AU-C section 570, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern, tells the auditor of a nonissuer how to evaluate management's use of the going concern basis of accounting and whether substantial doubt exists. SAS No. 132 recast the section so it follows the accounting framework, ASC 205-40 for US GAAP entities. SAS No. 134, effective for audits of financial statements for periods ending on or after December 15, 2021, amended how the matter appears in the report.
For management's evaluation under ASC 205-40, the indicators of substantial doubt and the disclosure outcomes, see going concern assessment under AU-C 570 and ASC 205-40. This page covers the standard itself.
This page paraphrases the standard. Read AU-C 570 in AICPA Professional Standards before relying on any point here.
What is the objective of AU-C 570?
The auditor's objectives are to obtain sufficient appropriate audit evidence about, and conclude on, the appropriateness of management's use of the going concern basis of accounting in preparing the financial statements, to conclude, based on the evidence obtained, whether substantial doubt exists about the entity's ability to continue as a going concern for a reasonable period of time, and to determine the implications for the auditor's report.
Who is responsible for what?
Management is responsible for assessing the entity's ability to continue as a going concern and for the related disclosures. The auditor does not replace that assessment but evaluates it. The auditor's evaluation is separate and must be documented separately. No audit can guarantee an entity's survival, so the absence of a going concern reference in a report is not an assurance of the entity's future viability.
What is the evaluation period?
The auditor evaluates the same period management is required to assess under the framework. For ASC 205-40 that is one year after the date the financial statements are issued, or available to be issued for entities that are not SEC filers. It is not one year from the balance sheet date. Where the framework sets no specific period, AU-C 570 defines the reasonable period of time as within one year after the date the financial statements are issued (or available to be issued, when applicable). Descriptions of the pre-SAS 132 standard measured from the balance sheet date, so do not rely on them.
Late-issued statements therefore have a later window. Ask management to cover the whole period in its assessment, and test the forecast over it.
What does the auditor do in risk assessment?
When performing risk assessment procedures under AU-C 315, the auditor considers whether there are events or conditions that may cast significant doubt on the entity's ability to continue as a going concern. The auditor also looks at whether management has already performed a preliminary assessment, and discusses it. If management has identified events or conditions, the auditor discusses management's plans to address them. If management has not yet assessed, the auditor discusses the basis for the intended use of the going concern basis and asks management whether events or conditions exist.
The auditor stays alert throughout the audit for audit evidence of events or conditions, and for a change in the conclusion on the evidence.
What does the auditor do when there are conditions or events?
If events or conditions exist that may cast significant doubt, the auditor obtains sufficient appropriate evidence to determine whether substantial doubt exists. The procedures include:
- requesting management to make an assessment, if it has not already done so
- evaluating management's plans for future actions in relation to its going concern assessment, whether the outcome of those plans is likely to improve the situation, and whether management's plans are feasible in the circumstances
- where the entity has prepared a cash flow forecast and analysis of it is a significant factor in considering the future outcome, evaluating the reliability of the underlying data and whether there is adequate support for the assumptions
- considering whether any additional facts or information have become available since the date management made its assessment
- requesting written representations from management, and where appropriate those charged with governance, regarding their plans for future action and the feasibility of those plans
Evidence for management's plans varies. A signed loan amendment is stronger evidence than an intention to seek one. A commitment from an owner to fund the entity needs support for the owner's ability to do so. This follows the two "probable" tests in ASC 205-40 for plans, which are that the plan will be effectively implemented and will mitigate the conditions. The going concern checklist can organize the file.
How does the conclusion drive the report?
After evaluating, the auditor concludes whether substantial doubt exists. The report outcomes follow from that conclusion and the adequacy of disclosure.
| Conclusion | Disclosures | Effect on the report |
|---|---|---|
| No substantial doubt | Not required | No going concern reference |
| Substantial doubt raised but alleviated by management's plans | Adequate | Opinion unmodified; no separate going concern section; auditor may include an emphasis-of-matter paragraph under AU-C 706 |
| Substantial doubt exists | Adequate | Opinion unmodified; separate section in the report with a heading that refers to substantial doubt about the entity's ability to continue as a going concern |
| Substantial doubt exists | Inadequate | Qualified or adverse opinion under AU-C 705 |
| Going concern basis is inappropriate | Not applicable | Adverse opinion |
The going concern section under SAS 134
When substantial doubt exists and disclosure is adequate, the report includes a separate section with a heading that includes the fact that substantial doubt exists. The section draws attention to the note that discloses the conditions and management's plans, states that the auditor's conclusion is that substantial doubt exists about the entity's ability to continue as a going concern for a reasonable period of time, and states that the opinion is not modified with respect to the matter. AU-C 570 requires the heading to refer to substantial doubt about the entity's ability to continue as a going concern, as in "Substantial Doubt About the Entity's Ability to Continue as a Going Concern". The section is not called an emphasis-of-matter paragraph. See AU-C 700 and AU-C 706.
Going concern is by nature a matter of most significance, but where the auditor is engaged to communicate key audit matters under AU-C 701, it is not described in the key audit matters section. The auditor refers to the going concern section there instead. Key audit matters are not part of a default private company report.
When the report is more than going concern
If management's use of the going concern basis is inappropriate, for example the entity is liquidating and the financial statements are prepared as a going concern, the auditor expresses an adverse opinion. If management is unwilling to make or extend its assessment when asked, the auditor considers the implications for the report, which may include a qualification or disclaimer as a scope limitation. See AU-C 705.
What is communicated to those charged with governance?
Unless all of those charged with governance are involved in managing the entity, the auditor communicates events or conditions identified that may cast significant doubt, whether they constitute substantial doubt, whether management's use of the going concern basis is appropriate, the adequacy of related disclosures, and the implications for the report. If substantial doubt is eliminated by plans, the same communication is appropriate. AU-C 260 covers that communication.
How does going concern interact with other standards?
- Subsequent events. The same post-year-end evidence that informs the estimate informs going concern, and the evaluation updates to the report date. See AU-C 560.
- Written representations. The representation letter covers management's plans. See AU-C 580.
- Covenants. A forecast covenant violation affects debt classification, and an audit report with a going concern section can itself trigger a covenant in some credit agreements. Ask early whether the credit agreement has one.
What must be documented?
The file should contain the events or conditions identified, management's plans and the auditor's evaluation of them, the evidence obtained on forecasts, the conclusion on substantial doubt and the adequacy of disclosure, and the effect on the report. See AU-C 230 audit documentation.
Common weaknesses in going concern files
Practice checks, not requirements of the standard. Gaps to avoid:
- Evaluation period measured from the balance sheet date instead of the issuance date
- Management's plans accepted on representation alone
- Cash flow forecast used without testing assumptions or data
- Going concern evaluation not updated to the report date
- Separate section omitted, or labeled as an emphasis-of-matter paragraph
- No documented conclusion where conditions existed but doubt was alleviated
Related
- Going concern assessment under AU-C 570 and ASC 205-40
- Going concern checklist
- AU-C 700 forming an opinion and reporting
- AU-C 705 modifications to the opinion
- AU-C 706 emphasis-of-matter and other-matter paragraphs
- AU-C 560 subsequent events
Sources
- AICPA, AU-C Section 570, The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern, as revised by SAS No. 132 and amended by SAS No. 134
- FASB ASC 205-40, Presentation of Financial Statements — Going Concern
- AICPA, AU-C Sections 700, 701, 705 and 706
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AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error