Management’s assessment and the auditor’s work
Under Ind AS 1, management uses the going concern basis unless it intends to liquidate or cease trading, or has no realistic alternative. It discloses material uncertainties and, if it uses another basis, explains the basis and why going concern is inappropriate. AS 1 identifies going concern as a fundamental accounting assumption. Filing for or entering a resolution process does not by itself decide the accounting basis. Section 134(5)(c) of the Companies Act requires the directors’ responsibility statement to address preparation on a going concern basis; read the statement with the applicable reporting framework.
SA 570 (Revised) requires the auditor to obtain sufficient appropriate evidence, conclude whether use of the basis is appropriate and whether material uncertainty exists, and report accordingly. Evaluate the period required by the applicable framework; if management’s assessment covers less than twelve months from the date of the financial statements, request an extension to at least that date. Inquire about known risks beyond the assessment period. Consider information through the audit report date and apply SA 560 as appropriate.
Indicators and evidence
| Area | Indicators | Possible audit evidence |
|---|---|---|
| Financial | Negative working capital, repeated losses, covenant breaches, debt approaching maturity, supplier demands, loss of credit | Cash forecasts, borrowing agreements, confirmed lender terms, maturity ladder, ageing and subsequent receipts and payments |
| Operating | Loss of major customers, key staff, markets or licences; supply disruption; plans to stop operations | Contracts and renewals, board minutes, concentration analysis and an assessment of replacements |
| Regulatory or other | Closure directions, litigation, capital shortfalls, regulatory changes, uninsured damage | Orders and insurance records, legal evidence as appropriate, and compliance and funding plans |
If indicators are identified, apply paragraph 16. Obtain an assessment if management has not made one. Evaluate whether proposed actions are feasible and likely to improve the position. Where a cash forecast is significant, test the reliability of its data and evidence supporting assumptions; compare prior forecasts to outcomes and stress-test collections, margins, costs, interest and funding dates as relevant. Consider new facts and obtain written representations about plans and feasibility from management and, where appropriate, those charged with governance. Representations alone are insufficient.
For refinancing, inspect commitments, conditions, waivers and lender responses. For asset sales, check saleability, realistic timing and lender or regulatory restrictions. For investor support, check the terms and the funder’s ability to pay when needed. For cost reductions, verify implementation dates, one-time costs and actual savings. Test cash availability month by month; an annual surplus can conceal a missed instalment.
Audit opinion and the separate CARO conclusion
| Audit finding | Reporting under the auditing standards |
|---|---|
| Appropriate basis and no material uncertainty | No dedicated material uncertainty section. Consider required disclosures and, where applicable, whether the matter is a key audit matter. |
| Appropriate basis, material uncertainty adequately disclosed | Include a separate Material Uncertainty Related to Going Concern section that refers to the note and makes clear the opinion is not modified for this matter. |
| Appropriate basis, material uncertainty inadequately disclosed | Qualified or adverse opinion according to materiality and pervasiveness, explaining the disclosure problem in the basis section. |
| Going concern basis used but inappropriate | Adverse opinion. If management uses an acceptable alternative basis with adequate disclosure, an unmodified opinion may be possible; consider an Emphasis of Matter paragraph. |
| Management refuses to make or extend the assessment | Consider the reporting implications. If sufficient evidence cannot be obtained, qualification or disclaimer depends on the possible effects and pervasiveness. |
CARO 2020 paragraph 3(xix), where applicable, separately addresses whether material uncertainty exists at the report date about meeting liabilities already existing at the balance sheet date as they fall due within one year of that date. Use ratios, ageing, expected realisation and payment dates, other accompanying information, and knowledge of the board and management plans. Explain any unfavourable or qualified answer, or inability to conclude. This finding does not replace the SA 570 assessment and gives no guarantee of payment or future viability. Check applicability under the Order: unlisted status alone gives no exemption. Paragraph 3(xxi) is the Order’s separate consolidated reporting clause.
