The concept of going concern is an accounting concept that assumes that each business entity or the company is a going concern. By going concern we mean that the company is going to keep its business running and is able to do so. The concept of going concern is used by the accounting professionals while preparing for the financial statements of the company. The concept of going concern is important because if the company is intended to do business in future it has to follow Generally Accepted Accounting Principle. The auditor of the company decides at the date of the issuance of the financial statements that whether a company is of going concern or not.
For example a company dealing in oil and gas was shut down in Nigeria because the company had no going concern in terms of business in Nigeria as it was shut down by the Nigerian court. On the other hand a company has a poor cash flow and it is difficult to run the daily operations however the government of the country helps the company to get out of its financial crises hence the company is of going concern in that country.
How auditor decides that a company is of going concern or not
There are a number of parameters through which the auditors decide that the company is of going concern or not. Some of these parameters can be explained as under:-
- The auditors look at the trends and if they find that there are negative trends and the series of losses they will declare the company as no going concern
- If the company has loan default it cannot follow the concept of going concern
- The company is experiencing denial of trade credit from the supplier is unable to continue its business
- Uneconomical commitment made by the company that spans over a long term period.
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