The Going Concern Assumption Accounting Essay

Dynamic economic environment has causes the addition of bankruptcy filing of companies. Similar to the weakness of the entity is the inability of the entity to traveling concern. Normally, fiscal statements are prepared under premise that the entity will non neutralize or scale down the operation size. ISA 570 stated that when an entity receives a traveling concern sentiment from the hearer, the entity is viewed as go oning concern for the foreseeable hereafter. ISA 570 has provided guidelines for hearers in Malaysia to publish sentiment on the traveling concern premise. The entity will be able to recognize its assets and dispatch its liability in the normal class of concern if the entity is said to be traveling concern. In the ISA 570, if there is features of the listed indexs exist, hearers should presume that the entity will non be traveling concern. Some of the indexs are repeating losingss of the operation, internal affairs such as loss of cardinal forces, external affairs such as pending judicial proceeding, inability to pay loan and important alterations in the market which affects fight of the company.

The traveling concern rating will be based on the information obtained from the audit processs which the hearer usually performs trial on the audit averments of the company ( Auditing Standard No.13 ) . Auditor will necessitate to measure the client ‘s ability to traveling concern and supply a traveling concern sentiment when they have doubt on the client ‘s future viability ( Stanley, Todd De Zoort & A ; Taylor, 2009 ) . Separate processs will necessitate to be done if hearers believe that there is significant uncertainty on the ability of traveling concern of the company.

Harmonizing to ISA 570, the rating of traveling concern is a undertaking that involves professional judgements from the hearers. Hearers have the duty to inform the stakeholders when there is a uncertainty of rationality of the traveling concern of the company exists. They are responsible to obtain sufficient audit grounds about the rightness on the usage of traveling concern premise in the readying and presentation of the fiscal statement. However this criterion is rather general and deficiencies of proficient counsel and it gives rise to different finding of facts among the hearers when covering with client with traveling concern job ( Atef, Suhaimi & A ; Zakimi, 2002 ) .

Traveling concern premise will hold effects on the fiscal statements and the audit study ( IAASB, 2009 ) . Harmonizing to the IAASB ( 2009 ) , the traveling concern premise is a cardinal rule in fixing fiscal statements and the appraisal of an entity ‘s ability to go on as a traveling concern is the duty of the direction. When hearers have doubt on the ability of the client to travel concern, they will measure the adequateness of the fiscal statement being audited and discourse with the direction of the client. More revelations will necessitate to be reported in the hearers study on the conditions doing the uncertainty on traveling concern, direction ‘s programs to get the better of the issue and information about the consequence on the assets and liabilities ( ISA 570 ) . Explanatory paragraph should be added to the hearer ‘s study when hearer has doubt on the traveling concern of the client. It is non necessary to publish a disclaimer but the paragraph will necessitate to include the description on the direction fiscal jobs and its program to extenuate it. If there is deficient revelation from the client, hearer usually will publish the qualified audit study. The audit study is the medium that the stakeholders use to do determinations and value the company. Therefore, the study must reflect the public presentation and state of affairs of the entity. The importance of the hearer ‘s study takes greater intending when the client faces fiscal hurt that could endanger its traveling concern position.

However, there are phenomena shows that hearers ‘ truth is lower than what has expected ( McKweon, Mutchler and Hopwood, 1991 ) . Hearers pay lesser attending on some of the factors that are of import on the issue of audit sentiment, such as fiscal indexs, grounds and revelation ( Haron, Hartadi, Ansari and Ismail, 2009 ) . There are some possible grounds for the inaccuracy, that is, hearers lack of experiences, hearers feel that those factors are non of import, and they are non hold on standards to be evaluate in make up one’s minding a company has a traveling concern job ( Bazerman, Loewenstein, Tanlu, and Moore, 2002 ) .

