SA 570

GOING CONCERN
(I) Short note on Going Concern
Q1. Explain about the Going Concern Basis of Accounting ?
Ans: 1. Meaning : Under going concern basis of accounting, the FS are prepared on the assumption that the entity is
a going concern and will continue its operations for the foreseeable future.

2. General purpose financial statements are prepared using the going concern basis of accounting, unless
management either :
(i) intends to liquidate the entity or to cease operations,
(ii) or has no realistic alternative but to do so.

3. Why considering G/C is important

- The significance of Going Concern is due to its effect on preparation of FS.
- Ability or inability of an entity to continue as a going concern affects its preparation of FS.

4. When company is a going concern

When company is a going concern (i.e. use of GC assumption is appropriate), it will be able to realize its assets and
discharge its liabilities in the normal course of business.

5. When company is not a G/C

When an entity is not a going concern, the financial statements are prepared on liquidation basis.
For example, inventories may need to be written down as these may be sold for a lower price. Assets may have to be
recorded at the likely prices they will fetch.

PPQ
1. Stay fit Private Ltd is a start-up that has been in business for about 2 years. It runs an application which
provides valuable information pertaining to nutrition and helps its clients to access customized healthy
food. The company’s revenues are expected to grow in the coming period. Although company has reflected
net losses in its FS for the last 2 years, it has managed to meet its financial commitments. The FS for last 2
years were prepared on going concern basis of accounting. The management of company wants to follow
the same basis of accounting for the current year. Is the view of management appropriate? How does the
“going concern” affect the preparation of FS? (MTP SEP 24)(5m)
Ans: Write short note on Going concern. In the given situation, company has reflected net losses in financial statements
of last two years but is able to meet its financial commitments signifying its ability to carry on business/trade. The
revenue of company is also expected to grow in the coming period. It shows that management has neither the intention
nor the necessity of liquidation or of curtailing materially the scale of operations. Therefore, view of the management
for following going concern basis of accounting in current year is appropriate.

(II) OBJECTIVES OF AUDITOR

Q2. What are the Objectives of the auditor regarding going concern?
Ans: The objectives of the auditor are:
To obtain SAAE & conclude as to , Whether:

185 SA 570
- the Going concern assumption is Appropriate ,
- a Material Uncertainty (M/Uc) exists relating to Events or Conditions (E/C) that may cast a significant doubt on the
entity’s ability to continue as a going concern and To report as per this SA.

PPQ
1. When the use of the going concern basis of accounting is appropriate, assets and liabilities are recorded
on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal
course of business. Explain stating also the objective of the auditor regarding going concern.
OR
On the basis of which assumption the financial statements of a company are prepared. Explain. Describe
the objectives of the auditor regarding going concern.(RTP MAY 19)
OR
Under the going concern basis of accounting, the financial statements are prepared on the assumption
that the entity is a going concern and will continue its operations for the foreseeable future. Explain.
Also discuss the objectives of an auditor regarding Going concern as per relevant standard on auditing.
(RTP MAY 21) (MTP MAY 22)
Ans: Hint: write Q1 (short note on going concern) & Q2 (Objectives of SA 570)

(III) Management’s Responsibility for

Assessment of the entity’s ability to continue as a going concern

Q4 : The preparation of the financial statements requires management to assess the entity’s ability to
continue as a going concern even if the financial reporting framework does not include an explicit
requirement to do so. Explain
Ans: (i) Responsibility of management
It is the responsibility of management to assess the entity’s ability to continue as a going concern even if the FRF does
not include an explicit requirement to do so.

(ii) Management’s assessment involves making a judgment

In order to assess entity’s ability to continue as a going concern ,
management is required to make a judgment about
inherently uncertain future outcomes of events or conditions ,
at a particular point in time.

The following factors are relevant to that judgment: -

(a) The degree of uncertainty associated with the outcome of an event or condition.
(b) The size and complexity of the entity, the nature and condition of its business and thedegree to which it is
affected by external factors
(c ) Any judgment about the future is based on information available at the time at which the judgment is made.
Subsequent events may result in outcomes that are inconsistent with judgments that were reasonable at the time they
were made.

(IV) RESPONSIBILITIES OF THE AUDITOR

A. Simply achieving the Objectives stated above

B. Absence of Material Uncertainty is Not Guarantee as Going Concern(MCQ)

SA 570 186
(i) As per SA 200, potential effects of inherent limitations on auditor’s ability to detect MMS are greater for future E/C
that may cause an entity to cease to continue as a GC.
(ii) The auditor cannot predict such future E/C.
(iii) Absence of any reference to a M/Uc about entity’s ability to continue as GC in A/R cannot be viewed as a guarantee
as to the entity’s ability to continue as a GC.

