ACA ICAEW Audit and Assurance Practice Exam

Evaluating going concern risks in an audit requires a comprehensive understanding of the entity's financial stability and future viability. The correct approach involves obtaining and assessing cash flow forecasts. This is crucial because cash flow forecasts provide insights into the entity's ability to meet its financial obligations as they become due.

These forecasts help auditors identify any potential liquidity issues or solvency concerns that could indicate whether the entity can continue operating for the foreseeable future, typically considered to be at least 12 months from the reporting date. By analyzing these forecasts, auditors can assess the reasonableness of the assumptions made by management regarding future revenues, expenditures, and overall cash flow.

In contrast, relying solely on past financial results does not give an adequate picture of future viability, because historical performance is not always indicative of future trends. Inspections of management's risk management strategies may provide some context but may not directly inform the assessment of going concern. Finally, ignoring bank covenants would be counterproductive, as these agreements often serve as key indicators of financial health and can directly impact liquidity and the ability to continue operations. Therefore, obtaining and assessing cash flow forecasts is essential for a thorough evaluation of going concern risks.