Going concern

It is essential that candidates preparing for the Advanced Audit and Assurance exam have a thorough understanding of the respective responsibilities of auditors and management regarding going concern. The going concern review can require significant judgement to be applied and the impact of external factors, such as significant global events, can make the assessment of management’s going concern review challenging. Further, recent corporate failures have brought the auditor’s review of going concern back into focus.

This article discusses the auditor’s responsibilities, as well as the indicators which could highlight where an entity may not be a going concern and the reporting aspects relating to going concern.

The auditor's objectives in relation to going concern

ISA 570 (Revised) Going Concern, contains well-established guidance on going concern, including the following objectives for the auditor:

  • to obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management's use of the going concern basis of accounting in the preparation of the financial statements
  • to conclude, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the entity's ability to continue as a going concern, and
  • to determine the implications for the auditor's report in accordance with ISA 570.

All audits should involve an assessment of the appropriateness of management’s use of the going concern basis of accounting, and it is obvious to say that the auditor may well have to perform additional procedures when there are heightened risks relating to going concern, caused by difficult economic and market conditions or specific industry considerations affecting the company. But going concern should be considered at all stages of the audit, not just in terms of specific procedures, and the auditor is required to remain alert to events or conditions which may cast significant doubt on the company’s ability to continue as a going concern. This requires the auditor to exercise high levels of professional judgement.

In the exam it is important to remember that going concern is therefore not just something considered at a particular stage in the audit cycle, but should be an issue that permeates the whole performance and review of an audit.

Auditors should consider going concern indicators and their impact on a particular audit when:

  • assessing risk at the planning stage of the audit, and when re-assessing risk as the audit progresses
  • designing and performing audit procedures to respond to the assessed risks
  • evaluating and concluding on the results of audit procedure, and
  • forming an audit opinion.  

Paragraph A3 of ISA 570 provides good examples of financial, operational and other indicators which may individually or collectively cast significant doubt on the entity’s ability to carry on as a going concern. This is where the auditor’s judgement is critical as it is not conclusive that one or more of these items always signifies that a material uncertainty exists.

Assessing risk at the planning stage of the audit

Auditors are required by ISA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, to gain an understanding of the audit client's business and the economic environment in which it operates. This understanding should then lead to the identification of business risks, which are then evaluated in terms of any risks of material misstatement in the financial statements.

Business risks include risks that could reduce the company's profit and/or cash inflows, and could ultimately mean that either a company is not a going concern, or that there are significant doubts over its ability to continue as a going concern. Identification of this heightened risk at this initial stage in the audit cycle means that additional audit procedures can be planned as a response to the specific risks identified.

All of this means that the auditor must gain a detailed understanding of the environment in which a company is operating, and more specifically, an understanding of the particular market conditions affecting its operations. Risks can arise from many factors, including reduced demand for goods and services, customers' inability to pay for goods and services already provided, an inability to raise necessary finance and the need and renewal of specific operating licences. Such factors must be assessed for their specific impact on a company's operations. It is important to remember that difficult economic or market conditions do not automatically mean that a material uncertainty exists about a company's ability to continue as a going concern but these must be considered by the auditor in order to gain a full understanding.

The evaluation of business risks should lead to the assessment of specific financial statement risks. For a company facing going concern difficulties, the fundamental financial statement risk is whether the financial statements have been prepared on the correct basis of accounting, or whether any significant uncertainties have been disclosed in the financial statements. However, there are more specific financial statement risks including:

  • potential overstatement of non-current assets if impairments caused by reduced market value or value in use have not been recognised
  • potential overstatement of inventory if net realisable value has fallen due to reduced demand
  • potential overstatement of receivables if irrecoverable debts are not provided for
  • incorrect measurement and recognition of gains or losses on financial instruments due to inactive markets
  • incorrect measurement and disclosure of assets held for sale or discontinued operations
  • incorrect measurement or disclosure of provisions or contingent liabilities caused by restructuring of operations.

Designing, performing and evaluating audit procedures

Where risks, such as the ones mentioned above, have been identified, the auditor must respond to the risks by designing and performing appropriate audit procedures. Clearly the procedures should address the specific risks identified, and so extra procedures may be needed on many balances and transactions such as the ones outlined above.