1.1.2 Financial hurt

When a house ‘s concern deteriorates to the point where it can non run into its fiscal duty, the house is said to hold entered the province of fiscal hurt ( Baldwin and Scott, 1983 ) . Whitaker ( 1999 ) defines the entry into fiscal hurt as the first twelvemonth in which hard currency flows are less than the current adulthood of long-run debt. The anticipation of fiscal hurt is an of import and ambitious issue that has served as the drift for many academic surveies over the past three decennaries ( Beaver, 1966 ) . Fiscal public presentation of the company is one of the elements that need to be tested by the hearer when they issue the hearer study ( ISA 570 ) .

Ferri et Al, ( 1998 ) reported that the jobs of corporate fiscal construction in East Asiatic Corporation, which including Malaysia, have been an of import factor in lending to the East Asiatic Financial Crisis and taking many houses to bankruptcy filings. The increasing figure of failure for the companies in Malaysia, including those public listed companies, has increased the concerns of public. Bursa Malaysia had come out with Practice Note to ease those public listed companies on their fiscal public presentation and give clip to companies which face fiscal hurt to work out their fiscal job before being delisted from the Bursa Malaysia.

1.2 Problem statement

There is a turning concern of the fiscal distress status of the listed company in Malaysia. Bursa Malaysia has been updating the company list that has the fiscal wellness job that grouped under PN17. There are different audit studies received by the company under PN17 in the Bursa Malaysia. Some of them are still utilizing the premise that they are able to travel concern ( which means that they able to go on their operation in foreseeable hereafter ) even though they have fiscal distress issue. Financial hurt companies should hold job to go on their operation in future because of their liquidness and fiscal jobs ( Baldwin and Scott, 1983 ) . It casts uncertainty on whether the audit study issued by the hearer is reflecting the exact fiscal status of the company. This has raised the research inquiry for this survey on the fiscal hurt degree and the issue of the traveling concern study by the hearers. Therefore, the chief research inquiry is whether there is a relationship between the fiscal hurt degree of the company and issue of traveling concern sentiment.

1.3 Research aims

Harmonizing to the job statement as discussed above, the intent of this survey is to analyze the relationship of the company ‘s fiscal hurt degree and issue of traveling concern sentiment. It investigates whether fiscal hurt degree will impact hearer determination to publish traveling concern sentiment to the company in Malaysia. It surveies about the likeliness of issue of traveling concern sentiment when there is difference fiscal hurt degree facing by the company and explores the ability of traveling concern sentiment by the hearers in Malaysia to function as a warning mark for bankruptcy to the users.

1.4 Contribution of survey

The determination of the survey will heighten cognition on one of the factor of issue of traveling concern sentiment. Findingss of this survey besides shows whether degree of fiscal distress degree affect the issue of traveling concern sentiment from the hearer. This paper makes important part in footings of measuring the effectivity of the traveling concern sentiment to reflect the badness of the fiscal hurt facing by the company.

The determination of the survey allows users of audit study more understand the index of the issue of non-going concern sentiment. The findings of the survey will give sightings for the users on when will the hearer assumes that the company is non traveling concern when it reach a certain degree of the fiscal hurt that is terrible. The users will be cognizant in the doing determination such as investing in the stock market, when the indexs exist in the concern operation. The user of the audit study will understands that when a non-going concern sentiment is issued, the company is in what phase of the hurt degree and therefore better their apprehension of fiscal public presentation of the company involved.

Besides that, determination of the survey will demo the effectivity of audit sentiment to reflect fiscal public presentation of companies in Malaysia. The determination besides indirectly shows the ability of hearers to publish a true and just premise on the traveling concern ability of the clients ‘ fiscal statements ; and possibility of type 2 audit mistake, which is failure of hearer to publish accurate traveling concern sentiment on the companies. It provides grounds to the accounting standard organic structures on the quality of audit which enable them to better on the criterions on scrutinizing which can guarantee the quality of audit profession in Malaysia in the hereafter.

1.5 Decision

This chapter briefly discuss about the survey that is traveling to be conducted. The parts that have been discussed are the background of the survey, the job statement that leads to the survey, the aim of the survey and in conclusion the part of the survey. The undermentioned chapter will discourse on the anterior surveies that had done on issues that related to the survey that is traveling to be conducted.

