The FRC flagged insufficient going concern evaluation in 29% of Tier 2 audit files in its 2022-23 inspection cycle. That is not because auditors forgot the topic. It is because going concern is usually done as a tick box exercise. The draft FS show net assets and a positive profit before tax (PBT), the EP nods, and the WP reads "no going concern issues noted." The indicator list in ISA 570 .A3 never gets run against the client's actual figures.
To evaluate going concern indicators under ISA 570 , the auditor identifies financial and operating indicators from ISA 570 .A3 and A4, assesses them against the client’s circumstances using quantitative thresholds, evaluates management’s mitigating plans, and documents the conclusion with corroborating evidence.
Key takeaways
- How to apply the ISA 570 .A3 indicator list to a real client without turning it into a tick box exercise
- How to set quantitative thresholds for financial indicators so your evaluation produces a defensible conclusion
- How to evaluate management’s mitigating plans with the scepticism ISA 570.16 requires
- What documentation ISA 570 .A24 expects, with specific working paper language you can adapt
What ISA 570 requires and where the evaluation fits
ISA 570.10 requires the auditor to evaluate whether events or conditions exist that may cast significant doubt on the client’s ability to continue as a going concern. This isn’t a single procedure. It’s a thread that runs from planning through to the opinion.
At planning, ISA 570.10 and 570.11 require you to consider whether events or conditions exist. During fieldwork, you gather evidence that corroborates or contradicts the initial assessment. At completion, ISA 570.16 requires you to evaluate management’s assessment of going concern and to conclude whether a material uncertainty exists.
The indicators in ISA 570 .A3 and A4 are application material, not a mandatory checklist. But every regulator in Europe uses them as the benchmark for whether an auditor’s evaluation was sufficient. If an indicator from that list applied to your client and your file doesn’t address it, the file has a gap. Treat the list as the minimum scope of your evaluation, not the maximum.
ISA 570 .A3 organises indicators into four categories: financial, operating, regulatory, and other. The financial indicators are the ones most auditors evaluate. The operating and other indicators (loss of key customers, labour shortages, regulatory non-compliance, pending litigation) are the ones most files miss. In the files we've reviewed, this is where the gap almost always sits.
The going concern glossary entry on ciferi.com covers the definitional framework.
Financial indicators: how to evaluate them with numbers
ISA 570 .A3 lists several financial indicators. Two of them appear in almost every going concern evaluation. The rest show up less often but matter just as much when they apply.
Net liability or net current liability position
This is the first indicator most auditors check. Pull net assets from the balance sheet. If total liabilities exceed total assets, the indicator is present. For net current liabilities, compare current assets to current liabilities. A current ratio below 1.0 triggers the indicator. The number alone is not the evaluation. A construction company with €12M in current liabilities and €10M in current assets (current ratio 0.83) might have a €15M committed credit facility drawn to only €3M. The indicator is present. The mitigating factor exists. Both go in the WP.
Use the ciferi ISA 570 going concern calculator to calculate the financial ratios and flag which indicators are triggered for your client’s specific figures.
Fixed-term borrowings approaching maturity
Check the debt maturity schedule. Any material borrowing maturing within 12 months of the balance sheet date triggers this indicator. “Without realistic prospects of renewal” means you need evidence about the renewal, not just management’s statement that the bank will renew. A term sheet or a renewal confirmation letter from the lender. ISA 570 .A3 does not specify the evidence standard, but ISA 570.16 (b) requires evaluating the feasibility of management’s plans. An oral assurance from the CFO that the bank is supportive is not corroborating evidence.
Inability to pay creditors on due dates
Aged payables analysis is the starting point. If the client is routinely paying suppliers 30 or 60 days past terms, this indicator is present. Cross-reference with the cash flow forecast. Can the client meet its obligations as they fall due over the next 12 months? If the forecast shows negative operating cash flow in any quarter without a funding plan to cover it, the indicator is triggered and you need to evaluate what management intends to do about it.
Adverse key financial ratios
ISA 570 .A3 references this without specifying which ratios. Four are relevant for most mid-tier clients. Current ratio below 1.0. Interest cover (EBIT divided by interest expense) below 1.5x. Debt-to-equity above 4:1 for non-financial entities (this varies by industry). Operating cash flow to total debt below 0.1, which signals limited debt serviceability from operations.