C. Remaining Alert throughout the Audit for Audit Evidence about Events or Conditions
Auditor shall remain alert throughout audit for E/C that may cast significant doubt on entity’s ability to continue as a
GC

D. Risk Assessment Procedures and Related Activities

When performing RAP as per SA 315, the auditor shall consider whether E/C exist that may cast significant doubt on
the entity’s ability to continue as a GC.
In doing so, the auditor shall determine whether management has already performed a preliminary assessment of the
entity’s ability to continue as a GC, and:

(a) If such an assessment has been performed, the auditor shall :

- discuss the assessment with management and
- determine whether mgmt. has identified E/Cs that, individually or collectively, may cast significant doubt on entity’s
ability to continue as a GC &, if so, mgmt.’s plans to address them or

(b) If such an assessment has not yet been performed, the auditor shall :
- discuss with management, the basis for the intended use of GC basis of accounting, and
- inquire the management whether E/C exist that, individually or collectively, may cast significant doubt on the entity’s
ability to continue as a going concern.

PPQ
1. When performing RAP as per SA 315, the auditor shall consider whether events or conditions exist
that may cast significant doubt on the entity’s ability to continue as a GC. In so doing, the auditor has
determined that management of XYZ Ltd has already performed a preliminary assessment of the entity’s
ability to continue as a GC. Explain how would auditor of XYZ Ltd proceed in this case. Also Explain how
would the auditor proceed if such an assessment has not yet been performed by the mgmt.(RTP MAY 21)

2. As described in SA 200, the potential effects of inherent limitations on the auditor’s ability to detect
MMS are greater for future events or conditions that may cause an entity to cease to continue as a GC.
Explain auditor’s responsibilities with regard to GC (RTP M’ 21)
Ans: Write objective and point B of inherent limitation

E. Evaluating Management’s Assessment

(a) The auditor shall evaluate management's assessment of the entity's ability to continue as a GC.
(b) While doing this, the auditor shall cover the same period which is used by management to make its assessment
as required by the applicable FRF, or by L/R if it specifies a longer period.
(c) If management's assessment is for less than 12 months period from the date of the F.S., the auditor shall request
mgmt. to extend its assessment period to at least 12 months from that date.
(d) In evaluating management's assessment, the auditor shall consider whether management's assessment includes
all relevant info. of which the auditor is aware as a result of the audit.

187 SA 570
STEP 1
(V) Events or Conditions or Indicators
That May Cast Significant Doubt on the Entity’s Ability to Continue as a Going Concern

Q.4. List those Events or Conditions or Indicators That May Cast Significant Doubt on the Entity’s Ability to
Continue as a Going Concern (VVIP)
OR
Give examples of financial events or conditions that, individually or collectively, may cast significant
doubt on the entity’s ability to continue as a going concern. (RTP NOV 21) (MTP MAY 24 SRS 1)
Ans: The auditor shall remain alert throughout the audit for audit evidence of events or conditions that may cast
significant doubt on the entity’s ability to continue as a going concern.
The following are examples of such events or conditions :

(A) Financial Indicators

- Net Liability position
- Negative operating cash flows indicated by historical or prospective FS.
- Substantial operating losses or significant deterioration in the value of assets used to generate cash flows.
- Adverse key financial ratios.
- Discontinuance / Arrears of dividends

- Inability to comply with the terms of loan agreements

- Inability to obtain finance for new products / services
- Excessive reliance on short-term borrowings to finance long-term assets.

- Inability to pay creditors on due dates

- Withdrawal of financial support by creditors.

- Change from credit to cash-on-delivery transactions with suppliers.

(B) Operating Indicators

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

Other Indicators (4 C’s)

- Uninsured or underinsured Catastrophes when they occur.

-Non-Compliance with capital or other statutory or regulatory requirements, such as

solvency or liquidity requirements for financial institutions.(Non-compliance with L/R)

-Pending legal or regulatory proceedings (litigations)(Cases) against the entity that if

successful, may result in claims that the entity might not be able to satisfy.

SA 570 188
- Changes in law/regulation/ government policy expected to adversely affect the entity.

[Note: However, such indicators may be mitigated by some positive factors. For example: loss of major supplier may be
compensated by availability of some alternate source of supply.]

