Going Concern Interview Questions & Answers

Q: What is the going concern assumption?

The going concern assumption is that an entity will continue in operation for the foreseeable future (at least 12 months from the reporting/approval date) and has neither the intention nor the need to liquidate or cease trading. Financial statements are normally prepared on this basis, affecting asset and liability valuation and classification.

Q: Whose responsibility is the going concern assessment?

Management is responsible for assessing the entity's ability to continue as a going concern and for preparing the statements on the appropriate basis, including any required disclosures. The auditor's responsibility (ISA 570) is to obtain sufficient evidence about, and conclude on, the appropriateness of management's use of the going concern basis and whether a material uncertainty exists.

Q: What are indicators that going concern may be in doubt?

Financial indicators (net liabilities, defaulted or callable loans, negative operating cash flows, inability to pay creditors, adverse ratios), operating indicators (loss of key management/markets/suppliers, labor issues), and other indicators (legal proceedings, regulatory changes, uninsured catastrophes). Any of these may cast significant doubt on the entity's ability to continue.

Q: How does the auditor evaluate management's going concern assessment?

The auditor evaluates management's assessment (usually cash-flow forecasts covering at least 12 months): testing the reliability of underlying data, challenging key assumptions, checking arithmetic and sensitivity, considering the feasibility of mitigating plans (e.g., refinancing, asset sales), reviewing subsequent events and post-year-end results, and obtaining written representations about future plans.

Q: What is a material uncertainty related to going concern?

A material uncertainty exists when events/conditions cast significant doubt on the entity's ability to continue as a going concern, and the magnitude of potential impact and likelihood are such that appropriate disclosure is necessary for fair presentation. If adequately disclosed and the going concern basis remains appropriate, the auditor issues an unmodified opinion with a 'Material Uncertainty Related to Going Concern' section.

Q: How do going concern conclusions affect the auditor's report?

If the going concern basis is appropriate but a material uncertainty exists and is adequately disclosed: unmodified opinion with a Material Uncertainty section. If not adequately disclosed: qualified or adverse opinion. If the going concern basis is used but is inappropriate (entity will liquidate): adverse opinion. If management won't perform/extend an assessment: possibly a qualified opinion or disclaimer.

Q: What basis of accounting is used if an entity is not a going concern?

If management determines the entity will liquidate or cease trading (not a going concern), the statements are prepared on a different basis—commonly a break-up/liquidation basis—where assets are stated at net realizable (recoverable) values, liabilities may be reclassified, and this basis and its reason are disclosed. The auditor considers whether that basis and disclosure are appropriate.

Q: What time period does the going concern assessment cover?

The assessment covers the foreseeable future—at least twelve months from the date of approval/authorization of the financial statements (some frameworks measure from the reporting date). The auditor also remains alert to events beyond that period. If management's assessment covers less than the required period, the auditor asks them to extend it.

Q: How do you audit a cash flow forecast supporting going concern?

Assess the reliability of the data and assumptions against historical accuracy, external evidence, and the entity's plans; check mathematical accuracy; perform sensitivity analysis on key drivers (sales, collections, financing); evaluate the availability and terms of financing facilities; and compare the forecast to actual post-year-end results. Corroborate mitigating actions (e.g., committed facilities, signed contracts).

Q: What are mitigating factors in a going concern assessment?

Mitigating factors are actions/plans that could alleviate doubt: committed financing or refinancing, asset disposals, cost reductions, shareholder/parent support (sometimes via a support letter), new contracts, or equity injections. The auditor evaluates whether these are feasible, likely, and sufficiently committed—not merely intentions—before relying on them.

What is the going concern assumption?

Beginner

The going concern assumption is that an entity will continue in operation for the foreseeable future (at least 12 months from the reporting/approval date) and has neither the intention nor the need to liquidate or cease trading. Financial statements are normally prepared on this basis, affecting asset and liability valuation and classification.

Real-world example Assets are stated at cost less depreciation, not fire-sale values, because the company is assumed to be a going concern.

Common follow-ups: What time horizon does going concern cover? | How does it affect valuation?

Audit Report & Opinions ISA Standards Going Concern

Whose responsibility is the going concern assessment?

Beginner

Management is responsible for assessing the entity's ability to continue as a going concern and for preparing the statements on the appropriate basis, including any required disclosures. The auditor's responsibility (ISA 570) is to obtain sufficient evidence about, and conclude on, the appropriateness of management's use of the going concern basis and whether a material uncertainty exists.

Real-world example Management prepares a cash-flow forecast supporting going concern; the auditor evaluates it and concludes on its appropriateness.

Common follow-ups: What does the auditor conclude on? | What must management prepare?

ISA Standards Audit Report & Opinions Going Concern

What are indicators that going concern may be in doubt?

Intermediate

Financial indicators (net liabilities, defaulted or callable loans, negative operating cash flows, inability to pay creditors, adverse ratios), operating indicators (loss of key management/markets/suppliers, labor issues), and other indicators (legal proceedings, regulatory changes, uninsured catastrophes). Any of these may cast significant doubt on the entity's ability to continue.