More generally, audit procedures are necessary in order to evaluate how the key management personnel have satisfied themselves that it is appropriate to adopt the going concern basis in preparing the financial statements. Procedures should include:

  • analysing and discussing cash flow, profit and other relevant forecasts with management
  • reviewing the terms of loan agreements and determining whether they have been breached
  • reading minutes of board meetings and relevant committees for any discussion of financing difficulties
  • reviewing events after the year end to identify factors relevant to the going concern assumption as a basis for the preparation of the financial statements.

Paragraph A16 of ISA 570 contains examples of additional procedures that may be used.

Analysis of cash flow is usually a key feature of any going concern evaluation. In this evaluation the auditor should pay particular attention to the reliability of the company's systems for generating the cash flow information, and whether the assumptions underlying the cash flow appear reasonable, applying professional scepticism and challenging those assumptions where needed.

In evaluating going concern, the auditor will consider whether necessary borrowing facilities are in place and in doing so will attempt to obtain confirmations from the company's bankers. However, the bankers may be reluctant to confirm whether the borrowing facilities will be available, in which case the auditor should consider the significance of this to the entity's ability to continue as a going concern, and also consider, through discussion with management, whether there are other strategies or sources of finance available.

Forming an audit opinion

In forming the audit opinion, the auditor should consider two issues: have the financial statements been prepared using the appropriate basis of accounting and is there adequate disclosure of any material uncertainty regarding going concern.

First, the auditor may conclude that management's use of the going concern basis is inappropriate. This means that the financial statements are effectively rendered meaningless, and ISA 570 requires the auditor to express an adverse opinion on the financial statements.

In rare circumstances, where the financial statements have not been prepared under the going concern basis of accounting (for example, using a liquidation basis), and the auditor agrees with the use of this alternative basis for the preparation of the financial statements, the audit opinion may be unmodified. This is so long as the auditor has also concluded that there is adequate disclosure in the financial statements regarding the basis of accounting. However, the auditor may consider it necessary to include an Emphasis of Matter paragraph in accordance with ISA 706 (Revised) Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report, to draw the user’s attention to the alternative basis of accounting and the reasons for its use.

It is much more likely that the auditor concludes that the level of disclosure in relation to material uncertainties is inadequate rather than concluding that the going concern basis of accounting is wholly inappropriate. ISA 570 contains detailed guidance in this area, which is briefly summarised below:

  • Where the disclosure of material uncertainty is considered adequate, the auditor will express an unmodified opinion and will also include a separate section in the auditor’s report entitled ‘Material Uncertainty Related to Going Concern’. This section will draw attention to the note in the financial statements which discloses the uncertainties. This section will also state that these events or conditions as disclosed constitute a material uncertainty but the auditor’s opinion is not modified in respect of the matter.

  • Where the disclosure of material uncertainty is not considered adequate, the auditor should express either a qualified or adverse opinion in accordance with ISA 705 (Revised) Modifications to the Opinion in the Independent Auditor’s Report. In the Basis for Qualified/Adverse Opinion section of the auditor’s report, the auditor should state that a material uncertainty exists which may cast significant doubt on the entity’s ability to continue as a going concern and that the financial statements do not adequately disclose this matter.

Ethical matters

In situations where entity’s are facing significant economic or operational pressure, auditors may find themselves being asked by audit clients to perform non-audit services which may create self-review or advocacy threats to objectivity or which would involve assuming management responsibilities For example for a client who is suffering financial pressure and is seeking to raise additional or alternative finance or restructure, the audit firm may be asked to perform:

  • a review of the business including advising on restructuring options
  • a review of prospective financial information, possibly for presentation to potential providers of finance
  • advising on corporate finance options or negotiating such options.

The problem created is that the audit firm may not be able to objectively assess going concern factors when in addition becoming involved with non-audit services pertaining to the going concern status of the company. The audit firm should carefully consider the appropriateness of providing such non-audit services in these circumstances.

Safeguards may be able to reduce the threats to objectivity and independence to an acceptable level. Safeguards may include:

  • a review of the going concern assessment and conclusion reached by a partner who is not a member of the audit team
  • additional procedures as part of an Engagement Quality Control Review
  • confirmation from the audit client that they remain responsible for any decisions or actions taken as a result of the non-audit service provided.


Auditors must be extra vigilant in relation to the audit of going concern matters, and should also remember the possible ethical implications of being involved in non-audit services relevant to going concern. Going concern is an area which should be front and centre of every audit and evidence must be challenged with the appropriate level of professional scepticism.

Written by a member of the AAA examining team