IMPORTANT NOTE
When SA 701 applies, matters relating to GC may be determined to be KAM and explains that a material uncertainty
related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern is,
by its nature, a key audit matter.

PPQ
1. M/s CM & Associates has been appointed as the statutory auditors of MNO Ltd. The company has been
suffering losses due to the emergence of highly successful competitor, thereby leading to negative net
worth. Also, the sales head, key management personnel, of the company left the company due to health
issues. When CA Chirag , the engagement partner discussed the scenario with the management of the
company, he did not get any satisfactory reply from the management. What is the responsibility of M/s
ANS & Associates with regard to SA 570? (MODULE)
Ans: As per SA 570, Write the objective.
The auditor shall remain alert throughout the audit for audit evidence of events or conditions that may cast significant
doubt on the entity’s ability to continue as a going concern.
The following are examples of events or conditions that, individually or collectively, may cast significant doubt on the
entity’s ability to continue as a going concern :
Financial
- Net Liability position
- Negative operating cash flows indicated by historical or prospective FS Operating
-Emergence of a highly successful competitor.
-Loss of key management without replacement.

In the present case, the above mentioned indicators are present in MNO ltd that may cast significant doubt on the
entity’s ability to continue as a going concern which are:
Here, MNO Ltd. has negative net worth on account of emergence of highly successful competitor and the sales head of
the company has also left the company.

Also, CA Chirag did not get any satisfactory reply when he discussed the going concern matter with the management.

Thus, from the above facts, it appears that MNO Ltd. is not going concern.
If the management of MNO Ltd. has used the going concern basis of accounting, the auditor should first ask the
management to adjust the financial statements. If the management of MNO Ltd. does not agree with the same, CA
Chirag shall consider the impact on his audit report.

STEP 2 (VI) Additional Audit Procedures When Events or Conditions Are Identified

If events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a
going concern,
the auditor shall performing additional audit procedures

189 SA 570
to obtain SAAE to determine as to whether or not a material uncertainty exists.
It also includes consideration of mitigating factors.
These procedures shall include:
(A) Compulsory Procedures (Info. From Mgmt)

(i) Request the mgmt. to prepare the Assessment if not prepared yet
Where management has not yet performed an assessment of the entity’s ability to continue as a going concern, request
the management to make its assessment.

(ii) Future Plan

Once the going concern assessment has been made,
Obtain information about management’s plans for future actions and
Evaluate whether:
- the management’s plans are feasible in the circumstances and
- the outcome of these plans is likely to improve the situation

(iii) Cash flow Forecasts

Where the entity has prepared a cash flow forecast, obtain it and analyse it.
While analysing the forecast , the auditor shall :

(i) Evaluate the reliability of the data used to prepare the forecast and
(ii) Determine whether the assumptions taken in the forecasts are reliable .

(iv) Any additional facts or information Available

Consider whether any additional facts or information have become available since the date on which management
made its last assessment.

(v) Obtain Written Representations

Obtain WR from management regarding the feasibility of their future action plans.

(B) Optional Procedures (Info. From third parties)

Audit procedures that are relevant to the requirement as stated above may include the following:
(i) Future Action Plans of Third Parties and Management
- Inquire the entity’s legal counsel regarding the existence of litigation & claims and the
reasonableness of mgmt’s assessments of their outcome & estimate of their financial implications.
- Obtaining and reviewing reports of regulatory actions.
- Read Minutes of the meetings of shareholders, TCWG & committees w.r.t financing difficulties.
- Determine the adequacy of support for any planned disposals of assets.
- Read terms of debentures & loan agreements & determining whether any have been breached.
- Evaluating the entity’s plans to deal with unfilled customer orders.

(ii) Cash flow and other forecasts & interim financial statements.
- Analyze and discuss cash flow, profit and other relevant forecasts with management.
- Analyze and discuss the entity’s latest available interim financial statements.

SA 570 190
(iii) Subsequent Events
Performing audit procedures to identify subsequent events that either mitigate or otherwise affect the entity’s ability
to continue as a going concern.

(iv) Written Representations from Third Parties

- Confirming the existence, legality and enforceability of arrangements to provide or maintain financial support with
related and third parties and assessing the financial ability of such parties to provide additional funds.

- Confirming the existence, terms and adequacy of borrowing facilities.

