The Effect of Auditors’ Responses to Management’s Going Concern Evaluation on Auditors’ Going Concern Reporting Judgments
45 Pages Posted: 1 Jun 2022 Last revised: 12 Jul 2023
Date Written: July 10, 2023
Abstract
The public and policymakers are interested in ways to reduce auditors’ reluctance to issue going concern opinions on financially distressed companies. In an experiment using a task with going concern risk, developed from a real-life bankruptcy where a going concern opinion was not issued by the auditor, experienced auditors make a preliminary going concern judgment after examining management’s quarterly going concern evaluation. Auditors then make a year-end going concern judgment. Findings indicate that auditors’ communicating informally to client management, and/or documenting in the workpapers their preliminary going concern judgment, increases the year-end likelihood of their issuing a going concern opinion in different, theory-consistent ways. Our results show the potential effects of auditors’ conveying responses to management’s evaluation on their likelihood of issuing a going concern opinion and can guide audit firms and policymakers on best practices.
Keywords: going concern, auditor reporting, standard-setting, FASB ASC 205-40
JEL Classification: M40, M42
Suggested Citation: Suggested Citation