Six worked cases
1. Covenant breach and a proposed standstill
At 31 March 2024, Precision Gears has ₹42.50 crore current assets and ₹78.20 crore current liabilities, a ₹35.70 crore deficit. The ₹30 crore term loan has ₹12 crore of principal scheduled for September. Reported DSCR of 0.72 times is 0.63 below the 1.35 covenant. Review whether the year-end breach made more debt payable on demand, separately from the cash forecast. The bank gives notice on 15 May and the borrower proposes an 18-month principal deferral on 10 June. At the 28 August report date, the proposal is still before the credit committee. Do not assume an approved standstill or treat a principal deferral as a funded interest loan.
The downside forecast shows cash exhaustion on 15 October without restructuring. If continuing remains realistic but a material uncertainty exists and Note 38 adequately explains the ₹14.80 crore loss, deficit, breach and pending application, include a dedicated section without modifying the opinion for this matter. Separately explain the evidenced uncertainty under CARO 3(xix) if applicable.
2. Major customer enters insolvency
Zenith accounted for ₹65 crore of Apex Logistics’ ₹125 crore FY 2023–24 revenue, or 52%. Assume the NCLT’s 22 April 2024 admission of a financial creditor’s section 7 application confirms distress already present at 31 March, making it adjusting evidence under Ind AS 10. Measure ECL under Ind AS 109 using probability-weighted and discounted expected cash shortfalls with supportable evidence. If that work supports 90% of the ₹24.50 crore receivable as ECL, the allowance is ₹22.05 crore and net receivables are ₹2.45 crore. Deduct the ₹1.20 crore already booked: the further ₹20.85 crore charge turns ₹8.40 crore profit before tax into a ₹12.45 crore loss before tax. Share capital of ₹10 crore and negative reserves of ₹4.50 crore alone imply positive equity of ₹5.50 crore at the point those figures apply; identify the timing and tax effect before concluding that equity is eroded.
Assess the customer concentration and alternative contracts separately. Three letters of intent projecting ₹18 crore are not firm replacement sales and do not establish a ₹14 crore overhead gap without cost data. If management refuses a supported ECL adjustment, determine qualification or adverse opinion by materiality and pervasiveness, and separately address the going concern basis, uncertainty and disclosure.
3. Parent letter of comfort
SolarTech has negative net worth of ₹18 crore and ₹26 crore due within 90 days. Its overseas parent expresses an intention to support it but is restructuring its own debt, has defaulted on coupons and had only €450,000 cash at its December 2023 reporting date. Review the letter’s wording, authority and governing law, obtain legal input where needed and verify current funding capacity, transfer restrictions, availability and timing. Neither enforceability nor coverage follows from the letter’s label. Do not count the support unless the evidence warrants it. Determine the reporting outcome from the appropriateness of the basis, uncertainty, disclosure and available evidence.
4. Match cash sources to existing liabilities
InfraBuild estimates the following amounts at 31 March 2024. Use contract-specific timing for unbilled, disputed and retention amounts, and distinguish statutory cash obligations from financial liabilities.
| Item (₹ crore) | Book amount | Expected realisation or payment within one year |
|---|---|---|
| Cash and bank | 4.20 | 4.20 |
| Trade balances | 48.00 | 26.50 |
| Retentions and deposits | 18.00 | 3.00 |
| Total stated asset sources | 70.20 | 33.70 |
| Trade payables | 36.00 | 36.00 |
| Short-term bank debt | 15.00 | 15.00 |
| Current long-term debt maturities | 8.50 | 8.50 |
| Overdue statutory dues | 4.80 | 4.80 |
| Total cash obligations shown | 64.30 | 64.30 |
Existing financial liabilities in the table total ₹59.50 crore. Including the ₹4.80 crore statutory payments leaves a ₹30.60 crore liquidity gap on the stated inputs. Check payment dates, collection evidence and credible funding or operating cash before concluding. Explain a material uncertainty under paragraph 3(xix) where the evidence supports it.