STEP 3 (VII) Implications for the Auditor’s Report

(Auditor’s Conclusions and Reporting)

(A) Auditor’s Conclusions

(i) On Going concern and Material Uncertainty
The auditor shall obtain SAAE and evaluate whether :
- management’s use of the GC basis of accounting in the preparation of the FS is appropriate.
- in his judgment, a material uncertainty exists related to events or conditions that may cast significant doubt on the
entity’s ability to continue as a going concern.

[A material uncertainty exists when the magnitude of its potential impact and likelihood of occurrence is such that, in
the auditor’s judgment, appropriate disclosure of the nature and implications of the uncertainty is necessary.]

(ii) Adequacy of disclosures when events or conditions have been identified and a material uncertainty exists
If the auditor concludes that management’s use of the GC basis of accounting is appropriate but a material uncertainty
exists, the auditor shall determine whether FS clearly disclose : -

(a) About the principal events or conditions that may cast significant doubt on the entity’s ability to continue as a going
concern and management’s plans to deal with them.

(b) That there is a material uncertainty related to events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern and, therefore, that it may be unable to realize its assets and discharge its
liabilities in the normal course of business.

(iii) Adequacy of disclosures when events or conditions have been identified but no material uncertainty exists
If events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a
going concern but, based on the audit evidence obtained the auditor concludes that no material uncertainty exists,
the auditor shall evaluate whether the FS provide adequate disclosures about these events or conditions as per the
applicable FRF. (i.e. disclosures of mitigating factors)

(B) AUDITOR’S REPORTING

(A) Use of Going Concern Basis of Accounting is Inappropriate

If the FS have been prepared by the mgmt. using the going concern basis of accounting
but, in the auditor’s professional judgment,
the going concern assumption is inappropriate,

191 SA 570
the auditor shall express an adverse opinion.

If the going concern assumption is inappropriate,

The auditor will require the management to prepare the FS on another basis
(e.g., on liquidation basis) (i.e. bring down all the A&L to realisable amount).

If the mgmt. does this and the auditor determines that the other basis of accounting is acceptable ,The auditor shall
perform an audit of those FS prepared on the alternative basis.

If there is adequate disclosure in the FS about the basis of accounting on which the FS are prepared, the auditor shall
express an unmodified opinion and may include an Emphasis of Matter paragraph as per SA 706 (Revised) in the
audit report to draw the user’s attention to that alternative basis of accounting and the reasons for its use.

(B) Use of the Going Concern Basis of Accounting is Appropriate but a Material Uncertainty Exists

The identification of a material uncertainty is a matter that is important to users’ understanding of the financial
statements.

(i) Adequate Disclosure of a Material Uncertainty is Made in the Financial Statements

If adequate disclosure about the material uncertainty is made in the FS,
the auditor shall express an Unmodified opinion and
the auditor’s report shall include a separate section under the heading
“Material Uncertainty Related to Going Concern” to :

(i) Draw attention to the note in the financial statements that discloses the matters
(ii) State that these events or conditions indicate that a material uncertainty exists that may cast significant doubt on
the entity’s ability to continue as a going concern and that the auditor’s opinion is not modified in respect of the matter.

(ii) Adequate Disclosure of a Material Uncertainty is Not Made in the F.S

If adequate disclosure about the material uncertainty is not made in the FS, the auditor shall:
(a) Express a qualified or adverse opinion, as appropriate as per SA 705
and
(b) In the Basis for Qualified / Adverse Opinion section of the auditor’s report, state that a material uncertainty exists
that may cast significant doubt on the entity’s ability to continue as a going concern and that the financial statements
do not adequately disclose this matter.

(C) Management Unwilling to Make or Extend Its Assessment

If management is unwilling to make or extend its assessment when requested to do so by the auditor, the auditor
shall issue a qualified opinion or a disclaimer of opinion in the auditor’s report as may be appropriate.
Reason : Because it may not be possible for the auditor to obtain SAAE regarding management’s use of the going
concern basis of accounting in the preparation of the financial statements.

PPQ
1. While doing audit of ABC Pvt Ltd, on the basis of SAAE, auditor comes to a conclusion that use of the Going
Concern Basis of Accounting is appropriate, but a material uncertainty exists. Discuss the implications
for auditor’s report if:

SA 570 192
 (a) Adequate Disclosure of a Material Uncertainty is Made in the Financial Statements
(b) Adequate Disclosure of a Material Uncertainty is Not Made in the Financial Statements(RTP NOV
21)
OR
S Ltd., a large textile manufacturing company, due to heavy recession in the market was unable to collect
amount of huge receivables in time and also holding large amounts of stock of raw materials and finished
goods since last 9 months of the Financial Year [Link] your primary observations of audit evidences
you feel that there is a material uncertainty exists about going [Link] will you deal in your audit report ?
What will be the effect on your audit opinion in the following situations ?
(i) If adequate disclosure of such material uncertainty is already made in the FS
(ii) If adequate disclosure of such material uncertainty is not made in the FS (May 23) (4 m)

