Advanced Audit and Assurance (International) · Subsequent events and going concern

Going Concern Assessment and Audit Procedures under ISA 570

Updated 11 October 2026 · Fact-checked

Going concern is the assumption that an entity will continue in operation for the foreseeable future. Management assesses it and discloses any doubt. The auditor concludes whether management's use of the assumption is appropriate and whether a material uncertainty exists, by evaluating management's assessment and obtaining sufficient appropriate evidence.

Understand Going Concern Assessment and Audit Procedures

The financial statements of most entities are prepared on the going concern basis. This means the entity will keep operating and will not need to be liquidated or stop trading. Assets are valued on that basis, for example at cost less depreciation rather than at forced-sale value.

If the assumption is wrong, the numbers may be misleading. So both management and the auditor have duties. Management must assess the entity's ability to continue, using the period and other requirements of the framework (under IAS 1 this takes into account all available information about the future, which is at least, but not limited to, twelve months from the end of the reporting period). Management must disclose any material uncertainty. The auditor does not make that assessment for them. The auditor's job is to conclude on whether management's use of the going concern basis is appropriate and whether a material uncertainty exists that must be disclosed. The auditor evaluates the same period as management's assessment, whatever length that is, and enquires whether management is aware of events or conditions beyond it.

The auditor also cannot predict the future. An unqualified report is not a guarantee that the entity will survive. This is why the auditor works with indicators of risk and with management's plans, and tests how realistic they are.

Indicators of going concern problems fall into three groups:

Financial: net liabilities or net current liability position, loans near maturity with no realistic renewal, heavy reliance on short-term borrowing for long-term assets, negative operating cash flows, adverse key ratios, arrears or discontinuance of dividends, inability to pay creditors on time, breached loan covenants.
Operating: loss of key management, loss of a major market, key customer, licence or supplier, labour difficulties, shortages of important supplies, a new highly successful competitor.
Other: non-compliance with capital or statutory requirements, pending legal proceedings that could result in claims that cannot be met, changes in law or government policy.

The risk of going concern problems should be considered from planning, and the auditor must stay alert throughout the audit. When events or conditions are found that may cast significant doubt, the auditor performs additional procedures. These mostly test management's plans, the cash flow forecasts behind them, and the evidence of support from lenders and others.

Key rules to remember

Core auditor conclusion (ISA 570 (Revised)): Conclude on: (1) is management's use of the going concern basis appropriate? (2) does a material uncertainty exist?; Both questions must be answered with sufficient appropriate evidence.
Reporting outcomes: Basis appropriate + no material uncertainty = no separate going concern section, although the standard report still describes management's and the auditor's going concern responsibilities; Basis appropriate + material uncertainty adequately disclosed = unmodified opinion with a 'Material Uncertainty Related to Going Concern' section; Uncertainty not adequately disclosed = qualified or adverse opinion (ISA 705), and the Basis for Opinion section states that a material uncertainty exists and that the financial statements do not adequately disclose it; Financial statements prepared on the going concern basis, but that basis is inappropriate = adverse opinion; Management has instead adopted an acceptable alternative basis and discloses it adequately = unmodified opinion may be given, with an emphasis of matter if appropriate; The auditor requests management to make or extend its assessment. If management is unwilling, the auditor considers the effect on the report. A limitation of scope may lead to a qualified opinion or a disclaimer of opinion. The adverse opinion applies only where the going concern basis has been used and is inappropriate. The conclusion depends on whether an acceptable alternative basis has been adopted and disclosed.
Period covered: Management's assessment period is whatever the applicable framework requires. Under IAS 1 it is at least, but not limited to, twelve months from the end of the reporting period, taking into account all available information about the future. Auditor (ISA 570 (Revised)): evaluate the same period as management's assessment and enquire whether management is aware of events or conditions beyond it.; If management's period is shorter than the framework requires, ask management to extend it.
Responsibility split: Management: assess and disclose. Auditor: evaluate, conclude, report.; The auditor's responsibility does not replace management's.

