Going concern assessment

Client Substantiation File.

The going concern assumption is the assumption that the entity will continue to operate /remain in business (in other words, continue as a going concern) into the foreseeable future. There are requirements in both NZ IFRS and PBE IPSAS to assess the validity of the going concern assumption, looking forward at least 12 months. There are also disclosure requirements in the financial statements.  

Responsibilities of management

When preparing financial statements, an assessment of the entity’s ability to continue as a going concern must be made. There are no specific requirements about what form this assessment should take, we recommended that this is a formal, written assessment approved by the appropriate level of management and/or those charged with governance. Management’s assessment involves making a judgement, at a particular point in time, about inherently uncertain future outcomes of events or conditions. The following factors are relevant to judgements about future outcomes:

  • The degree of uncertainty associated with the future outcome of an event or condition increases significantly the further into the future the outcome occurs.
  • The size and complexity of the entity, the nature and condition of its business, and the degree to which it is affected by external factors affect the judgement regarding the outcome of events or conditions.
  • Any judgement about the future is based on information available at the time at which the judgement is made.

The extent of these considerations will depend on the facts and circumstances of your entity. Any supporting evidence that is used to assess whether the going concern assumption should be retained. This usually includes items such as forecasts, budgets, and evidence of borrowing facilities.

The financial statements are not prepared on a going concern basis when the entity has an intention to liquidate or to cease its operations, or if it has no realistic alternative but to do so.

The financial statements are required to make a positive statement about whether they are prepared on a going concern basis or not, and that this basis is appropriate. If there is uncertainty regarding the ability of your entity to continue as a going concern then disclosure around this will need to be included in the financial statements.

Responsibilities of the auditor

The International Standards of Auditing (New Zealand) place certain requirements on auditors relating to the application of the going concern assumption. The auditor’s responsibilities in this regard are to:

  • Evaluate the assessment prepared by management.
  • Obtain sufficient appropriate audit evidence about the appropriateness of management’s use of the going concern basis of accounting in the preparation and presentation of the financial statements.
  • Conclude on whether there is a material uncertainty about the entity’s ability to continue as a going concern.

We are required to ensure that the period of the going concern assessment is at least 12 months in the future from the date of the audit report.

We may request further information from you if we become aware of facts or circumstances that cause us to doubt whether the going concern assumption is appropriate. This may arise from our risk assessment procedures or while performing our subsequent assessment of the appropriateness of applying the going concern assumption.

We will also require a written representation from those charged with governance at the end of the audit on whether or not the use of the going concern assumption is appropriate. This will normally be included in the representation letter.

What could influence the going concern assessment?

The following are examples from the International Standards of Auditing of events or conditions that may cast significant doubt on the ability of an organisation to continue as a going concern. This could be individually or collectively. This is not an all-inclusive listing, but it serves as some examples.


  • Net liability or net current liability position.
  • Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment; or excessive reliance on short-term borrowings to finance long-term assets.
  • Indications of withdrawal of financial support by creditors.
  • Negative operating cash flows indicated by historical or prospective financial statements.
  • Adverse key financial ratios.
  • Substantial operating losses or significant deterioration in the value of assets used to generate cash flows.
  • Arrears or discontinuance of dividends.
  • Inability to pay creditors on due dates.
  • Inability to comply with the terms of loan agreements.
  • Change from credit to cash-on-delivery transactions with suppliers.
  • Inability to obtain financing for essential new product development or other essential investments.


  • Management intentions to liquidate the entity or to cease operations.
  • Loss of key management without replacement.
  • Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
  • Labour difficulties.
  • Shortages of important supplies.
  • Emergence of a highly successful competitor.


  • non-compliance with capital or other statutory or regulatory requirements, such as solvency or liquidity requirements for financial institutions;
  • pending legal or regulatory proceedings against the entity that may, if successful, result in claims that the entity is unlikely to be able to satisfy;
  • changes in law or regulation or government policy expected to adversely affect the entity; and
  • uninsured or underinsured catastrophes when they occur.

Page created: 14 September 2018