2. The auditor of a company is having concerns about following of going concern basis of accounting
followed by management for preparation of financial statements. It asks the management to justify
preparation of financial statements. However, management is not willing to make its assessment and
share with auditor. What are implications for auditor’s report in such a scenario? (Module).
Ans: point C

3. CA B is statutory auditor of Boom Payments Bank for year 2023-24. During the year, banking regulator
has imposed restrictions on Bank from accepting new deposits due to non-compliance in conducting
KYC in large number of accounts and violation of rules aimed at preventing money laundering. There
is material uncertainty regarding probable outcome of such restrictions on ability of Bank to continue
as going concern. However, for year 2023-24, auditor has concluded that use of going concern basis of
accounting is appropriate.
The FS of Bank do not make adequate disclosure of material uncertainty due to above events in FS. What
are implications for auditor’s report for year 23-24 ? (MTP MAY 24)(4 Marks)
Ans: (a) Provision: As per SA 570 “Going Concern”, write category VI Auditor conclusions
Point (i)& (ii) then auditor’s reporting point B (ii)
(b) Correlation & Conclusion : As per the situation given in the question, banking regulator has imposed restrictions
due to non-compliance with regulatory requirements and there is material uncertainty of such events or conditions
which may cast a significant doubt on ability of Bank to continue as going concern. However, the financial statements of
Bank do not make adequate disclosure of material uncertainty due to above events in FS. If adequate disclosure about
the material uncertainty is not made in the FS, the auditor shall follow the above procedure.

4. While conducting audit of BYN Limited, CA Y notices that company has lost one of its key markets along
with important customers. Additionally, several highly successful competitors have emerged, impacting
business of the company. Despite the existence of material uncertainty, CA Y finds the use of going
concern basis of accounting appropriate for preparation of financial statements. The company has also
disclosed material uncertainty in notes to accounts adequately. How should he deal with the matter in
auditor’s report? (RTP SEPT 24)
Ans: (i) Provision: category VI point (i) & (ii) and then auditor’s reporting Point B (i)
(ii) Correlation & Conclusion : In the given case , while conducting audit of BYN Limited, CA Y noticed that company
has lost one of its key markets along with important customers. Additionally, several highly successful competitors
have emerged, impacting business of the company. Despite the existence of material uncertainty, CA Y concludes
that the use of going concern basis of accounting is appropriate and the company has also disclosed about material
uncertainty in notes to accounts adequately.

193 SA 570
Here , losing on market share and customers , emergency of highly successful competitor are operating indicators that
indicate existence of material uncertainty . However, auditor has concluded that going concern is appropriate and the
same has been disclosed by company is notes. Thus , he should follow the above mentioned procedure when disclosure
is made by the company about existence of material uncertainty.
5. M/s Airlift Ltd., carrying on the business of Passenger Transportation by air is running into continuous
financial losses as well as reduction in Sales due to stiff competition and frequent break down of its
own aircrafts. The Financial Statements for the Year ended on 31/03/2018 are to be now finalized.
The Management is quite uncertain as to its ability to continue in near future and has informed the
Auditors that having seized of this matter, it had constituted a committee to study this aspect and to
give suggestions for recovery, if any, from this bad, situation. Till the study is completed, according to
the Management, the issue involves uncertainty as to its ability to continue its business and it informs
the Auditor that the fact of uncertainty clamping on the "Going Concern" would suitably be disclosed in
notes to accounts. State the reporting requirement if any, in the Independent Auditor's Report in this
matter.[NOV’18 (5M)]
Ans: (i) Provision : (a) Write objective
(b) category VI Auditor’s conclusions point (i) & (ii) and then auditor’s reporting Point B (i)
(ii) Correlation & Conclusion : In the instant case, M/s Airlift Ltd., is running into continuous financial losses as well
as reduction in Sales due to stiff competition and frequent break down of its own aircrafts. The Management is quite
uncertain as to its ability to continue in near future and has informed the Auditors that having seized of this matter, it
had constituted a committee to study this aspect and to give suggestions for recovery, if any, from this bad, situation.
Till the study is completed, according to the Management, the issue involves uncertainty as to its ability to continue
its business and it informs the Auditor that the fact of uncertainty clamping on the "Going Concern" would suitably be
disclosed in notes to accounts . So here , there is material uncertainty and disclosure of the same would be made in
notes . Thus , the auditor should express an unmodified opinion and follow the above procedure.

