ACCA Advanced Audit and Assurance (AAA) Practice Exam

How should management communicate if the going concern basis was not used?

1. By providing a summary of company performance

2. By including detailed financial analyses

3. By disclosing and explaining the reason in the financial statements

4. By informing stakeholders through press releases

The correct answer is: By disclosing and explaining the reason in the financial statements

When management decides not to use the going concern basis in the preparation of financial statements, it is crucial to provide transparency about this significant change in accounting. The correct approach is to disclose and explain the reason for not using the going concern basis directly within the financial statements. This allows users of the financial statements—such as investors, creditors, and regulators—to understand the implications of this decision on the financial position and performance of the company. By providing a clear disclosure, management fulfills its obligation to communicate material information that could affect stakeholders’ decision-making processes. This disclosure typically includes details about the uncertainties that led to the conclusion that the company may not continue as a going concern, thereby promoting accountability and trust among users of the financial statements. Other approaches, such as summarizing company performance, providing detailed financial analyses, or disseminating information through press releases, may serve different purposes but do not fulfill the necessary requirement for disclosure within the financial statements. These methods might not provide the explicit and required explanation needed to clarify the implications of not operating under the going concern principle, which is central to financial reporting standards.