A client has made losses for three years and has a large loan repayment due in six months. How do you assess going concern?

What the interviewer wants to hear

• Identifies events and conditions that cast doubt
• Evaluates management’s assessment covering at least twelve months
• Tests cash flow forecasts and key assumptions
• Examines financing plans, lender support and covenants
• Concludes on material uncertainty and reporting under SA 570

Model answer

Recurring losses and a large repayment due soon are clear indicators, so I would ask management for its going concern assessment covering at least twelve months from the reporting date. I would test the cash flow forecast: compare past forecasts with actual results, challenge growth and margin assumptions, and run downside scenarios. For the loan, I would see whether refinancing has been agreed, read correspondence with the bank, check covenant compliance, and look for evidence such as a signed term sheet or a letter of support from the parent, along with the parent’s ability to support. I would also review events after the year end and board minutes. Then I conclude: if the going concern basis is appropriate but a material uncertainty exists, I check the disclosure and add a material uncertainty section. If the disclosure is inadequate, I modify the opinion, and if the basis itself is inappropriate, the opinion would be adverse.

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