5. Closure of the only plant
In this hypothetical case, an order dated 14 July 2024 under section 33A of the Water Act closes ChemDistill’s only facility and stops utilities. The requested stay is unsuccessful on 10 August. Examine the actual orders, effective dates and any appeal or stay with counsel. The plant generates all the revenue; estimated remedial capital of ₹14 crore and at least eight months to restart contrast with ₹1.80 crore cash and ₹0.90 crore monthly fixed costs, giving two months of cash before other flows. If management intends to cease or has no realistic alternative, use the appropriate alternative basis; if it nevertheless presents going concern statements, issue an adverse opinion. A temporary closure alone does not settle the basis.
6. Wind project cash sensitivity
GreenVolt’s 50 MW project uses ₹225 crore debt and ₹75 crore equity, 75% and 25% of ₹300 crore. At ₹3.15/kWh and 8,784 hours in FY 2023–24, the simplified model gives ₹32.51 crore at 23.5% plant load factor and ₹25.18 crore at 18.2%, a ₹7.33 crore gross revenue gap assuming all output is billable at the tariff. Reconcile actual billed units and distinguish a 210-day payment lag from a revenue loss.
| Model input or output | Base | Stress 1 | Stress 2 |
|---|---|---|---|
| Plant load factor | 22.0% | 18.5% | 17.0% |
| Gross model revenue (₹ crore) | 30.44 | 25.59 | 23.52 |
| Collection lag | 90 days | 180 days | 240 days |
| Working capital rate | 9.5% | 11.0% | 12.5% |
| Assumed annual cash available for debt service (₹ crore) | 23.60 | 18.80 | 15.60 |
| Assumed cash available by payment dates (₹ crore) | 23.60 | 13.60 | 8.20 |
| Illustrative DSCR | 1.18 | 0.94 | 0.78 |
| Illustrative debt service gap (₹ crore) | – | 6.40 | 11.80 |
For the illustration, assume ₹20 crore of scheduled annual debt service. DSCR divides assumed annual cash available for debt service by ₹20 crore. The gap is the portion of ₹20 crore not covered by assumed cash available by payment dates, which can be smaller than annual cash because of collection timing. These cash inputs are assumptions, not figures inferred from the tariff, interest or collection inputs alone. If a ₹14 crore funded two-quarter debt service reserve is available at each required date, it exceeds the two illustrated gaps by ₹7.60 crore and ₹2.20 crore respectively. Confirm lender access, permitted uses and replenishment; the reserve does not establish long-term viability. A dedicated uncertainty section is appropriate if material uncertainty remains, the basis remains appropriate and disclosures are adequate.
Questions before signing
Retain the approved assessment, tested forecast, evidence for mitigations, subsequent-events review, note disclosure, governance communications and separate CARO conclusion where required. Negative equity does not dictate the opinion. Under SA 701, where applicable, a matter giving rise to a modified opinion or a material going concern uncertainty is addressed in its designated section and referred to in the Key Audit Matters section rather than repeated as a separate KAM. Subsequent insolvency is not by itself proof of audit failure, and a report without a going concern uncertainty section does not guarantee viability.
Sources
- ICAI: SA 570 (Revised), Going Concern
- ICAI: SA 705 (Revised), modified opinions
- ICAI: SA 701, key audit matters
- ICAI: SA 560, subsequent events
- ICAI: full texts, including SA 501, SA 505 and SA 580
- India Code: Companies Act, 2013, sections 134 and 143
- Companies (Auditor’s Report) Order, 2020, paragraph 3(xix)
- ICAI: revised guidance on CARO 2020, including paragraph 3(xix)
- MCA: Ind AS 1, going concern
- Companies (Accounting Standards) Rules, 2021, including AS 1
- MCA: Ind AS 109, expected credit loss
- ICAI: Ind AS 10 educational material on adjusting events
- Insolvency and Bankruptcy Code, 2016, section 7
- India Code: Water Act, 1974, section 33A