Chapter 2

Literature Review

2. Introduction

This chapter will briefly reexamine some anterior surveies on traveling concern premise, fiscal hurt, and the relationship between fiscal hurt and issue of traveling concern sentiment.

2.1 Traveling Concern Assumption

International Standard on Auditing ( ISA ) is the criterions that deal with the hearers ‘ duty in the procedure of audit of fiscal statement. Under ISA 570 which is “ traveling concern ” criterion, under the traveling concern premise, an entity is viewed as able to go on in concern for the foreseeable hereafter. There are illustrations of events or status stated in the mentioned criterion that may project uncertainty on the traveling concern premise on the company. They are divided into three facets, which are, the fiscal facet, runing facet and others such as direction of the company and regulative proceedings against the entity. Hearers will necessitate to measure to all these three facet to presume that the audited entity will be traveling concern.

There are many variables that proposed by different researches that affect the issue of traveling concern from hearers. Mutcher ( 1985 ) had selected explanatory variables based on the proviso of SAS no. 34 ( AICPA, 1981 ) . The variables were the comparative grade of fiscal hurt, presence of good intelligence and bad intelligence points, hearer features and company size. The theoretical accounts tested in the survey exhibit high grade of prognostic truth on the variables to the sentiment determination.

Citron and Taffler ( 1992 ) besides had done a research that tested the variables consist of the likeliness of company failure, hearer switch rates, self-fulfilling prognostication statement and company size. A positive relationship is found between the likeliness of company failure and the chance of a traveling concern making ( GCQ ) . The consequences besides exhibit important relationship between hearer shift and GCQ. For the variables of self-fulfilling prognostication and houses ‘ size, they are non significantly attributed to the issue of GCQ.

Atef, Suhaimi and Zakimi ( 2002 ) from Malaysia had done a survey on relationship between the features of board of managers and audit commission of financially distress clients and the likeliness of having traveling concern audit studies. They found grounds to back up their hypothesis, which is traveling concern sentiment is associated with the proportion of outside managers to entire managers, outside managers with significant shareholdings and audit commission with lone outside managers.

In the survey conducted by Blay, Geiger, and North ( 2011 ) , they have provided grounds on the hearers ‘ communicating of concern hazard through the issue of the traveling concern modified audit study. It shows the relevancy of the study to the securities market in seting the portion monetary value rating. The communicating resulted in the displacement of market perceptual experience on the financially distress houses. The survey indicated that the traveling concern sentiment provides information towards the forsaking or version hazard. It shows the importance of the traveling concern study towards the equity market.

Mentioned in the survey by Goodman, Braunstein, Reinstein and Gregory ( 2011 ) , the issue of traveling concern sentiment by hearers is based on the opinion by the hearer himself. However, hearer demands to pass on with the direction capableness. The survey done has investigated the ability of non-financial variables to assist in the account of hearer ‘s determination in traveling concern sentiment determination. The consequences indicate that the non-financial variables as a category assistance in explicating the traveling concern sentiment determination from the hearers.

2.2 Financial Distress in Malaysia

In Malaysia, fiscal hurt frequently associated with the PN17 position of companies ( Noor and Iskandar, 2012 ) . Listed companies that experienced fiscal hurt will non be filed for bankruptcy straightaway but they will be temporarily suspended and given opportunity to reconstitute by Bursa Malaysia and Securities Commission ( SC ) Malaysia ( Zeni and Ameer, 2010 ) . Zeni and Ameer ( 2010 ) had done survey on the turnaround anticipation of distressed in companies which obtain grounds from Malaysia. In the survey, they mentioned that Bursa Securities came out with the Practice note No. 17/2005 ( PN17 ) which aimed at hastening the clip taken by listed companies with unsatisfactory fiscal status and degree of operations to regulate the companies ‘ status.

