Under ASC 205-40 (Presentation of Financial Statements — Going Concern), whose responsibility is it to evaluate, at each annual and interim reporting period, whether known or reasonably knowable conditions and events raise substantial doubt about an entity's ability to continue as a going concern within one year of the financial statement issuance date?
- Management
- The external auditor only
- The audit committee only, based on the auditor's report
- The SEC, when it reviews the filed financial statements
Correct answer: A. Management
ASC 205-40 places the going concern evaluation duty on management, requiring an assessment at each annual and interim reporting period of whether known or reasonably knowable conditions and events, considered in the aggregate, raise substantial doubt about the entity's ability to continue as a going concern within one year after the date the financial statements are issued, or available to be issued for entities that do not file with a regulator. Auditors separately perform their own going-concern evaluation under auditing standards and report on management's conclusion and disclosures, but that auditing requirement sits on top of management's ASC 205-40 duty rather than replacing it, which is why attributing the evaluation to the auditor alone is incorrect. The audit committee oversees financial reporting and the audit process but is not the party the accounting standard assigns to perform the evaluation itself. The SEC is a regulator that reviews filings after they are made public, not the party responsible for making the going concern assessment at the reporting date.
Source: FASB Accounting Standards Codification: ASC 205-40, Presentation of Financial Statements — Going Concern