SAS 126 arrives: an entity's ability to continue as a going concern.

• Author: Davis, A. Christine
• Position: Regulatoryupdate

When reading an entity's audited financial statements, users can draw assurance that the entity has the ability to continue as a going concern--meaning it can stay in business for a "reasonable period of time" unless there is significant, information LO the contrary. Such information includes the company's inability to pay liabilities as they become due without substantial sale of assets outside ordinary course of business, restructuring of debt or "externally forced revisions" of operations.

While a company's management has always been responsible for (lie preparation and reporting of its financial statements, it's the external auditor's responsibility to evaluate and report on whether it's questionable that the company can stay in business. In other words, the going concern assumption is in the purview of generally accepted auditing standards, but not generally accepted accounting principles.

FASB, however, has included the going concern assumption as a project in its Current. 'Technical Plan, with the objective of providing accounting guidance to entities about whether and how an entity should assess its ability to continue as a going concern and the nature and extent of any related disclosure requirements. FASB plans to issue the going concern Exposure Draft in the fourth quarter of 2012. liar no evaluating the applicability of the going concern assumption to a company remains with its external auditor.

Issuance of SAS 126

In July 2012, the AICPAs Auditing Standards Board (ASB) issued Statement on Auditing Standards No. /26 (SAS 126), The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern. SAS 126 supersedes SAS 59 and addresses the auditor's responsibilities with respect to evaluating whether there is substantial doubt that the company can continue as a going concern for a "reasonable period of time," which is defined as "a period of time not to exceed one war beyond the date of the financial statements being audited."

SAS 126 resulted from the ASB's Clarity Project, We main outcome of which is the implementation of a new "clarity format" intended to make the auditing. standards "clear, consistent and easy to understand."

Specifically; each SAS issued under the Clarity Project convention (beginning with SAS 122) will be uniformly presented with the following main sections: Introduction, Objective, Definitions, Requirements and Application and Other Explanatory Material.

SAS 126 does not change or expand SAS 59 significantly. The notable changes relate to the requirement to obtain certain written representations from management., and the references to the auditor's documentation and communication with those charged with the entity's governance as described below.

SAS 126 Provisions

Under SAS 126, the auditor is responsible for evaluating whether there is substantial doubt about the entity's ability to continue as a going concern for a "reasonable period of time." The evaluation is...