PN17 had set out standards to place companies in fiscal hurt. The standards includes shortage in the amalgamate adjusted stockholders ‘ equity, receiving systems or directors have been appointed over the belongings of the company or belongings of the major subordinates or major associated company whose belongings is at least 70 % of the entire assets employed of the company on amalgamate footing ; hearers had express inauspicious sentiment on latest history ; and the company ceased or suspended the major operations. PN17 declared that listed companies that have unsatisfactory fiscal status and operations will hold eight months to subject their regularisation programs to relevant governments for blessing. If they failed to make so, the securities will be suspended on the 5th market twenty-four hours after the eight months and de-listing processs will be started.

There are other surveies done on the fiscal hurt company in Malaysia. Noor and Iskandar ( 2012 ) have tested the relationship of the managerial ownership and fiscal variables with the survival likeliness of financially distress companies. They targeted on the PN17 companies population. The consequences imply that higher managerial ownership helps cut down the weakness of the company while larger companies contribute to higher hazard of neglecting.

2.2.1 Measurement of fiscal hurt

There are theoretical accounts that surveies used to prove the fiscal good health of a company. Based on anterior research, fiscal hurt is measured utilizing the undermentioned alternate variables: Altman ‘s Z-Score ( Altman, 1968 ) , Altman Z ” Mark ( Altman and Hotchkiss, 2006 ) , , the Hopwood et Al. ( 1994 ) bankruptcy chance mark, and the Zmijewski et Al. ( 1984 ) bankruptcy chance mark ( Sun L. 2007 ) . Hopwood et Al. ( 1994 ) had introduced a emphasis index that defines a company into hard-pressed class. The company demand to exhibit signals such as negative working capital, loss from operations, shortage retained net incomes, and a bottom line loss.

Salehi and Abedini ( 2009 ) have proposed the ability of fiscal ratio to foretell the fiscal hurt of the listed companies in Tehran Stock Exchange ( TES ) . The theoretical account was harmonizing to ratios that indicate liquidness, profitableness, managing of debt and managing of belongings. The consequences of the survey indicate that the theoretical account had presented right anticipation about the fiscal hurt. Study done by Bakar and Hamid ( 2012 ) besides indicate that NaA?ve Bayesian Network Model besides valid to foretell the bankruptcy of the company.

The survey conducted by Alifiah, Salamudin, and Ahmad ( 2011 ) used the accrual-based or fiscal ratio such as debt ratio, entire assets turnover ratio, current ratio, speedy ratio, working capital ratio and net income to entire income ratio. The findings found that the most utile and important ratio for the anticipation of fiscal hurt companies in the development sector in Malaysia was merely debt ratio. The findings besides showed that the anticipation theoretical account provided more than 50 % opportunity that the theoretical account is accurate for five old ages before hurt.

2.3 Linkage between fiscal hurt and traveling concern sentiment

Variables for depicting traveling concern sentiment determination should include the indexs of the house ‘s fiscal status ( Goodman, Braunstein, Reinstein and Gregory, 2011 ) . Dopuch, Holthausen and Leftwich ( 1987 ) mentioned that hearers will more likely issue a qualified audit sentiment when the company is sing fiscal status deteriorates for two grounds, that is, traveling concern makings had raised inquiries on the house ‘s ability to finance its on-going activities and the hearers are likely to make up one’s mind that eventualities of a given magnitude are stuff. It showed the linkage between the fiscal hurt and the traveling concern sentiment. In the above mentioned survey stated that the relationship between traveling concern and bankruptcy had been recognized in the auditing literature ( Foster et al, 1998 ; Lotus and Miller, 2000 ; Kuruppu et al. , 2003 ) . The literature identifies the chance of bankruptcy as the chief factor of a qualified traveling concern sentiment ( Foster et al. , 1998 ; Kaminski et al. , 2004 ) .

In Hopwood, McKeown and Mutchler ( 1989 ) survey, the consequence had showed that there is important association between audit study makings and fiscal failure. The survey had cited some of the consequence from old surveies that support the survey done. Altman and McGough ( 1974 ) found that 46.4 % of their samples of belly-up companies had received traveling concern sentiment prior twelvemonth to the bankruptcy. Deakin ( 1977 ) survey instances two old ages before the bankruptcy event and found out that 14.9 % of the belly-up company received traveling concern sentiment. All these surveies show that there is improbable a company that received traveling concern sentiment to be belly-up. Hopwood, McKeown and Mutchler ( 1989 ) besides mentioned that traveling concern sentiment is utile as a warning mark of bankruptcy of a company.