None of these ratios has a universal threshold. Industry context matters. Document the ratios and state the threshold you applied, with an explanation of why that threshold fits this client’s sector.
Substantial operating losses
Two consecutive years of operating losses triggers this indicator for most clients. Compare the loss to the client’s equity. An operating loss of €200,000 for a client with €8M of equity is concerning but survivable. The same loss for a client with €600,000 of equity erodes a material portion of the capital base.
Operating and other indicators: the ones auditors underweight
Financial indicators get attention because they are quantifiable. Operating and other indicators ( ISA 570 .A4) require judgment, and that makes them harder to document. They are often the early warning signs that precede financial deterioration by 12 to 18 months. Nobody enjoys these procedures, but skipping them is how files get flagged at inspection.
Loss of a major customer or supplier
If one customer represents more than 15% of revenue, the loss of that customer is a going concern indicator whether or not the FS show it yet. The revenue impact may not appear until the following year. At the balance sheet date, the contract termination notice sitting in the client’s inbox is the indicator. Ask management during the ISA 560 subsequent events inquiry whether any material customers have been lost or any material contracts cancelled since year-end.
Loss of key management without replacement
A manufacturing client whose sole technical director resigned in November, with no replacement hired by the time of your fieldwork in March, has an operating indicator present. This one rarely appears in going concern WPs because auditors do not ask about it. Add it to your standard inquiry list.
Regulatory or legal proceedings
Litigation with potential damages exceeding the client’s net assets is a going concern indicator, not just a provisions disclosure item. Cross-reference with your IAS 37 work. If your provisions WP identifies a possible obligation with a worst-case outcome of €5M and the client’s net assets are €3M, the going concern WP should address it.
Changes in legislation or government policy
This applies especially to entities in regulated industries. A pharmaceutical distributor whose operating licence is under review. A construction firm facing new environmental compliance costs that exceed planned capital expenditure. These indicators do not appear on the balance sheet. They appear in the client’s correspondence, board minutes, regulatory filings, and industry press. Read the board minutes. ISA 570 .A4 does not say this explicitly, but board minutes are where operating indicators surface first.
Evaluating management’s plans
Once you’ve identified which indicators are present, ISA 570.16 requires you to evaluate management’s plans to mitigate them. This is where most going concern evaluations either pass or fail review.
The question isn’t whether management has plans. They almost always do. The question is whether the plans are feasible and whether the outcome of those plans is likely to improve the situation. ISA 570.16 (b) uses the word “feasibility” deliberately.
A management plan to “reduce costs” is not feasible until you see which costs, by how much, over what timeline, and whether the client can operate at the reduced cost level. “Refinance the loan” is not feasible without a term sheet or at minimum documented lender correspondence. Selling non-core assets requires evidence that the assets are marketable and that a realistic timeline for sale exists.
For each mitigating plan, document four things in the WP. First, describe the plan itself. Second, state the evidence that supports its feasibility. Third, identify management’s assumptions and assess whether they are reasonable based on historical data and market conditions. Fourth, estimate the residual risk if the plan succeeds only partially.
Professional scepticism under ISA 570.16 means questioning whether management’s plans are realistic, not whether management is dishonest. An FD who says “we’ll cut operating costs by 20%” may be entirely sincere. If the client’s fixed costs represent 80% of the cost base and the variable cost reduction required is larger than last year’s total variable spend, the plan is not feasible regardless of management’s intentions.
The file should tell a story. State what the plans are, what evidence supports each one, what you tested, and your conclusion on feasibility. The going concern glossary entry on ciferi.com covers the ISA 570 framework in more detail.
Worked example: Van Leeuwen Installatietechniek B.V.
Van Leeuwen Installatietechniek B.V., a Dutch building services installation company. Revenue €22M, 145 employees. Year-end 31 December 2024. Non-Big 4 audit.
