Audit and Assurance · Going concern

Going Concern Basis and Management Responsibilities Explained

Updated 11 October 2026 · Fact-checked

The going concern basis assumes an entity will continue in operation for the foreseeable future. Under IAS 1, management assesses this when preparing financial statements, looking at least twelve months from the end of the reporting period. If material uncertainties exist, management must disclose them. If it will liquidate or cease trading, it uses another basis.

Understand Going Concern Basis and Management Responsibilities

Going concern is the default assumption behind financial statements. It says the entity will keep trading and will meet its obligations as they fall due. Assets are then valued on the basis that they will be used in the business, not sold off in a hurry.

IAS 1 puts the duty on management. When preparing financial statements, management must assess the entity's ability to continue as a going concern. Financial statements are prepared on that basis unless management either intends to liquidate the entity or cease trading, or has no realistic alternative but to do so.

In making the assessment, management takes into account all available information about the future. This covers at least twelve months from the end of the reporting period, but is not limited to that period. Note the wording: at least twelve months. Do not write that the period is exactly twelve months.

If management is aware of material uncertainties related to events or conditions that may cast significant doubt on the entity's ability to continue, it must disclose those uncertainties. If the statements are not prepared on a going concern basis, that fact must be disclosed, together with the basis used and the reason the entity is not regarded as a going concern.

The auditor's role is different. The auditor does not make the assessment. The auditor evaluates management's assessment and concludes on whether it is appropriate and whether disclosure is adequate (ISA 570). This split of responsibility is a frequent exam point.

Key rules to remember

Going concern assumption (IAS 1): Prepare on going concern basis unless management intends to liquidate or cease trading, or has no realistic alternative; This is the default basis. Management must assess it for every set of financial statements.
Minimum assessment period: Period assessed ≥ 12 months from the end of the reporting period; Management considers all available information about the future. It is not capped at twelve months.
Disclosure of material uncertainties: Material uncertainty about going concern → disclose the uncertainty; Applies where events or conditions may cast significant doubt on the ability to continue.
Non-going-concern basis: Not a going concern → disclose that fact, the basis used and the reason; Assets and liabilities are then typically measured on a break-up or similar basis.
Split of responsibility: Management: assess and disclose. Auditor: evaluate and conclude (ISA 570); The auditor's work does not replace management's duty and does not guarantee the entity's survival.

How to solve Going Concern Basis and Management Responsibilities questions

Use this method for scenario questions on going concern responsibilities, and for written parts asking who does what.

1Identify the question type: definition, management duty, auditor duty, or a scenario requiring a conclusion.
2State the going concern basis in one sentence: the entity will continue for the foreseeable future, with no intention or need to liquidate or cease trading.
3Name who is responsible. Management makes the assessment under IAS 1. The auditor evaluates it under ISA 570.
4State the period: at least twelve months from the end of the reporting period, using all available information about the future.
5Apply to the scenario facts. Look for loan repayments due, loss of key customers, negative cash flow, or a plan to close. Decide whether there is doubt.
6Conclude on disclosure. Material uncertainty means disclose it. Intention to liquidate means a different basis and disclosure of that fact.
7Add the auditor link only if asked: the auditor checks the appropriateness of the basis and the adequacy of disclosure.

Quickest way: Three-question check

When to use it: Use in Section A objective test questions and in the Section B constructed response questions where time is short and options or points sound similar.

Who? If the question says prepares or assesses, it is management. If it says evaluates or concludes, it is the auditor.
How long? Look for at least twelve months from the end of the reporting period. Reject options saying exactly twelve months or twelve months from the approval date.
What if doubt? Material uncertainty means disclosure. Intention to liquidate means abandon the going concern basis.