Sun ( 2007 ) conducted survey on the hearer ‘s sentiment versus statistical theoretical accounts in bankruptcy anticipation. Sun ( 2007 ) mentioned that the most typical ground for a company to register bankruptcy is the company is confronting fiscal hurt. The more financially distressed a company, there is more likely it will travel bankrupt. The analysis showed that there is incremental anticipation ability of the traveling concern sentiment. The ability is beyond the tradition fiscal ratio, composite step of fiscal hurt and non-financial-accounting information which include the market variables and industry failure rate ) . The survey conducted really showed us that the traveling concern sentiment by the hearer supposed to hold ability to demo to the populace on the anticipation on the fiscal hurt of the company.

Bryan, Tiras, and Wheatley ( 2005 ) have conducted survey on whether the traveling concern sentiments serve as early warnings of fiscal prostration of company. They have tested the variables of bankruptcy anticipation, hearers exchanging and the usage of income-increasing accounting methods for the fiscal statements issued. The survey found out that the traveling concern sentiments are positively associated with the bankruptcy outgrowth. The grounds suggested that hearers ‘ traveling concern sentiment has the ability as the early warning of fiscal prostration and supports the load placed on hearers to measure the success or failure of direction ‘s concern programs.

In Malaysia, Haron, Hartadi, Ansari and Ismail ( 2009 ) conducted survey to prove the factor that affects the issue of traveling concern sentiment. They tested the fiscal index ; type of grounds on the company ‘s traveling concern and adequateness of revelation that relates to direction attempt to get the better of traveling concern issue. They found out that fiscal index, grounds and revelation have important consequence on hearer ‘s opinion on the issue of traveling concern sentiment. The variable on the fiscal index was tested utilizing Z-score by Altman. The consequence that they collected has showed that the fiscal strength of the company significantly affect the hearers ‘ opinion to publish traveling concern sentiment.

The surveies done show that the traveling concern study issue by the hearers shall reflect the fiscal place of the related company ( Haron et al. , 2009 ; Hopwood, McKeown and Mutchler, 1989 ; Bryan, Tiras, and Wheatley, 2005 ) . The relationship between fiscal distress degree of company in Malaysia and the issue of traveling concern sentiment will be tested in this survey. It will be able to demo the dependability of the traveling concern sentiment issued by hearers in Malaysia to reflect the fiscal hurt facing by the company.

2.4 Decision

After discoursing anterior surveies on the linkage between fiscal hurt and traveling concern sentiment, the following chapter will discourse about the variables and methodological analysis used to prove the relationship between the fiscal hurt degree and issue traveling concern sentiment.

Chapter 3


3. Introduction

This subdivision will discourse about the method used to carry on this survey. This survey examines the relationship between the fiscal hurt degree of houses and the issue of traveling concern sentiment. Therefore, in this chapter, the method to prove each of the variables will be discussed and besides the expression that is traveling to be used to find the relationship between the two variables.

3.1 Hypothesis

H0: there is relationship between fiscal hurt degree and the issue of the traveling concern sentiment

H1: there severe the fiscal hurt, the higher the possibility of the company to have non-going concern sentiment from the hearers.

3.2 Data Collection

3.2.1 Beginning of informations

Company ‘s one-year study will be used as the chief beginnings for this survey. The aim of the survey is to analyze the relationship of fiscal distress degree of company and the traveling concern study received. The information and information for the survey can be gathered from the information stated in the one-year study. The one-year studies selected for the survey are sourced from public listed companies which categorized as PN17 companies in the Bursa Malaysia. Therefore, the one-year studies are publically available and can be downloaded from the company web site or Bursa Malaysia ‘s web site. The informations used in this survey is secondary informations. There are advantages of utilizing secondary informations in the survey as they are informations which publish to the populace and more dependable.

