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Audit and Assurance · Going concern

Indicators of Going Concern Problems in Audit

Updated 11 October 2026 · Fact-checked

Going concern indicators are events or conditions that cast doubt on whether an entity can keep operating for at least twelve months from the date of approval of the financial statements. They fall into financial, operating and other groups. In the exam, spot them in the scenario, explain the effect, then link to audit procedures.

Understand Indicators of Going Concern Problems

The financial statements are normally prepared on the going concern basis. This assumes the entity will continue in operation for the foreseeable future and will not need to liquidate or stop trading. If that assumption is wrong, assets and liabilities would be measured very differently.

Management must assess going concern when preparing the financial statements. The auditor must then evaluate that assessment. Under ISA 570 (Revised), management's assessment covers at least twelve months from the date of approval of the financial statements, and the auditor should ask management about events or conditions beyond that period.

An indicator is a warning sign. It does not prove the entity will fail. It tells you to look harder. Indicators are usually grouped as financial (money problems), operating (problems running the business) and other (legal, regulatory or external events).

Financial indicators include net liability or net current liability position, borrowings near maturity with no realistic prospect of renewal, heavy reliance on short-term borrowing for long-term assets, negative operating cash flows, adverse key ratios, substantial operating losses, arrears of dividends, inability to pay creditors on time, inability to meet loan terms, and a need to find new sources of finance.

Operating indicators include loss of key management without replacement, loss of a major market, key customer, licence or principal supplier, labour difficulties, shortages of important supplies, and the emergence of a highly successful competitor.

Other indicators include non-compliance with capital or other statutory requirements, pending legal or regulatory proceedings that could result in claims the entity cannot meet, and changes in law or government policy expected to harm the entity.

Key rules to remember

Foreseeable future (ISA 570 (Revised))
At least 12 months from the date of approval of the financial statements
Management's assessment should cover at least this period. The auditor asks about events or conditions beyond it.
Three groups of indicators
Financial + Operating + Other
Use these as headings in written answers so nothing is missed.
Current ratio
Current assets ÷ current liabilities
A ratio below 1 suggests liquidity pressure. It is a signal only, as some businesses operate safely with low ratios.
Interest cover
Profit before interest and tax ÷ finance costs
A low or falling figure suggests difficulty servicing debt.
Gearing
Debt ÷ equity (or debt ÷ (debt + equity))
State which definition you use. High and rising gearing is a warning sign.

How to solve Indicators of Going Concern Problems questions

Use this method for any question asking you to identify or discuss going concern indicators from a scenario.

  1. 1Read the scenario once and underline every fact about cash, debt, losses, customers, staff, suppliers, legal matters or regulation.
  2. 2Sort each fact into financial, operating or other.
  3. 3For each relevant fact, state why it threatens continued operation. One short sentence is enough.
  4. 4If numbers are given, calculate a ratio or trend (for example current ratio or cash movement) and comment on it.
  5. 5Note any mitigating facts, such as a confirmed loan renewal or a signed new contract, and say they need to be verified.
  6. 6If the question asks for procedures, link each indicator to a specific audit step, such as reviewing cash flow forecasts or loan agreements.
  7. 7Finish with the effect: further work is needed and there may be disclosure or reporting consequences.

Quickest way: Sort and Link

When to use it: Use this for Section A or B objective questions and for short Section C parts where time is tight.

  1. Scan for the key words: losses, overdraft, covenant, loan repayable, lost customer, lawsuit, licence.
  2. Label each as F, O or Other in the margin of your notes.
  3. Pick the choice that is a genuine threat to continuing operation, not a routine event.
  4. Check the wording: an indicator is not a conclusion. Reject options that say the entity will definitely fail.
  5. In written answers, use one bullet per indicator in the form: fact, why it matters.

Common mistakes in Indicators of Going Concern Problems

  • Listing only financial indicators.

    Money problems feel like the obvious cause of failure.

    Fix: Always check for operating and other indicators too, such as loss of a key customer or a legal claim.

  • Copying a list of indicators without using the scenario.

    Students memorise the ISA 570 list and write it out in full.

    Fix: Only include indicators supported by facts in the scenario and quote the fact.

  • Saying an indicator proves the entity is not a going concern.