Common mistakes in Going Concern Basis and Management Responsibilities

Saying the auditor is responsible for assessing going concern.
Students link going concern with ISA 570 and forget that IAS 1 places the duty on management.
Fix: Write management assesses and discloses; the auditor evaluates management's assessment and considers the disclosures.
Stating the period as exactly twelve months from the reporting date.
Students remember the number twelve and drop the word at least.
Fix: Write at least twelve months from the end of the reporting period, and note that management considers all available information about the future.
Thinking that an unmodified audit report guarantees the entity will survive.
The audit is wrongly seen as a guarantee of future viability.
Fix: State that the auditor cannot predict future events. A clean report is not an assurance of continuation.
Continuing with the going concern basis when management intends to liquidate.
Students focus on the numbers and ignore management's intentions.
Fix: If management intends to liquidate or cease trading, or has no realistic alternative, the going concern basis is inappropriate and another basis must be used with disclosure.
Forgetting disclosure when uncertainty exists but the basis is still appropriate.
Students think the choice is only between going concern and not going concern.
Fix: Remember a third case: going concern basis used, but material uncertainties disclosed.

Worked examples

Example 1

Seren Co's year ended 31 December 20X5. Management approved the financial statements on 15 March 20X6. State the minimum period management must consider when assessing going concern, and the date it runs to.

Show the solution

IAS 1 requires management to consider all available information about the future, which is at least twelve months from the end of the reporting period.
The end of the reporting period is 31 December 20X5.
Twelve months from that date runs to 31 December 20X6.
The approval date of 15 March 20X6 is not the starting point.

Answer: Management must consider at least the twelve months to 31 December 20X6, and longer if relevant information exists beyond that date.

Example 2

Kiran Ltd has a loan of ₹50,00,000 repayable in four months. Cash forecasts show it cannot repay and no refinancing is agreed. Management still plans to continue trading. Explain management's responsibilities and what the financial statements must contain.

Show the solution

Management must assess going concern under IAS 1, using all available information, covering at least twelve months from the year end.
The loan falls due within that period and the forecasts show a shortfall. This is an event that may cast significant doubt on the ability to continue.
Management has not decided to liquidate, and it plans to continue, so the going concern basis may still be used if management has a realistic plan.
Because the doubt is significant, management must disclose the material uncertainty.
If management concluded it had no realistic alternative but to cease trading, the going concern basis would be inappropriate and a different basis would be needed, with disclosure of that fact and the reason.
The auditor's separate role is to evaluate management's assessment and the adequacy of the disclosure.

Answer: Management must assess going concern, use the going concern basis only if it is still appropriate, and disclose the material uncertainty over the loan. If it has no realistic alternative to ceasing trading, it must abandon the basis and disclose that fact, the basis used and the reason.

Exam tips

In Section A questions on responsibility, check the verb. Assess and prepare point to management. Evaluate and conclude point to the auditor.
Use the IAS 1 wording: at least twelve months from the end of the reporting period.
In Section B scenario answers, link each fact to a point: loan due, lost customer, negative cash flow. Then state the consequence for disclosure.
Distinguish the three outcomes: going concern with no doubt, going concern with material uncertainty disclosed, and not a going concern.
Do not drift into audit reporting unless the question asks. Answer the management duty first.

Going Concern Basis and Management Responsibilities in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Going Concern Basis and Management Responsibilities: frequently asked questions

What is the going concern assumption?

It is the assumption that an entity will continue in operation for the foreseeable future and meet its obligations as they fall due. Financial statements are prepared on this basis unless management intends to liquidate or cease trading, or has no realistic alternative.

How far ahead must management look under IAS 1?

Management must consider all available information about the future, which is at least twelve months from the end of the reporting period. It may need to look further if relevant information exists.

Who is responsible for going concern, management or the auditor?

Management is responsible for assessing going concern and for disclosing material uncertainties. The auditor evaluates management's assessment and concludes on the appropriateness of the basis and the adequacy of disclosure under ISA 570.

What happens if the entity is not a going concern?

The financial statements must not be prepared on the going concern basis. Management must disclose that fact, the basis it used instead, and the reason the entity is not regarded as a going concern.