Going Concern: What It Means for Auditors and Finance Teams

What Is Going Concern?

Going concern is the assumption that a company will continue to operate for the foreseeable future — typically interpreted as at least 12 months from the date of signing the financial statements. Under this assumption, assets are recorded at historical cost rather than liquidation value, and liabilities are classified as current or non-current based on expected settlement dates.

If going concern is not appropriate, the financial statements must be prepared on a different basis — typically a liquidation or break-up basis — with full disclosure of the change.

The Auditor's Responsibility

Under ISA 570, auditors are required to obtain sufficient appropriate evidence about the appropriateness of management's use of the going concern assumption. This involves:

Evaluating management's assessment of the entity's ability to continue as a going concern; considering whether management has identified events or conditions that cast significant doubt; and assessing whether management's assessment covers a period of at least 12 months from the date of the financial statements.

Events and Conditions That May Indicate Going Concern Issues

Financial indicators: Net liability position; recurring operating losses; significant borrowings approaching maturity; negative operating cash flows; inability to comply with loan covenants; arrears in dividends or scheduled loan repayments.

Operational indicators: Loss of key management without replacement; loss of a major customer or supplier; fundamental changes in the market; labour disputes.

Other indicators: Non-compliance with legal or regulatory requirements; pending legal proceedings that may result in significant liabilities; withdrawal of financial support from parent companies.

What Auditors Do When Going Concern Doubt Exists

When events or conditions are identified that may cast doubt on going concern, auditors must perform additional procedures — for example, reviewing cash flow forecasts, loan agreements, and correspondence with lenders. They must also obtain written representations from management confirming their plans to address the issues.

Audit Report Implications

No material uncertainty: If the auditor is satisfied that going concern is appropriate and there is no material uncertainty, the audit report is unmodified on this point.

Material uncertainty — adequately disclosed: If management has disclosed the material uncertainty properly in the financial statements, the auditor includes a "Material Uncertainty Related to Going Concern" section in the audit report without modifying the opinion.

Material uncertainty — not adequately disclosed: If management has not made appropriate disclosure, the auditor qualifies the opinion (qualified or adverse, depending on materiality).

Going concern basis inappropriate: If the going concern basis should not have been used, the auditor issues an adverse opinion.

Management's Responsibility

Management is responsible for making the going concern assessment. Where material uncertainties exist, IAS 1 requires disclosure of those uncertainties. Finance teams should document their going concern assessment process, including the assumptions underlying cash flow forecasts and the mitigating actions available to address any identified risks.