How to solve Going Concern Assessment and Audit Procedures questions

Use this method for any question on going concern, whether it asks for indicators, procedures, or the audit report.

1Read the scenario and underline each fact that could threaten continuation: losses, covenant breaches, lost customers, cash shortage, legal claims.
2Group the facts under financial, operating and other indicators. Say which are significant and which have mitigating factors.
3State who is responsible: management assesses and discloses; the auditor evaluates the assessment and concludes.
4List procedures tied to the facts: review management's assessment and period, forecasts and assumptions, loan agreements, post year-end events, plans and support.
5Evaluate the evidence: ask whether plans are feasible, forecasts are reasonable and support is genuine and enforceable.
6Conclude on whether the basis is appropriate and whether a material uncertainty exists. State the effect on the report and the disclosure needed.
7Add communication: tell those charged with governance about the events, the plans, and the disclosures. Add ethics or scepticism points if the scenario hints at management bias.

Quickest way: Indicator, procedure, conclusion

When to use it: Use when time is short, for example a 10 to 12 mark requirement.

Pick the three or four strongest indicators in the scenario and name each in a short line.
For each indicator, write one procedure that tests it. Example: covenant breach, so obtain the loan agreement and lender correspondence.
Add two standard procedures: review the cash flow forecast and its assumptions, and review post year-end events and board minutes.
Add a written representation from management on its plans.
Finish with the effect on the report in one sentence, linked to the facts.

Common mistakes in Going Concern Assessment and Audit Procedures

Saying the auditor is responsible for assessing going concern.
Students blend the two roles because the auditor does so much work on it.
Fix: Write that management prepares the assessment and discloses. The auditor evaluates it and concludes.
Listing indicators without applying them to the scenario.
Learning a memorised list feels safe.
Fix: Quote the scenario fact, name the indicator, and say why it matters for this entity.
Writing generic procedures such as 'review the financial statements'.
Students run out of time or ideas.
Fix: Link each procedure to a specific risk. Say what document you obtain and what you check.
Accepting management's forecast without testing it.
Students treat a forecast as evidence.
Fix: Evaluate the assumptions, compare past forecasts to actual results, check the data used, and test sensitivity.
Confusing the audit report outcomes, for example giving an adverse opinion when disclosure is adequate.
Going concern modification rules are mixed up.
Fix: Adequate disclosure of a material uncertainty gives an unmodified opinion with a separate section. Inadequate disclosure gives qualified or adverse. Where the statements are prepared on the going concern basis but that basis is inappropriate, the opinion is adverse. If management has adopted an acceptable alternative basis and discloses it adequately, an unmodified opinion may be given, with an emphasis of matter if appropriate.
Ignoring management's plans or events beyond the assessment period.
Students stop at the indicators.
Fix: Always assess whether plans such as asset sales, refinancing or cost cuts are feasible, and ask management about events or conditions beyond the period its assessment covers.

Worked examples

Example 1

You are the audit senior on Zenith Retail, a listed company. It has made losses for two years, has a bank loan of $8 million due for repayment in four months, and its largest customer, 40% of revenue, has just terminated its contract. Management says it will renew the loan and has prepared a cash flow forecast. Explain the audit procedures to evaluate management's going concern assessment. (8 marks)

Show the solution

Identify the indicators: recurring losses and a near-term loan maturity (financial), and loss of a major customer (operating). Together they raise significant doubt.
Review management's assessment: check it covers the period the framework requires (under IAS 1, at least twelve months from the year end) and ask management to extend it if it does not.
Discuss with management its plans and the basis for believing the loan will be renewed.
Obtain the loan agreement and correspondence with the bank. Look for a renewal offer, covenants and security. Seek written confirmation of terms from the lender where possible.
Test the cash flow forecast: review assumptions on revenue after the lost contract, margins and working capital. Compare past forecasts with actual results and check the arithmetic.
Perform sensitivity analysis on the forecast, such as lower revenue or delayed receipts, to see whether the loan could be repaid or the entity would breach covenants.
Review post year-end events, board minutes and management accounts for further customers lost, new contracts won, or financing changes.
Obtain written representations from management on its plans and their feasibility. Then communicate with those charged with governance.