Key financial data:
- Net assets: €1.8M (2023: €2.3M)
- Operating loss: €420,000 (2023: operating profit €180,000)
- Current ratio: 0.91 (2023: 1.14)
- Bank loan of €3.5M maturing August 2025
- Interest cover: 0.7x (EBIT / interest expense)
- Cash at bank: €310,000
Screen financial indicators against ISA 570.A3
Run each financial indicator from ISA 570 .A3 against the client’s data. Four are triggered: net current liability position (current ratio 0.91), adverse key financial ratios (interest cover 0.7x), substantial operating losses (€420,000 loss versus €1.8M equity, a 23% erosion), and fixed-term borrowings approaching maturity (€3.5M loan maturing in eight months with no documented renewal).
Documentation note: “Financial indicators evaluated against ISA 570 .A3. Four indicators triggered: net current liability position (current ratio 0.91), interest cover below 1.0x (0.7x), operating loss of €420K representing 23% of equity, and €3.5M bank loan maturing August 2025 with no renewal documentation on file at date of fieldwork. Financial indicator schedule cross-referenced to audited trial balance.”
Screen operating and other indicators
Review board minutes from Q3 and Q4 2024. The minutes from September note that the client’s largest customer (representing 19% of 2024 revenue) has indicated it will not renew its framework agreement beyond March 2025. No replacement customer has been identified. This is a significant operating indicator under ISA 570 .A4. No other operating or regulatory indicators identified from the board minutes, management inquiries, or subsequent events review.
Documentation note: “Board minutes reviewed for Q3 and Q4 2024. September 2024 minutes record notification from [customer name] of non-renewal of framework agreement (19% of revenue, €4.2M). No replacement contract secured as at date of fieldwork. Operating indicator present under ISA 570 .A4. No regulatory or legal indicators identified from inquiry and document review.”
Evaluate management's plans
Management provided a written plan addressing the indicators. The plan has four elements: renegotiate the bank loan (discussions initiated, no term sheet received), win replacement contracts to offset customer loss (pipeline of €2.8M in proposals, none confirmed), reduce headcount by 12 positions (€720,000 annualised savings, redundancy consultation not yet started), and defer €400,000 of planned capital expenditure.
Evaluate each element. The bank loan renegotiation is unsupported by documentary evidence. Obtain the bank’s written response or the most recent loan review correspondence. The replacement contracts are speculative. A pipeline without confirmed orders is an intention, not evidence. The headcount reduction of 12 positions from 145 employees produces the stated savings only if the positions are eliminated before Q2 2025, and the redundancy consultation hasn’t started. The capex deferral is the most credible element because the expenditure was discretionary.
Documentation note: “Management’s plan evaluated under ISA 570.16 (b). Four elements assessed for feasibility: (1) Bank loan renegotiation: no lender confirmation on file, rated as unsupported at date of fieldwork. (2) Replacement contracts: pipeline of €2.8M, none confirmed, rated as speculative. (3) Headcount reduction: consultation not commenced, savings dependent on Q2 2025 implementation, rated as uncertain. (4) Capex deferral of €400K: discretionary expenditure, rated as feasible. Overall assessment: management’s plans rely on two unsupported assumptions (bank renewal and contract wins). Material uncertainty exists. Discussed with engagement partner [date].”
Conclude
The combination of financial indicators (particularly the loan maturity and operating losses) and the operating indicator (loss of a 19% revenue customer) creates conditions that cast significant doubt on going concern. Management’s mitigating plans address only part of the shortfall, and the two largest elements lack supporting evidence. A material uncertainty related to going concern exists. The auditor evaluates whether the FS include adequate disclosure under IAS 1.25 and considers the effect on the audit opinion under ISA 570.18 through 570.20.
Documentation note: “Conclusion: material uncertainty exists. Events and conditions ( ISA 570 .A3, A4) identified on a gross basis. Management’s plans partially mitigate but rely on unsupported assumptions. Disclosure adequacy to be evaluated under IAS 1.25 . Impact on opinion to be assessed under ISA 570.18 -20. Cross-reference to going concern disclosure working paper [WP ref].”
Practical checklist for going concern evaluation
Common mistakes
- Evaluating only financial indicators and ignoring operating indicators from ISA 570 .A4. The FRC’s 2022-23 Annual Inspection Results identified insufficient consideration of non-financial going concern indicators as a recurring deficiency in Tier 2 files.
