Going concern is one of those terms that gets thrown around in board meetings but rarely explained properly. If you’re a director signing off financial statements, understanding this concept isn’t optional. It’s a legal requirement under company law, and getting it wrong can trigger a qualified or adverse opinion on your audit report.
This guide covers what going concern means, the four FRC scenarios, what auditors look for under ISA 570, and how to prepare.
What is the going concern principle?
The going concern principle is a fundamental assumption in accounting. It means the company will continue to operate and meet its obligations for the foreseeable future, without any intention or need to liquidate or cease trading. In practice, that means a period of at least 12 months from the date the financial statements are approved.
Every set of accounts prepared under UK GAAP (FRS 102) or IFRS (IAS 1) uses the going concern basis of accounting unless directors know otherwise. It affects how assets and liabilities are valued. A building on the balance sheet might be worth GBP 2 million as a going concern, but only GBP 800,000 at a forced sale. The going concern basis of accounting touches the presentation of financial information across the entire set of accounts.
The director’s responsibility
This isn’t just the auditor’s problem. Under section 172 of the Companies Act 2006, directors must act in a way that promotes the success of the company. Section 414C requires the strategic report to describe the principal risks and uncertainties facing the business.
Directors are responsible for assessing whether the company is a going concern, making appropriate disclosures about material uncertainties, and preparing the financial statements on that basis. Management is required to form their own view, supported by evidence, before the auditor even begins their work. If the board hasn’t documented its assessment properly, that itself becomes a problem.
The four going concern scenarios
The Financial Reporting Council (FRC) updated its guidance on the going concern basis of accounting and related reporting on solvency and liquidity risk in February 2025. It sets out four scenarios representing increasing levels of risk.
Scenario 1: No material uncertainty. The going concern basis is appropriate, the company has adequate cash flow, and the auditor issues an unmodified opinion. Most businesses fall here.
Scenario 2: Events or conditions exist that could cast doubt on the company’s ability to continue as a going concern, but management’s plans to mitigate these risks are credible. The going concern basis is appropriate. The financial statements should also include disclosure about those events and conditions. The auditor reviews whether these disclosures are adequate.
Scenario 3: A material uncertainty related to going concern exists. The company might survive, it might not. The going concern basis of accounting is still appropriate, but the auditor’s report will include a “Material Uncertainty Related to Going Concern” paragraph. The opinion is not modified, but lenders, creditors, and investors will notice.
Scenario 4: The company is not a going concern. Directors know the business will cease trading or be placed into liquidation. Financial statements should be prepared on a break-up basis. If directors refuse, the auditor will issue an adverse opinion.
The 12-month assessment period
Directors must look forward at least 12 months from the date the financial statements are approved. Not from the year-end. This is a common mistake.
For a company with a December 2025 year-end that approves its accounts in September 2026, the assessment needs to cover through to September 2027. That’s 21 months from the balance sheet date. You’ll need cashflow forecasts for the full period, details of borrowing facilities and overdraft limits, sensitivity analysis, and a clear view of upcoming debt repayments.
The size and complexity of this exercise should be proportionate. But even small companies and micro-entities need a documented assessment. A one-page board minute with no supporting evidence won’t satisfy anyone.
What is the standard for going concern auditing?
The standard is ISA 570 (Revised). In the UK, the FRC adopts ISA (UK) 570, which adds requirements including references to the UK Corporate Governance Code.
ISA 570 requires the auditor to evaluate management’s assessment, determine whether events or conditions exist that cast significant doubt on the entity’s ability to continue, obtain sufficient audit evidence about the appropriateness of using the going concern basis, and conclude on whether a material uncertainty exists. Audit procedures include reviewing cash flow forecasts, checking bank facility letters, examining post-balance-sheet events, and performing a risk assessment.
If the auditor concludes that the going concern basis of accounting is appropriate but a material uncertainty exists, they must check that going concern disclosures are adequate. The auditor also stays alert throughout the engagement. A revenue decline spotted during substantive testing, or an overdue creditor discovered during payables work, can feed into the conclusion.
What is an example of a going concern?
Consider a Manchester-based manufacturing company with GBP 8 million turnover. It’s profitable, has GBP 400,000 cash in the bank and an unused overdraft facility. No pending litigation, no major customer losses, net current assets of GBP 1.2 million. The directors document their assessment, the auditor reviews it, and the going concern basis is appropriate. Clean report.
Now consider a similar company that’s lost its biggest customer (35% of revenue), has an overdraft facility up for renewal in four months, and is forecasting a cash shortfall by month nine. The directors have a plan involving cost cuts, but the outcome is uncertain. A material uncertainty related to going concern may exist here. The difference between scenario 2 and scenario 3 often comes down to how plausible the recovery plan is.
What are the red flags for a going concern?
Auditors are trained to spot potential indicators that substantial doubt exists. Here are the warning signs that trigger deeper investigation:
- Net current liabilities or recurring operating losses
- Inability to pay creditors on time, or increasing debtor days as liquidity tightens
- Breach of bank covenants, especially if the lender hasn’t waived it
- Overdraft consistently at its limit, or difficulty raising new finance
- Loss of a key customer, supplier, or contract
- Departure of key management without replacement
- Pending litigation with a potentially significant outcome
- Changes in legislation or regulation that affect the business model
None of these on their own means the company is not a going concern. But they trigger harder questions and demand more evidence. Auditing standards expect professional scepticism here.
Common mistakes and how to prepare
Leaving it too late. Directors wait until fieldwork is nearly finished before thinking about this assessment. Start at least two months before.
No documentation. A verbal board discussion doesn’t count. There needs to be a written assessment, supported by evidence, available for review.
Unrealistic forecasts. Hockey-stick recoveries with no supporting data will be challenged. If your forecast assumes 30% growth but the market is shrinking, expect questions.
Confusing profit with cash. A company can be profitable on paper and still run out of cash. Liquidity and solvency matter more than profit margins for this purpose.
Good preparation means building proper monthly projections for the full assessment period, running sensitivity analysis on downside scenarios, documenting borrowing facilities with renewal dates, and minuting the board discussion as a formal agenda item. A statement indicating that the directors have considered the matter, with the evidence they relied on, gives the auditor what they need.
How Audit Group can help
Going concern is one of the most scrutinised areas in any audit. The FRC regularly reviews how this is handled, and it’s a frequent finding in quality inspections. At Audit Group, part of the Jack Ross group (est. 1948), we work with businesses across Manchester and the wider UK on going concern assessments that meet auditing standards and give directors confidence in the process.
Our team understands the relevant requirements and we’ll help you prepare before the process begins.
Talk to us about your statutory audit and let’s make sure your assessment is ready.
