If events or conditions are identified that may cast significant doubt, the auditor performs the following procedures:
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### Core Audit Procedures
i. Ask Management to Perform Going Concern Assessment
If management has not yet done one, request them to conduct a formal assessment.
ii. Evaluate Management's Plans
Review the plans management has drawn up to address the identified events/conditions. Critically assess their feasibility — are the plans realistic?
iii. Review Cash Flow Forecast
If management has prepared a cash flow forecast:
Check the reliability of underlying data used in the forecast.
Evaluate the reasonableness of assumptions management used.
iv. Obtain Written Representations (WR)
Obtain written representations from management about:
Their future plans to deal with the going concern issue.
Their assessment of the feasibility of those plans.
v. Consider Any New Information
Consider any new information that has come to management's attention during or after the assessment period.
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### Additional Procedures (for Exam Extra Points)
Procedure
Purpose
Review minutes of board/committee meetings
Identify discussions about going concern or financial difficulties
Review borrowing covenants
Identify whether the entity is in breach of any loan covenants
Review management's investment plans
Assess if the entity can fund future operations
Inquire from legal counsel
Understand legal proceedings or regulatory matters that may impact going concern
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### Assessment Period – Key Rule
> Management's going concern assessment must cover at least 12 months from the balance sheet date (or date of the financial statements).
If management's assessment covers only 3 months → auditor must ask management to extend it to at least 12 months.
If management refuses to extend → auditor must modify the audit report (Qualified opinion).
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### How Detailed Should the Assessment Be?
Entity Situation
Required Level of Assessment
History of high profitability, zero debt
Not very detailed — auditor raises no objection provided SAAE obtained
Complex financial situation
Detailed assessment required — auditor evaluates management's plans and process thoroughly
Worked example
### Example 1
Scenario: A company's cash flow forecast projects positive cash flows for the next 18 months. The auditor notices that the forecast assumes a 30% growth in sales, while the industry is stagnating.
→ The auditor must evaluate the reasonableness of assumptions — here, the 30% growth assumption appears unreasonable given industry conditions. The auditor should challenge this assumption and consider whether it creates a Material Uncertainty.
### Example 2
Scenario: Management's going concern assessment covers only the next 6 months because their bank facility renewal is due in 6 months.
→ The auditor must request management to extend the assessment to at least 12 months. If management refuses, the auditor should consider a modified opinion (Qualified).
### Example 3
Scenario: A profitable manufacturing company with no debt and strong cash reserves has not prepared a formal going concern assessment.
→ Since the company has a history of high profitability and zero debt, the auditor does not need a highly detailed assessment. However, the auditor must still obtain Sufficient Appropriate Audit Evidence (SAAE) to be satisfied about going concern before issuing an unmodified opinion.
⚠️ Common exam mistakes
Treating Written Representations (WR) as sufficient audit evidence on their own — WR supplements but does not replace other audit procedures.
Forgetting to evaluate the FEASIBILITY of management's plans — the plans must be realistic, not just documented.
Not knowing the 12-month rule — if management's assessment is shorter than 12 months, the auditor must push for an extension.
Confusing 'evaluating assumptions in cash flow forecast' with 'preparing the cash flow forecast' — the auditor evaluates; management prepares.
Bare-Act text Para 16 · SA 570 (Revised) – Going Concern, issued by ICAI · click to expand
If events or conditions have been identified that may cast significant doubt on the entity's ability to continue as a going concern, the auditor shall obtain sufficient appropriate audit evidence to determine whether or not a material uncertainty exists through performing additional audit procedures, including consideration of mitigating factors. These procedures shall include: (a) Where management has not yet performed an assessment of the entity's ability to continue as a going concern, requesting management to make its assessment. (b) Evaluating management's plans for future actions in relation to its going concern assessment, whether the outcome of these plans is likely to improve the situation and whether management's plans are feasible in the circumstances. (c) Where the entity has prepared a cash flow forecast, and analysis of the forecast is a significant factor in considering the future outcome of events or conditions in the evaluation of management's plans for future actions: (i) Evaluating the reliability of the underlying data generated to prepare the forecast; and (ii) Determining whether there is adequate support for the assumptions underlying the forecast. (d) Considering whether any additional facts or information have become available since the date on which management made its assessment. (e) Requesting written representations from management and, where appropriate, those charged with governance, regarding their plans for future actions and the feasibility of these plans.