SA 570 Going Concern — Additional Audit Procedures When Doubt Is Identified
## SA 570: Additional Audit Procedures When Going Concern Doubt Is Identified
When events or conditions casting significant doubt on an entity's ability to continue as a going concern are identified, the auditor must obtain sufficient appropriate audit evidence to determine whether a material uncertainty exists.
### Trigger Indicators
Examples of conditions that may cast doubt:
Significant shortage of skilled labour
Inability to pay creditors on time / overall liquidity crisis
Default on a major loan repayment
Current liabilities exceeding current assets
Significant decline in sales revenue
### Required Additional Audit Procedures (SA 570)
#
Procedure
(i)
If management has not yet assessed going concern, request management to make its assessment
(ii)
Evaluate management's plans for future actions — assess feasibility and likelihood of improving the situation
(iii)
If a cash flow forecast is prepared: (a) evaluate reliability of underlying data; (b) assess adequacy of support for assumptions
(iv)
Consider whether additional facts or information have become available since the date of management's assessment
(v)
Request written representations from management (and TCWG where appropriate) regarding future plans and feasibility
### Key Principle
Identifying going concern indicators does not mean the entity will fail — it triggers enhanced scrutiny. Mitigating factors (e.g., creditor restructuring, cost-cutting plans) must be evaluated to determine whether they adequately address the doubt.
Worked example
### Example 1
ABC Pvt. Ltd. (MTP 7): ABC Pvt. Ltd. defaulted on a major loan, has current liabilities exceeding current assets by 50%, and revenue declined 30%. Management has not yet performed a going concern assessment but promises corrective measures (cost-cutting, loan restructuring discussions). CA Ram must: (i) Request management to perform a going concern assessment immediately. (ii) Evaluate the feasibility of the proposed corrective measures. (iii) If a cash flow forecast is prepared, assess reliability of underlying data and adequacy of assumptions. (iv) Check for any new facts or developments since the promises were made. (v) Obtain written representations from management on their future plans and feasibility.
### Example 2
Liquidity Crisis Scenario (Page 393): A company facing skilled labour shortage and inability to pay creditors prepares a cash flow forecast to address auditor concerns. The auditor must: evaluate the reliability of the data underlying the forecast; assess whether the assumptions are adequately supported; and check if any new information has emerged since management's assessment date.
⚠️ Common exam mistakes
Confusing going concern indicators with a conclusion that the entity will fail — indicators only trigger additional procedures, not a predetermined adverse opinion
Forgetting to request written representations about management's future plans — this is a mandatory step under SA 570
Accepting a cash flow forecast at face value without evaluating reliability of underlying data and adequacy of assumptions
Not considering mitigating factors when evaluating whether material uncertainty actually exists
Skipping the step to request management to prepare a going concern assessment when they have not done so
Bare-Act text Additional Audit Procedures When Events or Conditions Are Identified · SA 570 – Going Concern · 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 related to events or conditions that may cast significant doubt on the entity's ability to continue as a going concern through performing additional audit procedures, including consideration of mitigating factors. These procedures shall include: (i) requesting management to make its assessment where it has not yet done so; (ii) evaluating management's plans for future actions; (iii) where a cash flow forecast has been prepared, evaluating the reliability of the underlying data and determining whether there is adequate support for assumptions; (iv) considering whether any additional facts or information have become available since management's assessment; (v) requesting written representations from management and, where appropriate, those charged with governance.