Answer: The auditor reviews management's assessment and period, tests the forecast and its assumptions, obtains lender evidence on the loan, performs sensitivity analysis, reviews subsequent events, and gets management representations. If renewal is not assured, a material uncertainty exists and must be disclosed.

Example 2

Following the procedures on Zenith Retail, the auditor concludes that the going concern basis is appropriate but that a material uncertainty exists because the bank has not yet agreed to renew the loan. State the effect on the auditor's report in each case: (a) the financial statements disclose the uncertainty adequately; (b) they do not. (6 marks)

Show the solution

Start with the conclusion: the going concern basis is appropriate, and a material uncertainty exists.
Case (a): disclosure is adequate. The auditor expresses an unmodified opinion and includes a separate section headed 'Material Uncertainty Related to Going Concern'.
That section draws attention to the note disclosing the uncertainty and states that the opinion is not modified in respect of the matter.
Case (b): disclosure is not adequate. The financial statements are materially misstated, so the auditor modifies the opinion in accordance with ISA 705.
Under ISA 705 the choice follows the usual test. If the inadequate disclosure is material but not pervasive, the opinion is qualified ('except for'). If it is both material and pervasive, the opinion is adverse. The Basis for Opinion section states that a material uncertainty exists and that the financial statements do not adequately disclose it, and explains the basis for the modification.
Communicate the conclusion and the effect on the report to those charged with governance before issuing the report.

Answer: (a) Unmodified opinion with a Material Uncertainty Related to Going Concern section. (b) Qualified or adverse opinion for inadequate disclosure, chosen under ISA 705: qualified if the omission is material but not pervasive, adverse if it is material and pervasive. The Basis for Opinion section states that a material uncertainty exists and that the financial statements do not adequately disclose it, and gives the reasons for the modification.

Exam tips

Tie every indicator and every procedure to a fact in the scenario. Generic lists earn few marks.
Always state the responsibility split in one line when a question asks about roles. It is an easy mark.
For report questions, state the conclusion first (appropriate basis or not, uncertainty or not) and then the opinion type.
Show professional scepticism on management's forecasts and plans. Comment on bias or optimism where the scenario hints at it.
Add a point on communication with those charged with governance. Many students forget it.

Practice questions from Subsequent events and going concern

Going Concern Assessment and Audit Procedures 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 Assessment and Audit Procedures: frequently asked questions

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

Management is responsible for assessing the entity's ability to continue and for disclosing any material uncertainty. The auditor evaluates that assessment, concludes on whether the basis is appropriate and whether a material uncertainty exists, and reports accordingly. The auditor's work does not remove management's duty.

What are the main going concern indicators in the AAA exam?

Group them as financial, operating and other. Financial examples are net liabilities, loans due with no refinancing and negative cash flows. Operating examples are losing key customers or management. Other examples include legal claims or regulatory changes.

What procedures evaluate management's going concern assessment?

Review the assessment and the period it covers, discuss plans with management, and test the cash flow forecast and its assumptions. Obtain evidence on loans and support from lenders, review post year-end events, and get written representations. Tailor each to the facts.

What happens to the audit report if there is a material uncertainty?

If the uncertainty is adequately disclosed, the opinion is unmodified and the report includes a separate section on material uncertainty related to going concern. If disclosure is inadequate, the opinion is qualified or adverse. If the financial statements are prepared on a going concern basis that is inappropriate, the opinion is adverse. If management has adopted an acceptable alternative basis and disclosed it adequately, an unmodified opinion may be given, with an emphasis of matter if appropriate.