- Documenting the evaluation of management’s plans as “management’s plans appear reasonable” without assessing each plan element for feasibility and obtaining corroborating evidence. ISA 570.16 (b) requires the auditor to evaluate whether management’s plans are feasible and whether the outcome is likely to improve the situation. A single-sentence conclusion does not meet this requirement.
- Performing the going concern evaluation only at completion rather than updating it throughout the engagement. ISA 570.11 requires the auditor to remain alert throughout the audit. An indicator that arises during receivables testing (a major customer in financial difficulty) or inventory work (obsolete stock requiring write-down) should feed into the going concern evaluation immediately, not at sign-off.
Related content
- Going concern glossary entry: covers the ISA 570 framework, the material uncertainty definition, and the disclosure requirements under IAS 1.25 .
- ISA 570 going concern calculator: calculates financial ratios, flags which ISA 570 .A3 indicators are triggered, and generates a summary for your working paper.
- How to communicate going concern under ISA 706 : the reporting step that follows when material uncertainty is identified and adequately disclosed.
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Frequently asked questions
What financial indicators of going concern does ISA 570 .A3 list?
ISA 570 .A3 lists several financial indicators including: net liability or net current liability position, fixed-term borrowings approaching maturity without realistic prospects of renewal, inability to pay creditors on due dates, adverse key financial ratios, substantial operating losses, and arrears or discontinuance of dividends. Each indicator must be evaluated against the client’s specific circumstances using quantitative thresholds appropriate to the industry.
How do you evaluate management’s going concern plans under ISA 570.16 ?
ISA 570.16 (b) requires evaluating the feasibility of management’s plans, not just whether plans exist. For each mitigating plan, document four things: the plan itself, the evidence supporting its feasibility, management’s assumptions and whether they are reasonable based on historical data and market conditions, and the residual risk if the plan succeeds only partially. A plan to “reduce costs” needs specifics on which costs, by how much, and over what timeline. A plan to refinance needs evidence of lender discussions or a term sheet.
What operating indicators should auditors evaluate beyond financial ratios?
ISA 570 .A4 lists operating and other indicators that auditors frequently underweight: loss of a major customer or supplier (particularly if one customer represents more than 15% of revenue), loss of key management without replacement, regulatory or legal proceedings that could result in claims the entity cannot satisfy, changes in legislation or government policy affecting the entity’s operations, and loss of a key franchise or licence. These indicators often precede financial deterioration by 12 to 18 months and typically surface first in board minutes.
When should the going concern evaluation be performed during the audit?
The going concern evaluation is not a single procedure performed at one point. ISA 570.10 requires the auditor to consider whether events or conditions exist at planning, ISA 570.11 requires remaining alert throughout the audit for indicators that arise during fieldwork (such as a major customer in financial difficulty discovered during receivables testing), and ISA 570.16 requires a final evaluation at completion. An indicator that arises during fieldwork should feed into the evaluation immediately, not be deferred to sign-off.
What documentation does ISA 570 require for a going concern evaluation?
ISA 570 .A24 expects documentation of the indicators evaluated (both present and absent), the quantitative thresholds applied and their basis, the evaluation of management’s plans with evidence references, and the auditor’s conclusion. The conclusion should be stated in one sentence with cross-references to the indicator schedule, management’s plan evaluation, and the disclosure working paper. A reviewer should be able to reach the going concern conclusion file in under 60 seconds.
Further reading and source references
- IAASB Handbook 2024: the authoritative source for the complete ISA 570 text, including all application material on going concern indicators ( ISA 570 .A3–A7).
- ISA 570 (Revised), Going Concern: the parent standard governing the auditor’s responsibilities for going concern evaluation.
- IAS 1.25 –26, Presentation of Financial Statements: the disclosure requirements for going concern uncertainties that the auditor evaluates for adequacy.
- ISA 560 , Subsequent Events: the subsequent events inquiry that may identify going concern indicators arising after the balance sheet date.
- ISA 580 , Written Representations: the representations standard relevant to management’s going concern assessment and the limitations of oral assurances.