    Students treat a warning sign as a conclusion.

    Fix: Say it raises doubt and needs further evaluation, including management's plans.

  • Ignoring mitigating factors.

    Students focus on the bad news in the scenario.

    Fix: Mention positive facts such as new finance or support from a parent, and say the auditor must test that they are realistic and enforceable.

  • Treating a low current ratio as always a problem.

    Ratios are learned as rules of thumb.

    Fix: Compare with the industry and prior year. Some retailers and similar businesses normally run low ratios.

  • Describing audit procedures when asked only for indicators.

    Students rush to the going concern procedures they know well.

    Fix: Answer the requirement exactly. Add procedures only if asked.

Worked examples

Example 1

Harbor Foods Ltd is a supplier to supermarkets. In the year, it made an operating loss and its bank overdraft rose. Its main loan of $2 million is repayable in four months and the bank has not said whether it will renew. Its largest customer, who gave 40% of revenue, has just moved to another supplier. The finance director left last month and has not been replaced. Identify the going concern indicators and explain why each matters.

Show the solution
  1. Sort the facts. Operating loss, rising overdraft and loan repayable soon with no renewal confirmed are financial. Loss of the largest customer and the finance director leaving are operating.
  2. Operating loss and rising overdraft: the business is consuming cash and relying more on short-term finance, so liquidity is under pressure.
  3. Loan repayable in four months, renewal unconfirmed: this is within twelve months. If the bank refuses, the entity may be unable to repay.
  4. Loss of the customer giving 40% of revenue: income will fall sharply, making future losses and cash shortage more likely.
  5. Finance director leaving without replacement: weak financial management makes forecasting and negotiating with the bank harder.

Answer: Financial indicators: operating loss, increasing overdraft, loan repayable within four months with renewal not confirmed. Operating indicators: loss of a customer representing 40% of revenue and loss of the finance director without replacement. Together they raise significant doubt that needs further audit work.

Example 2

Delta Ltd has current assets of $1,200,000 and current liabilities of $1,500,000 at the year end. Last year the figures were $1,400,000 and $1,000,000. Operating cash flow was negative this year. Comment on the going concern implications.

Show the solution
  1. Current ratio this year = 1,200,000 ÷ 1,500,000 = 0.8.
  2. Current ratio last year = 1,400,000 ÷ 1,000,000 = 1.4.
  3. The ratio has fallen from 1.4 to 0.8 and is now below 1. Current liabilities exceed current assets by $300,000, a net current liability position.
  4. Negative operating cash flow means the business is not generating cash to meet this shortfall, so it may depend on new finance.
  5. This is a financial indicator, but not conclusive. The auditor should check industry norms, available facilities and management's plans.

Answer: The current ratio fell from 1.4 to 0.8, with net current liabilities of $300,000 and negative operating cash flow. These are financial going concern indicators that require further investigation of cash flow forecasts and financing.

Exam tips

  • Always tie each indicator to a fact in the scenario. Generic lists score poorly.
  • Use the three headings financial, operating and other to structure your answer and avoid missing categories.
  • In objective questions, look for the option that is a genuine threat to continuing operation and reject absolute wording.
  • If ratios are possible, calculate one or two quickly and comment on the trend, not just the number.
  • Read the requirement carefully: identify indicators, explain them, or list procedures. Each needs a different answer.

Indicators of Going Concern Problems in other exams

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

Indicators of Going Concern Problems: frequently asked questions

What are the main going concern indicators in audit?

They are grouped as financial, operating and other. Financial ones include net current liabilities, negative cash flow and loans due without renewal. Operating ones include loss of a key customer or management. Other ones include legal proceedings and regulatory breaches.

Does one indicator mean the entity is not a going concern?

No. An indicator only raises doubt. The auditor evaluates it with other evidence, including management's plans and mitigating factors, before deciding whether a material uncertainty exists.

How long is the foreseeable future for going concern?

Under ISA 570 (Revised), management's assessment covers at least twelve months from the date of approval of the financial statements. The auditor should also ask management about events or conditions beyond that period.

How is this tested in ACCA AA?

It appears in objective test cases and in constructed response questions, often as a scenario where you must identify indicators, explain their effect and suggest audit procedures. Link every point to the facts given.