## Learning Outcomes

After studying this article, you will be able to define the going concern concept, explain its importance in audit and financial reporting, recognise warning signs that may indicate going concern risks, and describe audit procedures required to assess going concern for the ACCA FAU exam.

## ACCA Foundations in Audit (FAU) Syllabus

For ACCA Foundations in Audit (FAU), you are required to understand the definition, significance, and audit implications of going concern. Key areas of the syllabus covered in this article include:

- The concept and definition of going concern
- The importance of going concern as a financial reporting assumption
- Indicators that may suggest going concern problems
- Auditor responsibilities to assess going concern
- Audit procedures to identify and address going concern risks
- Implications for auditor’s opinion if going concern is in doubt

## Test Your Knowledge

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, look more closely at that area during your revision._

1. What does the "going concern" assumption mean in relation to preparing financial statements?
2. List three financial or operational indicators that may suggest a business is not a going concern.
3. Which party is primarily responsible for assessing whether the going concern assumption is appropriate—management or auditors?
4. If material uncertainty exists regarding going concern, what must the auditor check is included in the financial statements?
5. Name two audit procedures which can help identify going concern risks.

## Introduction

Auditors must evaluate whether an entity will remain in business and meet its obligations for at least twelve months from the date the financial statements are approved. This assessment is essential because most financial reporting standards require accounts to be prepared on the "going concern" basis. A breakdown in this assumption can lead to significant issues for users of the financial statements and will affect the auditor's report.

> **Key Term: going concern**
> The assumption that an entity will continue to operate for the foreseeable future, with neither the intention nor the necessity to liquidate or cease trading.
>
> **Test Tip:**
> When revising Definition and significance, connect each definition, method, or rule to the kind of question the assessment is likely to ask.

### The importance of going concern

Going concern is a fundamental accounting assumption. If a business is not a going concern, asset and liability values shown in the accounts may not reflect their recoverable or payable amounts. It directly impacts issues such as asset valuation and classification, disclosure, and the addressees' reliance on the financial statements.

> **Key Term: material uncertainty**
> A situation where events or conditions cast significant doubt on the entity’s ability to continue as a going concern, but the outcome is not certain.

### Management and auditor responsibilities

It is management’s duty to assess if the business can continue as a going concern and use this basis when preparing the financial statements. The auditor’s role is to review and evaluate this assessment, looking for events or conditions—both financial and operational—that could threaten the entity’s survival.

> **Key Term: management’s assessment**
> The process by which management determines if there are significant doubts about the entity's ability to continue as a going concern, typically considering at least twelve months from the approval of the financial statements.
> **Key Term: auditor’s responsibility**
> The obligation of the auditor to evaluate management’s use of the going concern assumption, review evidence regarding its appropriateness, and decide if adequate disclosure has been made.

### Indicators of going concern problems

Auditors must be alert to a range of financial and non-financial factors which may indicate uncertainty over going concern status, including:

- Negative net assets or working capital
- Major losses or negative operating cash flows
- Defaults on loans or inability to secure new finance
- Overdue liabilities, such as tax or supplier payments
- Legal proceedings or significant contingent liabilities
- Loss of major customers or suppliers
- Withdrawal of financial support from shareholders or banks
- Plans to liquidate, significantly curtail operations, or cease trading

Management should identify and disclose any such issues, and the auditor must look for evidence of these during the audit.

### Audit procedures for going concern

ISA 570 (Going Concern) requires auditors to perform procedures to assess the appropriateness of the going concern basis. Key steps include:

- Reviewing management’s own assessment and forecasts
- Analyzing cash flow, profit and budget forecasts
- Inspecting loan agreements for breaches or imminent maturities
- Examining board and management meeting minutes
- Discussing liquidity, future plans, and risk factors with management
- Reviewing post-year-end transactions and subsequent events
- Evaluating the adequacy of disclosures about going concern

If significant doubts exist, the auditor must determine whether the financial statements include appropriate disclosures.

### Worked Example 1.1

Scenario:
The financial statements of ABC Ltd have been prepared assuming going concern. However, the company has overdue loan repayments and major suppliers have begun to demand payment up front.

Question:
What actions should the auditor take in this situation?

> **Answer:**
>
> - Review management’s forecasts, cash flows, and plans to resolve payment issues.
> - Inspect loan agreements for breaches or calls for repayment.
> - Examine correspondence with suppliers and banks for evidence of withdrawn support.
> - Assess whether the financial statements adequately describe these uncertainties.
> - Decide if a material uncertainty exists and whether the audit report needs to include an emphasis of matter.

### Worked Example 1.2

Scenario:
DEF Ltd has suffered continued losses for two years. Management prepared financial statements using the going concern basis and stated support will come from the parent company, but no confirmation letter has been received.

Question:
How should the auditor respond?

> **Answer:**
>
> - Request written evidence of ongoing support from the parent (e.g., a support letter).
> - If support is not confirmed, consider whether the use of the going concern basis is still valid.
> - Check if disclosures in the accounts make clear the uncertainty.
> - Assess whether to qualify the audit opinion for inadequate disclosure.
>
> **Exam Warning:**
> It is a frequent mistake to assume auditors are responsible for deciding if the going concern basis is appropriate. In reality, they review management’s assessment and supporting evidence, but the initial judgement rests with management.

### Reporting implications

If there is a material uncertainty that is sufficiently disclosed, the audit report should include an emphasis of matter paragraph drawing attention to the going concern uncertainty, but still give an unmodified opinion. If disclosures are inadequate, a qualified or adverse opinion may be necessary.

![Going concern audit procedures from reviewing management’s assessment to evaluating disclosure adequacy.](https://static.pastpaperhero.com/images/acca-fau-going-concern-definition-and-significance_00.png)

_Going concern evaluation procedures are presented in sequence, including forecast analysis, debt review, subsequent events, and disclosure assessment._

## Summary

Going concern affects asset valuation, disclosure and users’ trust in the accounts. Management must make an assessment of going concern; the auditor evaluates this, looking for indicators of risk and performing prescribed audit procedures. The auditor must report if significant uncertainty exists or if disclosures are inadequate.

## Key Point Checklist

_This article has covered the following key knowledge points:_

- Define going concern and explain why it is a critical accounting concept
- Identify indicators that may point to going concern problems
- Distinguish between management’s and the auditor’s responsibilities for going concern
- List and explain basic audit procedures for assessing going concern
- Explain the reporting consequences if there is material uncertainty about going concern

## Key Terms and Concepts

- going concern
- material uncertainty
- management’s assessment
- auditor’s responsibility


Going concern - Definition and significance