Auditing
Going Concern in Auditing: Substantial Doubt, Indicators and the Report
By SimplyCPA · 11 October 2026
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- Meaning: Financial statements assume the entity will keep operating and meet its obligations — the going concern basis.
- Look-ahead period: Under AICPA standards and US GAAP, generally one year after the financial statements are issued (or available to be issued). PCAOB standards use one year after the balance sheet date.
- Warning signs: Recurring losses, negative cash flows, loan defaults, loss of a key customer or supplier, legal or regulatory threats.
- Management's plans: The auditor evaluates whether plans are probable of being implemented and would alleviate the doubt.
- Report impact: If substantial doubt remains and is adequately disclosed, the opinion stays unmodified with a separate going-concern section. Inadequate disclosure leads to a qualified or adverse opinion.
Two responsibilities
Under US GAAP (Accounting Standards Codification, or ASC, 205-40), management must evaluate whether conditions raise substantial doubt about the entity's ability to continue as a going concern and make disclosures. The auditor separately evaluates whether substantial doubt exists — under AU-C 570 for private companies and PCAOB AS 2415 for public companies.
Conditions that may raise substantial doubt
- Financial: recurring operating losses, working capital deficiencies, negative operating cash flows, adverse key ratios.
- Debt: default on loans, breaches of covenants, inability to refinance, arrears in dividends.
- Operational: loss of key management, a major customer, a key licence or a principal supplier; labour difficulties.
- Other: legal proceedings or new legislation that could jeopardise the business; uninsured catastrophes.
The evaluation step by step
- Identify conditions or events that, together, could raise substantial doubt.
- If they exist, obtain information about management's plans — for example, selling assets, borrowing, cutting costs or raising equity.
- Evaluate whether those plans are probable of being effectively implemented and would mitigate the doubt. Where cash flow forecasts are central, test the underlying data and assumptions.
- Obtain written representations about the plans.
- Conclude whether substantial doubt remains, and evaluate the adequacy of disclosures.
Effect on the auditor's report
| Situation | Report |
|---|---|
| No substantial doubt | Unmodified; no going-concern section |
| Substantial doubt alleviated by management's plans | Unmodified; disclosure still required in the financial statements |
| Substantial doubt remains, adequately disclosed | Unmodified, plus a separate section headed "Substantial Doubt About the Entity's Ability to Continue as a Going Concern" |
| Substantial doubt remains, inadequately disclosed | Qualified or adverse (a misstatement) |
| Going concern basis inappropriate (e.g. liquidation is imminent) | Adverse, unless the statements are prepared on the liquidation basis |
Exam trap: The auditor's going-concern section is never a "subject to" opinion and never conditional language like "if the company obtains financing". The required wording is that substantial doubt exists.
Also see related parties and going concern in AUD and notes, subsequent events and going concern in FAR.