SA 570 Going Concern: Auditor Procedures, Warning Signs and Reporting Outcomes

Going concern is not a simple yes-or-no declaration made at the end of an audit. Under ICAI's SA 570 (Revised), Going Concern, the auditor evaluates management's use of the going concern basis of accounting, considers whether events or conditions may cast significant doubt on the entity's ability to continue as a going concern, and determines the implications for the auditor's report. ICAI also provides an Implementation Guide to SA 570 (Revised) for practical application.

What does going concern mean in an audit?

Under the going concern basis, financial statements are prepared on the assumption that the entity will continue operations for the foreseeable future. Management is responsible for assessing the entity's ability to continue as a going concern. The auditor's role is different: the auditor obtains sufficient appropriate audit evidence about the appropriateness of management's use of that basis and concludes whether a material uncertainty exists.

This distinction matters because an unmodified audit opinion is not a guarantee that a business will survive. SA 570 addresses audit evidence and reporting around the going-concern assessment; it does not turn the auditor into a predictor of future business success.

Step 1: Look for events or conditions that may create significant doubt

Going-concern work starts during risk assessment, not after the financial statements are drafted. The audit team should consider whether events or conditions exist that, individually or collectively, may cast significant doubt on the entity's ability to continue as a going concern.

Practical indicators can include recurring operating losses, negative operating cash flows, adverse key financial ratios, inability to pay creditors when due, loan defaults, withdrawal of financial support, loss of a major market or key customer, significant litigation, or difficulty obtaining essential financing. An indicator is a warning signal, not an automatic conclusion that the entity cannot continue.

Step 2: Understand management's assessment

SA 570 requires the auditor to evaluate management's assessment of the entity's ability to continue as a going concern. The auditor considers the same period used by management as required by the applicable financial reporting framework or by law or regulation where that period is longer. If management's assessment covers less than twelve months from the date of the financial statements, SA 570 requires the auditor to request management to extend the assessment to at least twelve months from that date.

A useful audit file should identify the assessment period, assumptions, forecasts, funding sources, covenant position, expected cash inflows and outflows, and management actions relied upon. The auditor should not merely accept a board statement that the company is a going concern.

Step 3: Challenge forecasts and management plans

When events or conditions are identified, additional audit procedures are required. The auditor evaluates management's plans for future actions and whether those plans are feasible and likely to improve the situation. Cash-flow forecasts should be tested against underlying data, historical forecasting accuracy, current trading information and supportable assumptions.

For example, suppose a company has suffered losses, has a large borrowing due in eight months and expects refinancing to solve the liquidity gap. The audit response should go beyond reading management's forecast. The team may inspect lender correspondence, assess the status and terms of refinancing discussions, test forecast cash flows, perform sensitivity analysis, examine post-year-end trading and consider whether alternative funding is realistically available. A plan that depends on an unsigned facility should not be treated as equivalent to committed financing.

Step 4: Ask about the period beyond management's assessment

SA 570 also requires inquiry of management about its knowledge of events or conditions beyond the period of management's assessment that may cast significant doubt on the entity's ability to continue as a going concern. The auditor does not need to design all the same procedures for an unlimited future horizon, but known events outside the formal forecast period cannot simply be ignored.

Step 5: Decide whether a material uncertainty exists

The existence of risk indicators does not by itself mean a material uncertainty exists. The auditor considers the magnitude and likelihood of the potential impact, together with management's mitigating plans and the evidence supporting them. The central question is whether the potential impact and likelihood are such that appropriate disclosure of the nature and implications of the uncertainty is necessary for the financial statements to achieve fair presentation or not be misleading under the applicable framework.

Step 6: Map the conclusion to the auditor's report

The reporting outcome depends on two separate questions: whether use of the going concern basis is appropriate, and whether any material uncertainty is adequately disclosed.

• Going concern basis appropriate; no material uncertainty: the auditor follows the normal reporting framework, while considering any other reporting requirements applicable to the engagement.
• Going concern basis appropriate; material uncertainty exists and disclosure is adequate: SA 570 requires an unmodified opinion with a separate section under the heading Material Uncertainty Related to Going Concern, drawing attention to the relevant note and stating that the events or conditions indicate a material uncertainty and that the opinion is not modified in respect of the matter.
• Material uncertainty exists but disclosure is inadequate: the auditor expresses a qualified or adverse opinion, as appropriate, in accordance with the applicable reporting standards.
• Use of the going concern basis is inappropriate: SA 570 requires an adverse opinion.

This is why a going-concern issue should not automatically be described as an emphasis-of-matter issue. SA 570 has specific reporting requirements when a material uncertainty related to going concern exists.

Practical going-concern audit checklist

1. Identify financial, operating and other warning indicators during risk assessment.
2. Obtain management's documented going-concern assessment and confirm the period it covers.
3. Reconcile forecast opening balances to audited or reliable underlying records.
4. Challenge revenue, margin, working-capital, financing and cost assumptions.
5. Compare prior forecasts with actual outcomes to assess forecasting reliability.
6. Inspect loan agreements, covenant calculations and lender correspondence.
7. Evaluate management's mitigating plans and evidence that those plans are feasible.
8. Review post-balance-sheet trading, cash collections, payments and financing developments.
9. Perform sensitivity analysis where forecast headroom is narrow or assumptions are highly judgmental.
10. Assess the adequacy of financial-statement disclosures and map the conclusion to the correct reporting outcome.
11. Communicate relevant going-concern matters with those charged with governance as required.
12. Document the evidence, significant judgments and final conclusion clearly.

Common mistakes to avoid

• Treating positive net assets as proof that no going-concern risk exists.
• Accepting management forecasts without testing underlying data and assumptions.
• Relying on intended refinancing without examining evidence of its feasibility.
• Confusing the existence of warning indicators with the conclusion that a material uncertainty necessarily exists.
• Using an Emphasis of Matter paragraph when SA 570 requires a Material Uncertainty Related to Going Concern section.
• Failing to connect the audit conclusion with the adequacy of the entity's disclosures.

Practical takeaway

A strong SA 570 file tells a logical story: identify the warning signs, understand management's assessment, challenge forecasts and mitigating plans, obtain evidence, decide whether a material uncertainty exists, evaluate disclosure and then select the reporting consequence required by the standard. The most important discipline is to keep the evidence and the conclusion connected. ICAI's current Engagement and Quality Control Standards library lists Revised SA 570, and practitioners should check the current official text and guidance for live engagements.