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📚 Learn/ / SA 570 - Going Concern (Revised)
Microlesson · 5-min read

Going Concern Indicators, Risk Assessment, Audit Procedures, and Reporting

## SA 570 (Revised): Going Concern

### What Is the Going Concern Assumption (GCA)?

FS are prepared assuming the entity will continue in operation for the foreseeable future. If this assumption is inappropriate, assets and liabilities would need to be measured on a break-up basis.

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### Indicators That Cast Doubt on GCA

#### Financial Indicators

  • Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment
  • Excessive reliance on short-term borrowings to finance long-term assets
  • Negative operating cash flows (historical or prospective FS)
  • Adverse key financial ratios
  • Substantial operating losses or significant deterioration in asset values
  • Change from credit to cash-on-delivery transactions with suppliers

#### Operating Indicators

  • Loss of key management without replacement
  • Loss of major market, key customer(s), franchise, license, or principal supplier(s)
  • Labour difficulties
  • Shortages of important supplies
  • Emergence of a highly successful competitor

#### Other Indicators

  • Non-compliance with capital or statutory/regulatory requirements
  • Pending legal or regulatory proceedings
  • Expected adverse changes in law/regulation/government policy
  • Uninsured or underinsured catastrophes

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### Risk Assessment Procedures (Under SA 315)

During RAP, the auditor shall:

1. Consider whether events/conditions exist that cast significant doubt on GCA

2. Remain alert throughout the audit for such indications

3. Check whether management has already performed a preliminary GCA assessment

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### Additional Audit Procedures When GCA Doubt Is Identified

ProcedureDetails
Request management's GCA assessmentIf management has not yet prepared one
Evaluate management's plans for future actionsAssess whether outcomes of plans are feasible
Analyse cash flow forecasts (if prepared)(i) Evaluate reliability of underlying data; (ii) Assess adequacy of support for assumptions
Consider new facts since management's assessmentAny additional information that has become available
Obtain Written RepresentationsRegarding plans for future actions and their feasibility

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### Reporting — Four Scenarios

ScenarioOpinion Required
GCA is inappropriate to useAdverse Opinion
GCA appropriate + Material Uncertainty (MU) exists + adequate disclosure made in FSClean (Unmodified) Opinion + separate 'Material Uncertainty Related to Going Concern' section in report
GCA appropriate + MU exists + adequate disclosure NOT madeQualified or Adverse Opinion
GCA appropriate + no material uncertaintyClean Opinion, no special section needed

> Material Uncertainty (MU): A level of doubt that is so significant that it should be disclosed in the FS for users to understand the risk.

### The 'Material Uncertainty Related to Going Concern' Section

When adequate disclosure is made, the auditor's report must:

  • Draw attention to the note in FS disclosing the MU
  • State that the events/conditions indicate that a material uncertainty exists

Worked example

### Example 1

Financial indicator + Audit Response: A company has a ₹50 crore term loan maturing in 3 months and the lender has confirmed non-renewal. Auditor identifies this as a GCA doubt indicator (fixed-term borrowing without renewal prospects). Auditor requests management's GCA assessment and evaluates the feasibility of their plan to raise equity capital instead.

### Example 2

Adequate disclosure → Clean Opinion with MU section: A retail company discloses in Note 14 that lease renewals for 60% of its stores are uncertain, creating material uncertainty about GCA, but management has signed letters of intent for renewal. Auditor concludes GCA is appropriate and disclosure is adequate → issues Clean Opinion with a separate 'Material Uncertainty Related to Going Concern' section pointing to Note 14.

### Example 3

GCA inappropriate → Adverse Opinion: A manufacturing company is clearly insolvent (liabilities exceed assets by ₹20 crore, all credit lines exhausted, operations halted) but prepares FS on going concern basis without any disclosure. Auditor concludes GCA is inappropriate → Adverse Opinion.

### Example 4

MU exists but no disclosure → Qualified/Adverse: A company has significant going concern doubt (bank has filed for recovery) but management refuses to make any disclosure in the FS. Since adequate disclosure is NOT made, auditor issues a Qualified or Adverse Opinion as appropriate.

⚠️ Common exam mistakes

  • Thinking any going concern doubt automatically requires a qualified opinion — the opinion type depends on (a) whether GCA itself is appropriate and (b) whether adequate disclosure is made.
  • Confusing 'GCA inappropriate' (Adverse) with 'MU not disclosed' (Qualified/Adverse) — when GCA is simply wrong to use, the opinion is Adverse; when GCA is right but disclosure is missing, it can be Qualified.
  • Forgetting that when adequate disclosure IS made, the auditor issues a CLEAN opinion (not qualified) but must add the 'Material Uncertainty Related to Going Concern' section.
  • Overlooking the requirement to obtain Written Representations from management about their plans and feasibility when GCA doubt has been identified.
Bare-Act text Para 21 · SA 570 (Revised) - Going Concern (ICAI) · click to expand
If the financial statements have been prepared using the going concern basis of accounting but, in the auditor's judgment, management's use of the going concern basis of accounting in the preparation of the financial statements is inappropriate, the auditor shall express an adverse opinion.
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