The unprecedented squeeze on credit raises the stakes for both management and auditors in determining whether an entity can continue as a going concern. The assessment for financial reporting purposes is tougher than ever, yet at the same time more important than ever.

To the rescue, the International Auditing and Assurance Standards Board has published a practice alert to address the challenges. The alert highlights excerpts of international auditing standards that tell the auditor what to consider in evaluating management’s going concern assumptions. The alert focuses on liquidity and credit risk that may create new uncertainty for entities, or complicate uncertainties that already exist.

IAASB, an arm of the International Federation of Accountants, focuses its guidance on international auditing standards, but they aren’t significantly different from U.S. standards, said James Sylph, executive director for professional standards at the IAASB. “The basic underlying work that an auditor would do around going concern is quite similar in the U.S. environment and the international environment,” he said. “U.S. auditors would benefit from reading it.”

The Public Company Accounting Oversight Board published an audit alert in December that addressed the going concern question along with a host of other financial reporting and auditing considerations that command a fresh look during persistent market uncertainty.

The IAASB alert says the going concern assumption is a fundamental concept in the preparation of financial statements, and it is management’s job to make an assessment of whether an entity can continue as a going concern. The auditor, though, has to consider whether management’s assessment is appropriate as a part of every audit engagement, the alert says.

Following the applicable financial reporting requirements, management is responsible for determining the extent of disclosure necessary to address the going concern question, the alert says. Even further, though, auditors should think carefully about whether to add an “emphasis of matter” paragraph to the audit opinion, or an extra paragraph in the audit opinion to call attention to the going concern assessment, according to the alert.

The intent, said Sylph, is to remind auditors that the economic environment commands a fresh look at assumptions that were safe in prior years. “In the past, an audit client may have had bank loans that come up for renewal every year and they get renewed,” he said. “Management never really had to worry about getting bank loans renewed, but they may have to worry about that today. This highlights that auditors need to pause a moment and not just repeat what they did last year.”

Sylph acknowledged the disclosure is sensitive if companies must profess they have a going concern question because it makes investors more likely to pull back. “This is a very real area of contention between management and auditors in all audits,” he said. “It’s very much alive around the world right now.”