Audit and Assurance Practice Exam 2025 – Complete Prep Resource

The term 'going concern' in the context of auditing refers to the assumption that an entity will continue to operate for the foreseeable future without the intention or necessity of liquidating or significantly reducing its operations. This concept is fundamental to the preparation of financial statements, as it underpins the basis on which accounts are prepared.

When auditors assess whether a company is a going concern, they evaluate various factors that might affect the company's future viability, such as financial health, operational performance, and market conditions. If there are doubts about the entity's ability to remain a going concern, this must be disclosed in the financial statements, which can significantly alter the perception of the company's worth.

In contrast, the other options focus on aspects that do not encapsulate the essence of the going concern assumption. For example, the assurance that a company's stock will increase is speculative and not guaranteed, while a guarantee of profitability is also an assumption that varies based on numerous factors and isn't central to the concept of going concern. Similarly, while assessing a company's ability to pay its debts relates to its financial health, it does not fully encompass the ongoing operational aspect tied to the going concern assumption.