In February 2017, the AICPA issued SAS No. 132, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern. SAS No. 132 will supersede SAS No. 126 and become the source of auditing guidance found in AU-C section 570 when it becomes effective for audits of financial statements for periods ending on or after December 15, 2017. SAS No. 132 applies to all audits of a complete set of financial statements, regardless of whether the financial statements are prepared in accordance with a general purpose framework (e.g., the FASB or GASB standards) or a special purpose framework (e.g., the cash basis).
The auditor’s primary task in SAS No. 132 involves the auditor forming conclusions regarding:
- management’s use of the going concern basis of accounting;
- whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern and whether they have been properly disclosed by management; and
- the audit reporting that flows from those first two conclusions.
A key reason for the development of SAS No. 132 was that the AICPA needed to update the auditing literature for the accounting guidance found in FASB ASU No. 2014-15, which became effective at the end of 2016. To apply SAS No. 132 to an entity following the FASB or GASB standards, it is important to understand the accounting requirements found in those standards.
Currently, both the FASB and GASB standards require management to evaluate the entity’s ability to continue as a going concern for a period of time beyond the date of the financial statements:
- Under FASB ASU No. 2014-15, management should evaluate whether there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or are available to be issued.
- Under GASB No. 56, management has a responsibility to evaluate whether there is substantial doubt about a government’s ability to continue as a going concern for 12 months beyond the date of the financial statements. However, if there is information that is currently known to the government that may raise substantial doubt shortly thereafter (e.g., within an additional three months), such information should also be considered.
In addition to evaluating the entity’s ability to continue as a going concern for a period of time beyond the date of the financial statements, both the FASB and GASB standards require management to consider the results of that evaluation on the entity’s financial reporting:
- Under FASB ASU No. 2014-15, the continuation of an entity as a going concern is presumed as the basis for financial reporting and this presumption is referred to as the going concern basis of accounting. (If an entity’s liquidation becomes imminent, financial statements are prepared under the liquidation basis of accounting by applying FASB ASC 205-30.) Even if an entity’s liquidation is not imminent, there may be conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, the financial statements will continue to be prepared under the going concern basis of accounting, but the guidance in FASB ASU No. 2014-15 will be followed to determine the necessary level of additional disclosure.
- Under GASB No. 56, certain disclosures and discussions in the MD&A are required when it is determined that there is a substantial doubt about a government’s ability to continue as a going concern.
SAS No. 132 contains approximately 30 requirements. However, the number of requirements that are applicable to a given audit is dependent upon the circumstances encountered during the audit (i.e., more requirements are applicable if conditions and events are identified that raise substantial doubt about an entity’s ability to continue as a going concern).
Interested in learning more? Attend one of these webinars on How to Do a GAAS Audit.
Charlie Blanton, CPA, is Senior Director of Governmental and Nonprofit Content for Surgent Professional Education, where he authors Surgent’s government and not-for-profit CPE courses and is a frequent webinar instructor. Charlie has over 25 years of experience in auditing and industry having worked at KPMG, the Texas Society of CPAs, Taylor Publishing, Texas Wesleyan University, and the AICPA.