Traditional Approach to Dealing with Accounting Uncertainty When the audit has been performed in accordance with generally accepted auditing standards, and the auditor has done all things possible in the circumstances, no alteration of these standard paragraphs is necessary as long as the uncertainty has been properly disclosed. LO1 3

4. Traditional Approach to Dealing with Accounting Uncertainty  Under Canadian audit standard CAS 706, the auditor may decide to place a “red flag” paragraph drawing attention to the uncertainty in the report.  If there is material uncertainty about the going-concern assumption CAS 706 requires that an emphasis of matter paragraph be added even when there is proper disclosure in the financial statements. LO1 4

5. Traditional Approach to Dealing with Accounting Uncertainty Uncertainty situations may cause audit reports to be qualified for departures from GAAP, if (1) management’s disclosure of the uncertainty is inadequate, (2) management uses inappropriate accounting principles to account for the uncertainty, or (3) management makes unreasonable accounting estimates in connection with the effects of the uncertainty. The audit report also may be qualified because of a scope limitation regarding available evidence about an uncertainty. LO1 5

6. Emphasis of a Matter Paragraph Auditors may opt to add additional information to the auditor’s report.  Emphasis of matter (EOM) paragraphs refer to information presented in the financial statements.  Other matter (OM) paragraphs can refer to other information included with the financial statements, such as MD&A or comparative information from other periods. LO1 6

7. Going Concern GAAP assumes continued existence of the enterprise for at least one year.  Auditors must evaluate matters of financial analysis, business strategy, and financial forecasting.  Evidence of financial difficulties or mitigating factors should be observed.  Handle going-concern issues in the same manner as contingencies. LO1 7

8. Going-Concern Reports The CICA research study, “The Going-Concern Assumption” recommends five types of reports:  Standard: Going-concern issues are properly disclosed.  Standard with additional explanatory paragraph: Going-concern substantial issues are disclosed.  Adverse: There is a failure to disclose substantial doubts, and GAAP no longer applies.  Qualification: Disclosure of going-concern issues is inadequate.  Qualification: The auditor encounters a scope limitation with respect to going-concern issues. LO1 8