Going Concern

What is going concern?

In 2023, the FRC found that 29% of inspected audits with going concern indicators had deficiencies in how the auditor evaluated management's assessment. That figure has been broadly consistent for five years. The problem is rarely that auditors miss the indicators entirely. It is that the going concern section of the file reads like a tick box exercise: management's forecast is summarised, a few ratios are noted, the conclusion follows, and there is no record of genuine challenge.

Going concern is the accounting assumption that an entity will remain in business for the foreseeable future. Financial statements (FS) are prepared on this basis unless management either intends to liquidate or cease trading, or has no realistic alternative but to do so. Under ISA 570 , the auditor obtains sufficient appropriate evidence about whether management's use of that assumption is appropriate, and concludes whether a material uncertainty related to going concern (MURGC) exists. This is not a prediction of failure. It is an assessment of whether the basis on which the FS are prepared is valid.

The assessment period covers at least twelve months from the reporting date, but auditors must also consider known events or conditions beyond that period. A debt maturity in month 14 with no refinancing plan is relevant even though it falls outside the minimum window. In our experience, those "just outside the window" items are exactly the ones that generate inspection findings, because the file often says nothing about them at all.

Where going concern assessments fail

Going concern is a high-priority area for regulatory inspections, and the pattern of findings is strikingly consistent year to year. The file should tell a story of how the auditor identified indicators, challenged management's response, evaluated the mitigating factors, and reached a conclusion with supporting evidence. In practice, that story is often missing.

Common inspection findings include:

• The auditor accepted management's cash flow projections without testing the key assumptions (revenue growth rates, cost reductions, refinancing probability) or performing sensitivity analysis
• The audit file contained evidence of going concern indicators (covenant breaches, losses, negative cash flows) but the going concern section of the file did not address them
• The auditor did not extend going concern procedures to the date of the audit report, missing a post-year-end event that changed the assessment
• A MURGC existed but the auditor's report did not include the required separate section, or the entity's FS did not include adequate disclosure

What actually happens, at many firms, is that the going concern evaluation gets completed late in the audit when the team is under time pressure. The engagement partner (EP) signs off on management's forecast because challenging it would delay the report date. We have seen files where the only evidence of "challenge" is a single sentence stating that management's assumptions were considered reasonable, with no record of what was tested or why that conclusion was reached.

What the standard requires

ISA 570.10 requires the auditor to evaluate management's assessment. ISA 570.16 requires the auditor to consider whether events or conditions exist that may cast significant doubt, and to evaluate management's plans to address them. ISA 570.18 -19 then requires a conclusion on whether a MURGC exists.

None of this is optional. But the standard gives the auditor significant room to apply judgment about how much challenge is enough, and that room is where the quality gap lives.

The grey zone between indicators and MURGC

A going concern issue is any event or condition that may cast doubt on the entity's ability to continue operating. Many entities have going concern indicators. A net current liability position alone does not necessarily mean a MURGC exists.

A MURGC is a higher threshold. It means the events or conditions, individually or collectively, may cast significant doubt on the entity's ability to continue as a going concern. When a MURGC exists, the consequences for both the FS and the audit report are specific and mandatory.

The hard part is the space between these two. Seasonal businesses with tight cash flow windows, start-ups relying on funding rounds, entities in cyclical industries, and companies renegotiating major contracts all present indicators that may or may not cross the MURGC threshold. I believe the most common error is not calling a MURGC when one exists, but rather failing to document why the auditor concluded that indicators did not rise to that level, because inspectors cannot evaluate judgment they cannot see.

Worked example: De Vries Maritime

De Vries Maritime BV is a mid-size shipping company. During the audit of the 2025 FS, the team identifies the following indicators:

• A net current liability position of EUR 4.2 million, up from EUR 1.8 million in the prior year
• A EUR 12 million revolving credit facility expiring in 8 months, with the bank indicating it will only renew at significantly tighter covenants
• Two major charter contracts (35% of revenue) expiring within 6 months with no confirmed renewals
• Negative operating cash flows for the second consecutive year

Management prepares a cash flow forecast showing the entity can continue operating if the credit facility is renewed and at least one charter contract is extended. The audit team evaluates the assumptions: renewal terms are not yet agreed, and the charter market has softened significantly. The team concludes that a MURGC exists.

