## SA 570: Indicators of Going Concern Doubt

The following events or conditions — individually or collectively — may cast significant doubt on an entity's ability to continue as a going concern.

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### (A) Financial Indicators — Mnemonic: FOTO CAN WAN

Letter	Indicator
F	Fixed-term borrowings approaching maturity without realistic renewal prospects; or excessive reliance on short-term borrowings to finance long-term assets
O	Substantial operating losses
T	Inability to comply with terms of loan agreements
O	Inability to obtain financing for essential new product development or other essential investments
C	Inability to pay creditors on due dates
A	Adverse key financial ratios
N	Net liability or net current liability position
W	Indications of withdrawal of financial support by creditors
A	Arrears or discontinuance of dividends
N	Negative operating cash flows (historical or prospective)

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### (B) Operating Indicators — Mnemonic: MK SaL²E

Letter	Indicator
M	Management intentions to liquidate or cease operations
K	Loss of key management without replacement
L¹	Loss of a major market, key customer(s), franchise, license, or principal supplier(s)
L²	Labour difficulties
S	Shortages of important supplies
E	Emergence of a highly successful competitor

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### (C) Other Indicators — Mnemonic: No PUC

Letter	Indicator
N	Non-compliance with capital or other statutory/regulatory requirements (e.g., solvency/liquidity for financial institutions)
P	Pending legal or regulatory proceedings that may result in claims the entity cannot satisfy
U	Uninsured or underinsured catastrophes
C	Changes in law, regulation, or government policy expected to adversely affect the entity

> These are examples, not an exhaustive list. The auditor remains alert throughout the entire audit for any such signals.

Worked example

### Example 1

Example – Multiple Financial Indicators: A manufacturing company has: (i) a term loan of ₹50 crore maturing in 3 months with no refinancing arranged, (ii) negative operating cash flows for the last 2 years, and (iii) net current liabilities of ₹20 crore. These simultaneously trigger F (FOTO), N (negative cash flows), and N (net current liabilities) — collectively creating significant going concern doubt even if each alone might not.

### Example 2

Example – Operating Indicator: A software firm's CEO, CTO, and CFO all resign within 6 months, and no replacements have been identified. This triggers the 'K' indicator (loss of key management without replacement) under operating conditions, warranting the auditor to perform going concern procedures.

### Example 3

Example – Other Indicator: A pharmaceutical company is under investigation by the Drug Controller for a product recall. A successful prosecution could result in a ₹200 crore penalty the company cannot pay. This is the 'P' indicator (pending legal proceedings) under other conditions.

⚠️ Common exam mistakes

Treating these indicators as conclusive proof of going concern failure — they only 'may cast significant doubt'; management plans may mitigate them.
Ignoring indicators that appear collectively — each item alone may seem minor, but the combined effect can be significant.
Limiting going concern review to only financial indicators — operating and other indicators are equally relevant.
Confusing 'net current liability position' (financial indicator) with insolvency — a company can be technically solvent but still face going concern doubt due to liquidity mismatches.
Missing the auditor's ongoing alert duty — going concern indicators must be watched throughout the audit, not only during the final review stage.

Reference: Q4 – Events or Conditions That May Cast Significant Doubt — SA 570 – Going Concern

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Events and Conditions That May Cast Significant Doubt on Going Concern

Worked example

⚠️ Common exam mistakes