Going concern is the financial reporting assumption that the entity will continue operating for the foreseeable future. In practice, the auditor asks whether management has enough liquidity evidence, refinancing support and operational plans to support that assumption. The strongest response is not verbal reassurance. It is a scenario-based cash flow model, written financing evidence, covenant analysis and transparent disclosure.
What does going concern mean?
Going concern means that the financial statements are prepared on the assumption that the company will continue operating, settle liabilities in the normal course of business and avoid liquidation or forced restructuring. Under Polish accounting practice and ISA/KSB 570, management is responsible for assessing that assumption. The statutory auditor evaluates whether the assessment is reasonable and whether disclosures are adequate.
When does the auditor require deeper analysis?
The auditor escalates the topic when financial or operational red flags suggest that the company may not be able to continue without new financing, waiver, restructuring or shareholder support.
| Area | Red flag | Audit implication |
|---|---|---|
| Liquidity | Negative operating cash flows, current ratio below 1.0, overdue payables | The auditor will challenge short-term cash availability and payment discipline. |
| Debt | Covenant breach, loan maturity within 12 months, refinancing not signed | Debt classification and going concern disclosures become linked. |
| Equity | Negative equity or accumulated losses | Management duties under the Polish Commercial Companies Code and recovery actions must be assessed. |
| Operations | Loss of a key contract, production interruption, loss of key management | Forecast assumptions require external evidence, not optimism. |
How can it affect the audit opinion?
If a material uncertainty exists and management discloses it properly, the auditor may issue an unmodified opinion with a separate paragraph highlighting the material uncertainty related to going concern. If disclosures are incomplete or misleading, the auditor may modify the opinion. If management does not provide sufficient evidence, the auditor may be unable to obtain sufficient appropriate audit evidence.
What should the cash flow scenario include?
A useful going concern model is monthly, not annual. It should reconcile opening cash, operating inflows, payroll, taxes, debt service, supplier payments, CAPEX, bank facilities and covenant testing. The downside scenario should show what happens if revenue is delayed, margins fall, a customer pays late or the bank reduces availability.
- Base case: management plan based on signed contracts, expected collections and approved financing.
- Downside case: lower revenue, slower collections, higher working capital and covenant stress.
- Mitigating actions: shareholder support, bank waiver, refinancing, cost reduction, sale of non-core assets or working-capital release.
What does the auditor focus on?
The auditor focuses on the quality of evidence. A board presentation is useful, but it is not enough. Bank letters, signed term sheets, shareholder resolutions, covenant calculations, post-year-end collections and updated forecasts are more persuasive. The auditor will also link going concern to bank covenant waivers and negative equity.
Frequently asked questions
Auditor asking about going concern?
JMFC helps management prepare cash flow scenarios, financing evidence and audit-ready disclosures before the issue becomes an audit report problem.