What does going concern mean in an audit?

The idea. Accounts are normally prepared assuming the business will continue operating, so assets are valued as being used rather than sold in a hurry. If that assumption is doubtful, the figures and disclosures may need to change.

Who does what

• Directors assess whether the company can continue, and prepare accounts on the right basis. Board approval of the accounts (section 251) includes the directors' statement.
• The auditor evaluates the directors' assessment, looks at cash flows, borrowings, covenants, support from shareholders and post year-end events.

If there is a material uncertainty. Under international auditing standards (ISA 570), if events create significant doubt and the directors disclose it adequately, the auditor gives an unmodified opinion with a separate section titled "Material Uncertainty Related to Going Concern". If disclosure is inadequate, the opinion may be qualified or adverse. If the directors use a going concern basis that is inappropriate, an adverse opinion is likely.

Related statutory statements. The exempt private company certificate (section 260) and the auditor's statement for companies not lodging accounts (section 261) both involve confirming that the company appeared able to meet its liabilities as they fall due.

Warning signs for owners

• recurring losses and negative operating cash flow;
• net current liabilities or loans due soon;
• dependence on a director's or parent's continuing support.

Action. Talk to the auditor early, and get written support letters if relying on shareholder funding.