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

See all articles by Lindsay M. Andiola

Lindsay M. Andiola

Virginia Commonwealth University (VCU) - Department of Accounting

Tamara A. Lambert

Lehigh University

Marietta Peytcheva

Lehigh University

Date Written: November 18, 2022

Abstract

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

Andiola, Lindsay M. and Lambert, Tamara A. and Peytcheva, Marietta, Prompt and Response: The Effect of Auditors’ Assessment of Management’s Going Concern Evaluation on Auditors’ Going Concern Reporting Judgments (November 18, 2022). Available at SSRN: https://ssrn.com/abstract=4120500 or http://dx.doi.org/10.2139/ssrn.4120500

Lindsay M. Andiola

Virginia Commonwealth University (VCU) - Department of Accounting ( email )

Richmond, VA 23284
United States

Tamara A. Lambert (Contact Author)

Lehigh University ( email )

621 Taylor Street
Bethlehem, PA 18015
United States

Marietta Peytcheva

Lehigh University ( email )

621 Taylor Street
Bethlehem, PA 18015
United States
610 758 2818 (Phone)
610 758 5992 (Fax)

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