In this topic 7 sections
Answer three different questions
Going concern work asks whether the accounting basis is appropriate, whether a material uncertainty exists and whether the financial statements explain the position adequately. Keeping these questions separate prevents a warning sign from being treated as an automatic qualification.
Management assesses the entity's ability to continue operating and prepares the financial statements on an appropriate basis. The auditor evaluates that assessment using sufficient appropriate evidence and draws a reporting conclusion. The auditor does not guarantee survival. Even an audit report containing no going concern warning cannot eliminate uncertainty about future events.
The going concern basis normally assumes assets will be realised and liabilities settled through ordinary operations. It becomes inappropriate when management intends liquidation or cessation, or has no realistic alternative. Serious financial pressure can exist while that basis remains appropriate, provided the evidence supports continued operation and the reporting explains any material uncertainty.
Concept sources: ASA 570, January 2023 version, compiled March 2023, paragraphs 2–7 and 17–20 — responsibilities, accounting basis and separate conclusions.
Establish the assessment period
Under the historical ISA 570 applicable to this study context, the auditor considers management's assessment period under the reporting framework; an assessment shorter than twelve months from the financial statement date must be extended to at least twelve months. The Australian requirement differs.
ASA 570 defines the relevant period as approximately twelve months from the current auditor's report date to the expected auditor's report date for the next annual reporting period, with a corresponding rule for interim reports. Ask management to extend its assessment where it does not cover this period. Enquire about known events beyond the assessment period as well; a known major repayment does not become irrelevant simply because it lies just outside the forecast.
Concept sources: ASA 570, January 2023 version, conformity statement, Aus 13.1–Aus 13.2, paragraphs 14–15 — historical ISA/Australian assessment-period difference.
Convert warning signs into evidence needs
Cash losses, overdue creditors, refinancing dependence, covenant breaches, the loss of an important customer or licence, and major unresolved claims may cast significant doubt. Consider their combined effect. A profitable entity can still lack the cash needed to meet a near-term obligation.
Where indicators arise, obtain management's assessment if none exists, evaluate its response plans, examine new information and request written representations about the plans and their feasibility. The assessment should connect operating assumptions, financing arrangements and the timing of payments. Read recent financial information, lender correspondence, governance minutes, legal updates and relevant regulatory communications.
| Claim in the assessment | Evidence to examine | Practical challenge |
|---|---|---|
| Customers will pay sooner | Receipts after year-end, aged balances and changed credit terms | Does the improvement reflect customer behaviour or merely a budget target? |
| A lender will maintain funding | Facility terms, correspondence, covenants and confirmed amendments | Is finance committed, available when needed and conditional on something uncertain? |
| Cash generation will improve | Orders, pricing, cost commitments and capacity information | Can demand and margins improve together without additional working capital? |
| A major cash payment can be deferred | Contractual terms and evidence of an agreed variation | Does management have the power to delay it? |
Concept sources: ASA 570, January 2023 version, paragraphs 10–16, A3 and A16–A20 — indicators and procedures responding to significant doubt.
Challenge forecasts and mitigating plans
Test the data feeding a forecast and the support for its assumptions. Compare earlier budgets with actual results and the current forecast with performance achieved so far. Investigate systematic optimism. Reconcile opening cash and debt, incorporate repayment dates and test the effect of realistic changes in volumes, prices, margins, interest and collections.
Sensitivity analysis helps explain how much room the entity has before it cannot meet obligations. It is a way of challenging assumptions, not a formula that automatically decides whether a material uncertainty exists. Consider whether several adverse movements could occur together.
Mitigating plans need evidence of feasibility, timing and cash impact. An asset sale may require lender consent and may remove productive capacity. Cutting expenditure may trigger termination costs. New capital may depend on investors who have made no commitment. Loan renegotiation must address actual repayment and covenant terms. Deferring dividends may conserve cash, but it does not create money already paid out. Avoid counting the same benefit twice in different parts of the forecast.
Concept sources: ASA 570, January 2023 version, paragraph 16 and A16–A19 — forecast reliability, assumptions and feasibility of management's plans.
Test what a support arrangement actually provides
A letter of support may promise additional funding. A letter of subordination changes the position or repayment priority of an existing debt; some arrangements also prevent repayment demands for a specified period. Their effect depends on their actual terms. Postponing a parent's loan does not fund wages or external creditors when operating cash is insufficient.
Inspect the arrangement's period, amount, conditions, approvals and termination provisions. Obtain evidence of the supporter's intention and financial capacity, and assess legal effectiveness where relevant. Board minutes and written confirmations can establish decisions, but a signature does not prove available resources. Do not assume a bank, parent or government can provide support merely because of its identity.
Smaller entities may prepare less elaborate assessments, and discussion supported by documentary evidence can be appropriate. The evidence requirement remains. Where survival depends on an owner-manager, assess that person's capacity to provide funds and document relevant loan subordination, guarantees or commitments.
Concept sources: ASA 570, January 2023 version, A5–A6, A12–A13 and A16 — smaller entities, financial support, enforceability and capacity.
Translate the conclusion into the report
A material uncertainty exists when the potential impact and likelihood make disclosure of the uncertainty's nature and implications necessary for fair presentation, or to avoid misleading reporting under a compliance framework. It is not synonymous with an evidence limitation.
| Supported conclusion | Reporting consequence |
|---|---|
| Basis appropriate; no material uncertainty | An unmodified opinion may be appropriate. Still evaluate required disclosure of significant events, conditions and judgements. |
| Basis appropriate; material uncertainty adequately disclosed | Unmodified opinion with a separate Material Uncertainty Related to Going Concern section referring to the note and explaining that the opinion is not modified for this matter. |
| Basis appropriate; material uncertainty inadequately disclosed | Qualified or adverse opinion, depending on pervasiveness. Explain the disclosure failure in the basis section. |
| Going concern basis used when inappropriate | Adverse opinion, even if a note describes the difficulty. |
| A material limitation prevents sufficient appropriate evidence being obtained | Qualified opinion or disclaimer, depending on the possible effects and pervasiveness. |
| An acceptable alternative basis is used and adequately explained | An unmodified opinion may be possible; an Emphasis of Matter paragraph may draw attention to that basis and its reasons. |
Concept sources: ASA 570, January 2023 version, paragraphs 18–24, A26–A27 and A35; ASA 705, December 2023, paragraphs 7–9 — reporting outcomes and evidence limitations.
Adequate uncertainty disclosure identifies the main conditions, management's plans and the risk that assets cannot be realised and liabilities settled normally. A vague reference to challenging markets may not convey that risk. The separate going concern section is not a substitute for the financial statement note, and an ordinary Emphasis of Matter paragraph does not replace the required going concern section.
In extremely rare circumstances, multiple significant uncertainties may interact so extensively that a disclaimer is appropriate despite evidence about each uncertainty. This narrow situation does not change the adverse-opinion rule for an inappropriate accounting basis.
Discuss significant going concern conclusions, disclosure adequacy and reporting consequences with those charged with governance, subject to the standard's exception where all are involved in management. Investigate significant delays in approving the financial statements: the reason may reveal further uncertainty and require additional work.
Concept sources: ASA 570, January 2023 version, paragraphs 19, 22 and 25–26, A33 — disclosures, rare multiple-uncertainty cases, governance and delayed approval.
Sources and further reading
- ASA 570, January 2023 version — Going Concern: Aus 13.1–Aus 13.2; paragraphs 16–26; A12–A20 and A26–A35.
- ASA 705, December 2023 — Modified opinions: paragraphs 7–10.