Prompt and Response: The Effect of Auditors’ Assessment of Management’s Going Concern Evaluation on Auditors’ Going Concern Reporting Judgments
45 Pages Posted: 1 Jun 2022 Last revised: 21 Nov 2022
Date Written: November 18, 2022
FASB standard ASC 205-40 requires management to evaluate the company’s viability as a going concern (GC) every quarter. Auditors’ required assessment of management’s quarterly evaluation may affect their year-end GC judgments. Specifically, communicating informally to management or documenting in the workpapers their preliminary GC judgment may increase auditors’ willingness to issue a GC opinion at year-end. In an experiment using a task with GC risk, experienced auditors make a preliminary judgment after management’s evaluation, and then make a year-end GC judgment. We manipulate whether auditors communicate informally to client management (absent/present) and document in the workpapers (absent/present) their preliminary GC judgment. Findings indicate that each conveyance increases the year-end likelihood of the auditor issuing a GC opinion in different, theory-consistent ways. Our results show the potential effects of auditors’ formulating and conveying responses to management’s evaluation on their GC judgments and can guide audit firms and regulators on best practices.
Keywords: going concern, auditor reporting, standard-setting, FASB ASC 205-40
JEL Classification: M40, M42
Suggested Citation: Suggested Citation