Going Concern: Why a Profitable Company Can Still Fail the Test

A company can report a profit and still face serious going concern risk. The reason is simple: profitability does not necessarily translate into sufficient liquidity to meet upcoming obligations. Profit is a measure of performance. Liquidity and funding are what keep operations running.

That distinction sits at the centre of ISA 570, the auditing standard on going concern — and it is why an auditor's work on going concern does not stop at reviewing the financial statements.

What an auditor looks for

During the audit, indicators that call for closer evaluation include:

• Recurring operating losses
• Negative operating cash flows
• Loan defaults or upcoming repayment pressures
• Dependence on refinancing or external funding
• Significant overdue payables
• Adverse legal, regulatory or commercial developments

One indicator on its own does not establish that a material uncertainty exists. The auditor's task is to weigh them together, against management's own assessment and the company's actual position.

The practical challenge: management's forecast

Suppose management prepares a 12-month cash-flow forecast built on:

• 20% revenue growth
• Improved gross margins
• Timely collection of receivables
• Renewal of existing bank financing

The auditor cannot accept this forecast simply because management has approved it. The work involves evaluating it in sequence:

Assumptions → Data → Plausibility → Sensitivity

• Are the assumptions consistent with recent performance, contracts and market conditions?
• Is the underlying data — order book, collection history, facility terms — reliable?
• Is the forecast plausible as a whole, not just line by line?
• What happens when the assumptions are stressed?

For example: what if revenue growth is lower than forecast? What if major customers delay payment? What if the bank does not renew the facility?

A forecast that works only under optimistic assumptions may not provide sufficient support for management's conclusion that the company is a going concern.

What ISA 570 (Revised 2024) changes

The revised standard strengthens the auditor's responsibilities concerning going concern, including the evaluation of management's assessment, the relevant assumptions, and the reporting implications for the auditor's report.

It becomes effective for audits of financial statements for periods beginning on or after 15 December 2026. Companies and audit committees should expect more probing questions on funding, forecasts and headroom in the audits that follow.

What this means for management

Going concern assessment is not a box-ticking exercise, for the auditor or for the board. It requires professional scepticism, a hard look at management's assumptions, and a judgement on whether the financial statements adequately communicate any material uncertainty.

For directors, the practical implications are:

• Prepare the cash-flow forecast early and document the basis for each assumption.
• Run downside scenarios before the auditor asks for them.
• Obtain written confirmation of facility renewals where the forecast depends on them.
• Be prepared to disclose material uncertainties clearly, rather than defend a forecast that does not survive sensitivity testing.

A going concern discussion handled well is the sign of a board that understands its funding. Handled late, it can delay the audit report and unsettle lenders at exactly the wrong moment.

Reference: ISA 570 (Revised 2024), Going Concern — International Auditing and Assurance Standards Board (IAASB).