Financial: net current liabilities, loan defaults, negative cash flow.
Operating: loss of major customer, key staff departures.

Real-world example Breached loan covenants plus negative operating cash flows prompt the auditor to scrutinize going concern closely.

Common follow-ups: What are financial vs operating indicators? | Does one indicator mean going concern fails?

Analytical Procedures Audit Risk & Materiality Going Concern

How does the auditor evaluate management's going concern assessment?

Intermediate

The auditor evaluates management's assessment (usually cash-flow forecasts covering at least 12 months): testing the reliability of underlying data, challenging key assumptions, checking arithmetic and sensitivity, considering the feasibility of mitigating plans (e.g., refinancing, asset sales), reviewing subsequent events and post-year-end results, and obtaining written representations about future plans.

Real-world example The auditor stress-tests the forecast's sales assumptions and confirms a claimed refinancing is realistically committed.

Common follow-ups: What period should the forecast cover? | How do you test mitigating plans?

Audit Evidence & Procedures Analytical Procedures Going Concern

What is a material uncertainty related to going concern?

Advanced

A material uncertainty exists when events/conditions cast significant doubt on the entity's ability to continue as a going concern, and the magnitude of potential impact and likelihood are such that appropriate disclosure is necessary for fair presentation. If adequately disclosed and the going concern basis remains appropriate, the auditor issues an unmodified opinion with a 'Material Uncertainty Related to Going Concern' section.

Real-world example With doubtful but disclosed refinancing, the auditor gives a clean opinion plus a Material Uncertainty section highlighting the risk.

Common follow-ups: How is a material uncertainty reported? | Is the opinion modified if it's well disclosed?

Audit Report & Opinions ISA Standards Going Concern

How do going concern conclusions affect the auditor's report?

Advanced

If the going concern basis is appropriate but a material uncertainty exists and is adequately disclosed: unmodified opinion with a Material Uncertainty section. If not adequately disclosed: qualified or adverse opinion. If the going concern basis is used but is inappropriate (entity will liquidate): adverse opinion. If management won't perform/extend an assessment: possibly a qualified opinion or disclaimer.

Basis appropriate + MU disclosed -> unmodified + MU section
MU not disclosed -> qualified/adverse
Basis inappropriate -> adverse

Real-world example Because the failing company still used the going concern basis, the auditor issued an adverse opinion.

Common follow-ups: When is an adverse opinion required for going concern? | What if disclosure is inadequate?

Audit Report & Opinions ISA Standards Going Concern

What basis of accounting is used if an entity is not a going concern?

Beginner

If management determines the entity will liquidate or cease trading (not a going concern), the statements are prepared on a different basis—commonly a break-up/liquidation basis—where assets are stated at net realizable (recoverable) values, liabilities may be reclassified, and this basis and its reason are disclosed. The auditor considers whether that basis and disclosure are appropriate.

Real-world example A company planning to wind up restates assets at expected sale values under a break-up basis, disclosed in the accounts.

Common follow-ups: How are assets valued on a break-up basis? | Must the change of basis be disclosed?

Audit Report & Opinions ISA Standards Going Concern

What time period does the going concern assessment cover?

Intermediate

The assessment covers the foreseeable future—at least twelve months from the date of approval/authorization of the financial statements (some frameworks measure from the reporting date). The auditor also remains alert to events beyond that period. If management's assessment covers less than the required period, the auditor asks them to extend it.

Real-world example Management's forecast stops at nine months, so the auditor requests an extension to cover the full twelve-month period.

Common follow-ups: From what date is the 12 months measured? | What if the assessment is too short?

ISA Standards Audit Evidence & Procedures Going Concern

How do you audit a cash flow forecast supporting going concern?

Advanced

Assess the reliability of the data and assumptions against historical accuracy, external evidence, and the entity's plans; check mathematical accuracy; perform sensitivity analysis on key drivers (sales, collections, financing); evaluate the availability and terms of financing facilities; and compare the forecast to actual post-year-end results. Corroborate mitigating actions (e.g., committed facilities, signed contracts).

Real-world example The auditor sensitizes the forecast to a 10% sales fall and confirms whether the entity would still meet obligations.

Common follow-ups: Why perform sensitivity analysis? | How do post-year-end actuals help?

Audit Evidence & Procedures Analytical Procedures Going Concern

What are mitigating factors in a going concern assessment?

Intermediate

Mitigating factors are actions/plans that could alleviate doubt: committed financing or refinancing, asset disposals, cost reductions, shareholder/parent support (sometimes via a support letter), new contracts, or equity injections. The auditor evaluates whether these are feasible, likely, and sufficiently committed—not merely intentions—before relying on them.

Real-world example A parent-company support letter and a committed bank facility together mitigate doubt about the subsidiary's going concern.

Common follow-ups: What makes a mitigating factor reliable? | What is a letter of support?

Audit Evidence & Procedures Audit Report & Opinions Going Concern