Specific Independent Auditing Standard No.17 - Going Concern

Specific Independent Auditing Standard No.17 - Going Concern Chapter 1 General provisions Article 1 This standard is prepared in accordance with the General Independent Auditing Standard to establish standard and to define the working requirements for Certified Public Accountants("CPAs") when considering the appropriateness of the going concern assumption in the audit of financial statements and to ensure a high standard of professional work. Article 2 The term "going concern assumption" in this standard refers to an assumption made by an entity in the preparation of the financial statements that its operating activities will continue in the foreseeable future and that there is no intention or necessity to liquidate or curtail significantly the scale of operation.The term "foreseeable future" in this standard normally refers to an operating period within one year or an operating cycle of over one year after the balance sheet date. Article 3 Unless otherwise specified ,CPAs should refer to this standard in performing audit work other than the audit of financial statements. Chapter 2 General principles Article 4 The CPAs audit report should provide reasonable assurance of the credibility of the audited financial statements to the users of the financial statements.However,this should not be regarded as a guarantee of the entity’s ability to continue as a going concern. Article 5 When preparing the audit plan,performing the audit procedures and evaluating the audit results,the CPAs should consider the appropriateness of the going concern assumption underlying the preparation of the financial statements by the entity. Article 6 The CPA should maintain professional scepticism,apply professional judgement reasonably and adquately consider the possibility that the going concerm assumption will no longer be appropriate in the foreseeable future. Chapter 3 Paying attention to indications that the going concern assumption is no longer appropriate Article 7 The CPA should pay adequate attention to various indications in the entity’s financial and operating aspects etc that the going concern assumption is no longer appropriate. Article 8 The CPA should pay adequate attention when one of the following financial and operating indications appears in the entity: (1)excess of liabilities over assets: (2)negative working capital; (3)inability to repay matured debts; (4)inability to repay borrowings which are approaching maturity and without realistic prospects of renewal; (5)excessive reliance on short-time borrowings for financing: (6)deterioration of the financial position reflected by key financial indicators; (7)substantial amounts of accumulated operating losses; (8)existence of substantial overdue unpaid dividends; (9)inability to continue complying with relevant terms of loan agreements; (10)existence many inferior assets which have not been disposed of for a long period of time; (11)inability of any principal subsidiary, which has not yet been disposed of,to continue as a going concern; (12)inability to obtain normal commercial credit from suppliers; (13)difficulty in obtaining financing for essential new product development of essential investment;and (14)other indications reflecting deterioration of the financial position. Article 9 The CPA should pay adequate attention when one of following operating indications appears in the entity: (1)loss of key management personnel without replacement; (2)main products not complying with the State’s industrial policies; (3)loss of a major market,franchise or principal supplier; (4)shortage of human resources of important raw materials; (5)failure to achieve the expected operating objectives;and (6)other indications reflecting deterioration of operating conditions. Article 10 The CPA should pay adequate attention when one of following other indications appears in the entity: (1)serious violation of the relevant laws,regulations or policies; (2)existence of substantial contingent losses; (3)suspension of work and production due to unusual reasons; (4)changes in the relevant laws regulations or State policies which would have a material adverse impact; (5)no intention to continue operation as expiry of the operating period is approaching; (6)failure of the investors to fulfill the obligations required in agreements,contracts and articles of association which would have a material adverse impact; (7)serious losses caused by uncontrollable factors such as natural disasters and wars etc;and (8)other indications reflecting that the going concern assumption is no longer appropriate. Article 11 If the entity’s management plans to adopt the following measures in respect of the existence of indications of inappropriateness of the going concern assumption,the CPA should pay attention to whether these measures can mitigate the adverse impact on the going concern assumption; (1)disposal of assets: (2)leaseback of assets after disposal; (3)obtaining secured loans; (4)implementation of asset restructing; (5)obtaining new investments; (6)reducing or delaying expenditures; (7)obtaining substitutes for important raw materials; (8)developing new markets;and (9)other measures. Chapter 4 Consideration in performing the audit procedures Article 12 When the CPA doubts the appropriateness of the going concern assumption,he should perform necessary additional audit procedures and abtain sufficient appropriate audit evidence to judge the appropriateness of the going concern assumption. Article 13 The additional audit procedures performed by the CPA include; (1)analysis and discussion with the management about the latest available financial statements; (2)analysis and discussion with the management about cash flow forecasts,profit forecasts and other forcasts; (3)review of subsequent events, commitments and contingencies which affect the ability to continue as a going concern; (4)review of compliance with loan agreements etc; (5)reading of minutes of the shareholders’meetings,of the board of directors’meetings and of other important meetings which concern financing difficulties; (6)enquiring the entity’s legal advisors regarding the relevant litigation and claims;and (7)review of whether there are improvement measures and financial support plans,and assessment of their legality and enforceability. Article 14 In the course of the audit. the CPA should obtain representations from the entity’s management regarding the going concern assumption.If the going concern assumption is inappropriate,the CPA should request the entity’s management to indicate the intended improvement measures in the representations. Chapter 5 Considerations in preparing the audit report Article 15 After performing the necessary audit procedures, the CPA should determine whether the doubts over the appropriateness of the entity’s going concern assumption have been removed and should thereby determine the impact on the audit opinion. Article 16 If there are situations in the entity which have a significant impact on its ability to continue as a going concern , but the management plans to adopt relevant improvement measures that will remove the CPA’s doubts, the CPA should consider whether it is necessary to require the entity to disclose the improvement measures in the finanical statements.If the entity refused to disclosed the measures or the disclosure is inadequate, the CPA should consider the impact on the audit report. Article 17 If there are situations in the entity which have a significant impact on its ability to continue as a going concern and the management has not planned any relevant improvement measures, or there are improvement measures but the doubts are still not removed, the CPA should request the entity to disclose the following matters in its financial statements: (1)principal conditions that affect the ability to continue as a going concern in the foreseeable future; (2)significant uncertainty about the ability to continue as a going concern and possible inability of the entity to realise its assets and discharge its liabilities in the normal course of business; and (3)no adjustments which should have been made to the amounts or classifications of assets and liabilities if the entity is unable to continue as a going concern. If the entity has made adequate disclosure in the financial statements, the CPA should add an explanatory paragraph after the opinion paragraph in the audit report to explain the doubts over the inappropriateness of the going concern assumption. If the entity does not make adequate disclosure in the financial statements, the CPA should express a qualified opinion or an adverse opinion. Article 18 If the CPA concludes that the entity is unable to continue as a going concern in the foreseeable future,and that it would significantly mislead the users of the financial statements if the entity applies the going concern assumption in preparing these financial statements, the CPA should express a qualified opinion or an adverse opinion. Article 19 If the CPA cannot obtain the necessary audit evidence regarding the appropriateness of the going concern assumption,he may express a disclaimer of opinion. Chapter 6 Supplementary provisions Article 20 The Chinese institute of Certified Public Accountants is responsible for the interpretation of this standard. Article 21 This standard takes effect from 1 July 1999.