Going concern: AU-C 570 procedures and the ASC 205-40 look-forward period

In this lesson you will

Compute the ASC 205-40 look-forward period from the issuance date
Apply the two probable tests to management plans
Identify the procedures AU-C 570.16 and .17 require when conditions exist
Choose the reporting outcome under AU-C 570.23 through .26

The period and the threshold

ASC 205-40, added by ASU 2014-15, puts the first evaluation on management. Substantial doubt exists when conditions and events, considered in the aggregate, indicate it is probable the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued (or available to be issued). Probable has the ASC 450 meaning: likely to occur.

AU-C 570.11 adopts the framework's period. When the framework sets none, the reasonable period of time is one year after the date the statements are issued or available to be issued. Under AU-C 570.14 your evaluation covers the same period management used, and AU-C 570.15 requires you to ask about conditions beyond that period too.

The period runs from the issuance date, not the balance sheet date. A December 31 year end with statements available to be issued on April 15 looks forward to April 15 of the following year.

What you do during the audit

AU-C 570.12 requires you to consider going concern during risk assessment and to find out whether management has done a preliminary evaluation. AU-C 570.13 then requires you to stay alert for conditions throughout the audit. Typical conditions: recurring operating losses, negative operating cash flow, working capital deficits, debt covenant breaches, maturing debt with no refinancing, loss of a major customer, and legal proceedings.

When conditions exist, AU-C 570.16 requires additional procedures, including:

Asking management to make an evaluation if it has not.
Evaluating whether it is probable that management's plans can be effectively implemented and probable that they would mitigate the conditions.
When a cash flow forecast is central to the plans, evaluating the reliability of the underlying data and the support for the assumptions, including contradictory evidence.
Considering facts that became available after management made its evaluation.

ASC 205-40-50-7 uses the same two probable tests for management. ASC 205-40-50-8 adds that a plan is generally probable of implementation only if management, or others with authority, approved it before the issuance date. ASC 205-40-50-11 adds that a plan to meet obligations through liquidation is not counted as part of management's plans, even if liquidation is probable.

AU-C 570.17 is the trap in owner-managed entities. When the plan relies on support from an owner or third party, you need evidence of both intent and ability, and the intent evidence must be written. Without written evidence of intent, AU-C 570.17 directs you to conclude that the plans are insufficient to alleviate substantial doubt.

If you believe substantial doubt exists before considering plans, AU-C 570.18 requires written representations describing the plans and confirming that all relevant matters are disclosed.

Conclusions and the report

Your conclusion	Report outcome
Going concern basis is inappropriate	Adverse opinion (AU-C 570.23)
Substantial doubt remains, disclosure adequate	Unmodified opinion plus a section headed "Substantial Doubt About the Entity's Ability to Continue as a Going Concern" (AU-C 570.24)
Substantial doubt remains or was alleviated, disclosure inadequate	Qualified or adverse opinion (AU-C 570.26)
Substantial doubt alleviated by plans, disclosure adequate	No going concern section; disclosures still required by ASC 205-40-50-12

AU-C 570.25 bars conditional language about whether substantial doubt exists. "May raise substantial doubt" is not acceptable wording in the report.

AU-C 570.28 requires communication with those charged with governance (unless all of them manage the entity) covering whether substantial doubt exists, your view of management's plans, the basis of accounting, disclosure adequacy and the report effect. AU-C 570.32 lists what the file must hold. The going concern evaluation memo and the going concern checklist are built around those elements.

Where files fall short

The forecast is accepted as presented, with no test of the assumptions against history.
Owner support rests on an oral promise.
The look-forward period is measured from year end.
The memo concludes substantial doubt is alleviated but no one checked the ASC 205-40-50-12 disclosure.

For evidence on specific plan types, see evaluating management's plans.

Worked example

Ridgeline Freight Co.: is substantial doubt alleviated?

Ridgeline Freight Co. has a December 31, 2025 year end. The statements will be available to be issued on April 15, 2026, so the look-forward period runs to April 15, 2027.

Facts: cash at year end is $180,000. A $1,200,000 bank line matures September 30, 2026 and the bank has said it will not renew. Management forecasts $420,000 of operating cash inflow over the look-forward period.

Gap: $1,200,000 - $180,000 - $420,000 = $600,000 of obligations not covered.

Management's plans: (1) sell a terminal with an appraised value of $750,000, approved by the board on February 20, 2026, with a signed purchase agreement closing June 1, 2026; (2) the owner says she will lend $300,000 if needed.

Evaluation: Plan 1 was approved before the issuance date and is supported by a signed agreement, so it is probable of implementation. Net proceeds after 6% selling costs are $750,000 x 0.94 = $705,000, which exceeds the $600,000 gap by $105,000. Plan 2 has only an oral promise, so under AU-C 570.17 it cannot be counted, and the team does not need it.

Conclusion: substantial doubt was raised and is alleviated by the sale. The report has no going concern section, but the notes must describe the line maturity, management's evaluation and the sale plan under ASC 205-40-50-12.

Self-check

Answer each question before you open the answer.

Statements for a June 30, 2026 year end are available to be issued on September 25, 2026. What is the end of the look-forward period?
Show answer
September 25, 2027. ASC 205-40 and AU-C 570.11 measure one year from the date the statements are issued or available to be issued, not from the balance sheet date.
The CEO-owner tells you she will fund any shortfall. What evidence does AU-C 570.17 require?
Show answer
Evidence of her intent, which must include written evidence, and evidence of her ability to provide the funds. Without the written evidence of intent, you conclude the plan is insufficient to alleviate substantial doubt.
Substantial doubt remains and the note is complete. What opinion do you issue?
Show answer
An unmodified opinion with a separate section headed "Substantial Doubt About the Entity's Ability to Continue as a Going Concern" under AU-C 570.24. The opinion is not modified because disclosure is adequate.
Why is "these conditions may raise substantial doubt" unacceptable in the report?
Show answer
AU-C 570.25 prohibits conditional language about the existence of substantial doubt. Once you conclude it exists, the report states that it exists.

Sources

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Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error