ACCA Advanced Audit and Assurance (AAA) Practice Exam

What is the primary assumption of the going concern basis of accounting?

1. The entity will close its operations in the near future

2. The entity will continue in business for the foreseeable future

3. The entity will cease to exist within the next year

4. The entity will only operate at a loss

The correct answer is: The entity will continue in business for the foreseeable future

The primary assumption of the going concern basis of accounting is that the entity will continue in business for the foreseeable future. This means that when preparing financial statements, accountants assume that the business will not be forced to cease operations or liquidate its assets in the near term. This assumption underpins the preparation of financial statements by allowing for the deferral of certain expenses and revenues, reflecting a more stable view of the entity's financial health and performance. The rationale behind this assumption is crucial for stakeholders, including investors, creditors, and management, as it provides a basis for assessing the potential for future cash flows and the longevity of the business. If an entity were not considered to be a going concern, it would require a different financial reporting approach, focusing more on liquidation values rather than on continued operations. In contrast, the other options suggest scenarios where the business is ceasing operations or struggling financially, contradicting the essence of the going concern principle. Therefore, understanding this key assumption is essential for interpreting financial reports and evaluating an entity's viability in the long term.