3.2.2 Population and sample choice

The population covered for this research covered public listed companies in the chief market of Bursa Malaysia. The sample for the survey will be the PN17 companies. Those companies are chosen because they are those companies that Bursa Malaysia listed as they sing fiscal hurt but non yet delisted or bankrupt. From the samples, we can prove the different degree of the fiscal hurt experience by each company and accordingly see the audit study received by the company. The sample of this survey merely includes companies that have fiscal hurt and may take the hearers to doubt on their traveling concern ability. Dopuch, Holthausen and Leftwich ( 1987 ) mentioned that hearers will more likely issue a qualified audit sentiment when the company is sing fiscal status deteriorates.

3.3 Variables

The independent variable for this survey is the fiscal hurt degree of company and the dependant variable is the issue of traveling concern sentiment by the hearer.

3.3.1 Independent variables

Fiscal Distress degree

emphasis zone

Grey zone

hurt zone

Fiscal index used to prove fiscal hurt degree in this survey is Altman ‘s Z-score. Altman ‘s Z mark is normally used to measure fiscal hurt. It is a leaden complex of fiscal indexs which relate to profitableness, gross, loose resources, and market return ( Altman, 1968 ) . Hayes, Hodge and Hughes ( 2010 ) showed the efficaciousness of Altman ‘s Z ‘ mark in foretelling fiscal hurt houses in their survey.

Odipo and Sitati ( 2011 ) concluded in their survey that Altman theoretical account is a utile tool for the investors in Kenyan market to foretell fiscal hurt of the companies. They found out that the theoretical account indicates 80 % successful anticipation. Samarakoon and Hasan ( 2003 ) besides investigate the ability of the three version of Altman ‘s Z score theoretical account of hurt anticipation in the emerging market of Sri Lanka. The consequence shows overall success rate of 81 % us observed utilizing the Z mark. Gerantomis, Vergos and Christopoulos ( 2009 ) besides concluded that Altman theoretical account performs good in foretelling failures of companies.

Z ‘ Score Bankruptcy Model:

Z ‘ = 0.717T1A + 0.847T2A + 3.107T3A + 0.420T4A + 0.998T5

T1A = ( Current Assets a?’ Current Liabilities ) / Entire Assetss

T2A = Retained Earnings / Total Assetss

T3A = Earnings before Interest and Taxes / Total Assetss

T4A = Book Value of Equity / Total Liabilities

T5A = Sales/ Total Assetss

Analysis for Z-score:

Zones of Discrimination:

Z ‘ & gt ; 2.9 – ” Safe ” Zone

1.23 & lt ; Z ‘ & lt ; 2. 9 – ” Grey ” Zone

Z ‘ & lt ; 1.23 – ” Distress ” Zone

3.3.2 Dependent variable

Traveling Concern Opinion

1= Traveling Concern sentiment

0= otherwise

Data for this variable is collected by looking at the audit study issued by the audit house. There are different sentiment can be issued by the hearers, such as, unqualified sentiment, qualified sentiment, disclaimer, inauspicious, or accent of affair. There will be explanatory paragraph added to explicate the making before the sentiment of affair or accent on affair the affair paragraph. From reading the audit sentiments and paragraph, the information on traveling concern premise on the company can be detected.

3.4 Data analysis

Logistic arrested development will be used to construe the informations collected on the two variables. Logistic arrested development is a technique used to mensurate the relationship between a categorical depended variable and the independent variables by change overing the dependant variable to chance mark. It can be used when the predicted result is binary ( on/off, pass/fail, infected/not infected and etc. ) . This technique decide the incompatibilities associated with dichotomous dependant informations and the premises on ordinary amount of squares regression methods ( Healy, 2006 ) . The independent variables that are used for the result anticipation may be dichotomous, categorical or uninterrupted.

The expression for the arrested development is

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3.5 Decision

The survey will be carried out utilizing the methodological analysis mentioned in this chapter. The findings will be discussed in the chapter four and decision will be made in chapter five.


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