Once conditions raise substantial doubt, the whole going concern conclusion turns on one question: do management's plans change the answer? The note either says doubt is alleviated or says it is not, and the audit report follows. This post is about the evidence behind that question. The overall framework is in going concern assessment under AU-C 570 and ASC 205-40, and the wording of the notes is in going concern note examples.
The test a plan must pass
Under ASC 205-40, management evaluates whether conditions and events, considered in the aggregate, raise substantial doubt about the entity's ability to meet its obligations as they become due within one year after the date the financial statements are issued, or are available to be issued for nonpublic entities. Substantial doubt exists when it is probable that the entity will be unable to meet its obligations, and "probable" is used as it is in the contingencies topic.
Management's plans are then considered only if both of these hold:
- It is probable the plans will be effectively implemented within one year after the date the financial statements are issued (or available to be issued).
- It is probable the plans, when implemented, will mitigate the conditions that raise substantial doubt.
To be probable of implementation, a plan generally has to be approved by management or others with the appropriate authority before the financial statements are issued. A plan that has not been approved by that date does not count.
If so, doubt is alleviated and the notes describe the principal conditions, management's evaluation and the plans. If not, the notes include an explicit statement that substantial doubt exists. Plans that mitigate but do not alleviate are still described.
A plan that is hoped for is not a plan that is approved. And "probable" is a high bar, so evidence has to exist, not be promised.
What the auditing literature expects
For audits of issuers, the PCAOB's AS 2415 sets out how an auditor considers plans. It is not an AICPA standard, but its categories and questions are the clearest published list and map onto what a nonissuer team asks.
AS 2415.07 groups plans into four types, with matters to consider for each:
| Plan | What to consider |
|---|---|
| Dispose of assets | Restrictions on disposal, such as covenants and encumbrances; apparent marketability; direct and indirect effects of the disposal |
| Borrow or restructure debt | Availability of financing, including existing or committed credit lines, factoring, sale-leaseback; committed arrangements to restructure, subordinate or guarantee debt; restrictions on additional borrowing and sufficiency of collateral |
| Reduce or delay expenditures | Feasibility of cutting overhead, postponing maintenance or research, leasing instead of buying; direct and indirect effects of the reduction |
| Increase ownership equity | Feasibility of raising capital, including existing or committed arrangements; arrangements to reduce dividends or accelerate distributions from affiliates |
The recurring words are "existing or committed." A line of credit that is signed and undrawn is evidence. A line the bank has said it will "consider" is not.
AS 2415.08 adds that the auditor should identify the elements of the plan that are particularly significant to overcoming the adverse conditions and obtain evidence about them. Where prospective financial information is significant to the plan, AS 2415.09 directs attention to assumptions that are material to the forecast, especially sensitive or susceptible to change, or inconsistent with historical trends, and calls for comparing prior forecasts to actual results.
A timing difference to keep straight: AS 2415 for issuers looks to a reasonable period not to exceed one year beyond the balance sheet date, while ASC 205-40 looks one year from the issuance date. Management's evaluation under US GAAP covers the longer window.
Evidence by plan type
Asset sales
- Signed purchase agreement or letter of intent, with price and closing date.
- Lender consent where a loan agreement restricts disposals, and evidence of how proceeds are applied. If a lender takes the proceeds, the plan may not improve liquidity.
- Evidence of marketability: appraisals, broker opinions, recent comparable sales.
- Effect of losing the asset on revenue and cash flow in the forecast.
Financing and debt restructuring
- The executed amendment, waiver or new facility, not a term sheet. A waiver should cover the full period and the covenant tests within it.
- Borrowing base calculations, to confirm the amount available, not the amount of the commitment.
- For related-party or owner loans, the owner's ability to fund, shown by bank statements, and whether support is a signed commitment with an amount and term.
- Effect on classification. See debt classification and covenants.
Cost reductions
- Specific actions with dates: headcount, leases, contracts terminated.
- Cost of executing the plan, such as severance and termination fees, and when the cash savings arrive.
- Evidence of progress as of the report date.
- Whether the reduction harms revenue assumed in the same forecast.
Equity raises
- Signed subscription agreements or a closed round, with funds received or a binding commitment with conditions satisfied.
- Investor's capacity, where a related party commits.
- Conditions precedent. A commitment contingent on a milestone that the entity may not meet is not probable.
Testing the forecast
Every plan lands in a cash flow forecast. Obtain it, and then:
- Agree the opening cash balance to bank statements.
- Compare the prior forecast to actual results. A history of missed forecasts weakens current assumptions.
- Test the sensitive assumptions: collections timing, customer concentration, and the effect of covenant tests.
- Run the downside case. If the plan works only if every assumption holds, it is not probable.
- Check that the forecast period matches the evaluation period.
See also analytical procedures for expectation building.
Worked example
All figures are illustrative. A distributor has $250,000 of cash and average monthly cash burn of $60,000. It owes $300,000 on a line of credit that the lender can call because a covenant was breached at year end, with repayment due in month 4. Over the twelve-month evaluation period, cash needs are $720,000 of burn plus the $300,000 repayment, or $1,020,000, against $250,000 on hand. The shortfall before plans is $770,000, and substantial doubt exists. Management has three plans:
| Plan | Evidence at report date | Effect on shortfall | Assessment |
|---|---|---|---|
| Lender waiver and one-year extension of the $300,000 line | Signed amendment covering the covenant tests | Removes $300,000 | Executed; counts |
| Cut overhead by $15,000 a month from month 3 | Two leases terminated, six positions eliminated, notices given | Saves $150,000 over months 3 to 12 | Approved and in progress; counts |
| Owner to inject $350,000 | Verbal assurance | None supported | Not approved or committed; does not count |
After the waiver the shortfall is $470,000. After the cost cuts it is $320,000. Only the owner's injection could close it, and a verbal assurance does not meet the conditions. Doubt is not alleviated. The note says so, and the audit report is affected.
If the owner signs an unconditional commitment of $350,000 and bank statements show the funds are available, the plan can be considered. The shortfall closes with $30,000 to spare, which is thin. The team then runs the downside case: a two-month slip in collections moves $120,000 of receipts out of the period and re-opens the gap. The conclusion rests on that test, not on the signature alone.
What the file should show
- The conditions identified and the length of the evaluation period.
- Each plan, its approval, and the evidence that it is probable of being implemented and mitigating.
- The forecast, the tests of it and the downside case.
- The conclusion, with the reasons the plans do or do not alleviate the doubt.
- A link to the note, so the disclosure matches the conclusion.
FAQ
Do plans need to be approved before issuance?
Yes. To be probable of implementation, a plan generally has to be approved by management or others with the appropriate authority before the financial statements are issued or available to be issued.
Can an owner's verbal support count as a plan?
Not without more. Evidence of a commitment, the amount and the means to fund is what makes it probable.
What if the plans only partly close the gap?
If they mitigate but do not alleviate, the notes state that substantial doubt exists and describe the plans.
Sources
- The CPA Journal, Changes in going concern disclosures (February 2016)
- Journal of Accountancy, Going concern: what CPAs in audit and finance should know (October 2026)
- PCAOB, AS 2415, Consideration of an Entity's Ability to Continue as a Going Concern (paragraphs .02 and .07-.11), in the PCAOB auditing standards for audits after December 15, 2024
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