Then, three weeks before sign-off, De Vries receives a letter of intent from a new charterer for a 2-year contract covering 25% of fleet capacity. Management argues this removes the MURGC. The EP must now decide: does a letter of intent (not a signed contract) with a counterparty the firm has not previously worked with, covering less revenue than the expiring contracts, actually change the conclusion? This is where judgment earns its name. We concluded it did not, because the letter of intent was non-binding and the credit facility renewal remained unresolved. Other reasonable auditors might have reached a different conclusion if the charterer had strong creditworthiness and the bank had provided informal comfort.

The FS include the required MURGC disclosure. The auditor's report includes a "Material Uncertainty Related to Going Concern" section referring to the disclosure. The audit opinion remains unmodified because the FS appropriately disclose the uncertainty.

The timing paradox

There is a structural contradiction at the centre of going concern work that the standards do not resolve. The moment going concern doubt is most warranted (when the entity is genuinely struggling) is also the moment when raising it is most commercially dangerous, because the entity often needs the clean audit report to secure the refinancing that would resolve the doubt. Calling a MURGC can become self-fulfilling: the bank sees the auditor's report, pulls the facility, and the entity fails.

This creates a perverse incentive. Auditors who apply genuine skepticism risk accelerating the client's failure and losing the engagement. Auditors who accept management's optimistic forecast keep the relationship intact. The regulator arrives two years later and asks why the file shows no evidence of challenge.

I think this is the single hardest judgment call in audit, because the auditor is not choosing between right and wrong but between two kinds of harm. There is a reasonable argument that auditors should weight commercial sensitivity more heavily in borderline cases, because a premature MURGC disclosure can destroy value that would otherwise have been preserved. I disagree. The auditor's obligation runs to the users of the FS, not to the entity's management, and softening the conclusion to protect the client relationship is precisely the failure that inspection findings document.

One second-order consequence that gets little attention: when firms consistently avoid calling MURGCs on borderline cases, the market learns to discount the signal. If a MURGC only appears when failure is already obvious, it provides no early warning value, and the audit report loses credibility on the one topic where credibility matters most.

Key standard references

• ISA 570.10 : Evaluating management's assessment of the entity's ability to continue as a going concern
• ISA 570.16 : Considering whether events or conditions exist that may cast significant doubt, and evaluating management's plans
• ISA 570.18 -19: Concluding on whether a MURGC exists and the implications for the audit report
• ISA 570.21 -23: Reporting requirements when a MURGC exists, including required sections in the audit report
• IAS 1.25 -26: The going concern assumption in the preparation of FS under IFRS

Related terms

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Jurisdiction notes

National adoptions of ISA 570 vary in scope. In the United Kingdom, ISA (UK) 570 (Revised September 2019) adds paragraphs A2-1 and A2-2 defining material uncertainty, and A3-1 requires auditors to identify events or conditions before considering mitigating factors (a requirement not present in the base ISA). The FRC's Guidance on the Going Concern Basis of Accounting (April 2016) supplements the standard for entities applying the UK Corporate Governance Code. In the Netherlands, NV COS 570 (issued by the NBA) treats MURGC as always constituting a key audit matter under NV COS 701 . The AFM has flagged deficiencies in auditors' challenge of management cash flow forecasts. In Australia, ASA 570.A2 uniquely requires listed entity auditors to disclose under a "Going Concern" heading how they evaluated management's assessment even when no material uncertainty exists.

In the United States, going concern is addressed by AU-C 570 for non-public entity audits and PCAOB AS 2415 for SEC registrant audits. Both use the "substantial doubt" framework rather than ISA 570 's "material uncertainty" language. AS 2415.02 requires the auditor to evaluate whether substantial doubt exists for a reasonable period not exceeding one year beyond the balance sheet date. AS 2415.06 lists specific indicator categories: negative trends, financial difficulties, internal matters, and external events. When substantial doubt remains after evaluating management's plans (AS 2415.07-09), the auditor adds an explanatory paragraph following the opinion paragraph (AS 2415.12-13). On the accounting side, ASU 2014-15 (ASC 205-40) requires management to perform its own going concern evaluation and disclose substantial doubt in the notes. PCAOB inspection findings have cited insufficient evaluation of conditions in the aggregate (AS 2415.03) and inadequate testing of management's mitigation plans (AS 2415.17).

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