What is the going concern assumption in Hong Kong audits

Going Concern Hong Kong

The going concern basis assumes a company will operate for the foreseeable future, typically for at least 12 months from the date the financial statements are authorised for issue. This premise dictates how a company prepares its financial statements. Assets and liabilities are recorded on the basis they will be realised or settled in the normal course of business, not through a forced liquidation. Directors must assess whether the going concern basis remains appropriate when approving the financial statements. If material uncertainties exist about the company's ability to continue, the directors must disclose those uncertainties in the notes to the financial statements. This concept is a core part of the audit requirement under the Companies Ordinance (Cap. 622); the auditor's report cannot be completed without evaluating the directors' going concern assessment.

Going Concern Basis Hong Kong

A company prepares its financial statements using the going concern basis unless management intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. In Hong Kong, the directors must document their assessment. This assessment must consider current profitability, access to financing, the adequacy of accounting records, and other relevant factors. The auditor reviews this assessment as part of the statutory audit.

Going Concern Audit Hong Kong

During a going concern audit in Hong Kong, the auditor evaluates whether the directors' use of the going concern basis is appropriate. The auditor considers evidence about the company's ability to meet its liabilities as they fall due. They review cash flow forecasts and assess the directors' plans to address any identified risks. This evaluation directly informs the auditor's report.

Financial Statements Going Concern

The going concern assumption is central to how accountants apply HKFRS or the SME-FRF and SME-FRS. Inventories and property, for example, are valued at recoverable amount rather than forced sale value. If the assumption is not appropriate, the company must prepare its financial statements on a different basis, such as liquidation accounting, and disclose that fact.

HKICPA Going Concern

The HKICPA provides the authoritative guidance for practising certificate holders and practice units. Auditors must follow Hong Kong Standard on Auditing 570 (Going Concern). This standard sets out the procedures for evaluating the directors' assessment and the implications for a modified opinion in the auditor's report. The auditor reports to the members through the directors' report and the auditor's report.