6. CA. K is appointed statutory auditor of SEEK INDIA LTD under Companies Act, 2013 for the first time. The
company is preparing its accounts keeping in view applicable requirements of Division I of Schedule Ill of
Companies Act, 2013. On scrutiny of financial statements of company put up for audit, it was noticed that notes
to accounts show ageing of trade payables as per amended requirements of Schedule III of the Companies Act,
2013. The ageing schedule forming part of notes is as under:
Outstanding for following periods from due date of payment (& In crore)
Particulars Less than 1-2 2-3 More Total
1 year years years than
3 years
MSME NIL NIL NIL NIL NIL
Others 2 4 3 1 10
Disputed dues-MSME NIL NIL NIL NIL NIL
Disputed dues-others NIL NIL NIL NIL NIL

Besides above, current ratio, debt-equity ratio, trade payables turnover ratio and net profit ratio disclosed in
notes to accounts have slipped drastically as compared to last year and from standard norms. Most of the key
financial ratios are in red. There is no other relevant information concerning above in notes to accounts.
Further, on reviewing bank statement of cash credit limit (against hypothecation of paid stocks), it was noticed
that there is no debit transaction in the month of March, 2023. On inquiry, he came to know that stock audit of
company was conducted in the month of January, 2023 and stock auditors have commented vide their report
dated 25.2.2023 that company had negative drawing power due to high creditors, Accordingly, the bankers

SA 570 194
have refused further debits in cash credit account from start of March, 2023. There is no information in this
respect in financial statements and notes to accounts. Discuss how CA K should deal with above for reporting
in his audit report under the Companies Act, 2013.[MTP-Oct. 22; RTP-May 23]
Ans : (i) Provision : category VI point (i) & (ii) and then auditor’s reporting Point B (ii)
(ii) Correlation & Conclusion
• Based on the facts relating to ageing schedule given in the situation, it is clear that company is not able to pay its
creditors on time. Outstanding to creditors for a period of 1 year or more account for 80% of total dues to the
creditors of the company from due date of payment. Most of key financial ratios are adverse. Further, bankers
have refused further debits in cash credit account due to negative drawing power from March 2023. Cash credit
loans are repayable on demand. There is no other information or disclosure available how the company plans to
run its business without bank finance.
• All the above factors are indicators that a material uncertainty exists that may cast a significant doubt on the
company's ability to continue as going concern. There is no express disclosure of this fact in financial statements.
Therefore, it is a situation where material uncertainty exists which has cast a significant doubt on company's
ability to continue as going concern in accordance with SA 570, "Going Concern".
Conclusion: Keeping in view the fact that although a material uncertainty exists casting a significant doubt on
the ability of company to continue as going concern, adequate disclosure of material uncertainty is not made in
financial statements, CA K shall give qualified or adverse opinion as per SA 705, "Modifications to the Opinion in
the Independent Auditor's Report".

7. TUV Ltd. is a company engaged in the business of manufacture of spare parts. Saroj & Associates are the
statutory auditors of the company for the FY 2022-23. During the course of audit, CA Saroj noticed that
the company had a major customer, namely, Korean Mart from South Korea. Owing to an outbreak of
war and subsequent destruction leading to government ban on import and export in South Korea, the
demand from Korean Mart for the products of TUV Ltd. ended for an unforeseeable time period. When
discussed with the management, CA Saroj was told that the company is in the process of identifying new
customers for their products. CA Saroj understands that though the use of going concern assumption is
appropriate but a material uncertainty exists with respect to the identification of new customers. This
fact is duly reflected in FS of TUV Ltd. for the FY 2022-23. How should CA Saroj deal with this matter in
audit report for FY 2022-23?(M) [MTP NOV’21 APR’23]
Ans: (i) Provision: write about indicators given in the Q , category VI Auditor’s conclusions point (i) & (ii) and then
auditor’s reporting Point B (i)
(ii) Correlation & Conclusion :
In the present case, TUV Ltd. has a key customer in South Korea from which the demand for its products has ended on
account of outbreak of war, subsequent destruction and government ban on import and export in South Korea. Further,
the company has not yet identified new customers and is in the process of doing the same. As such, the identification
of new customer is a material uncertainty that cast a significant doubt on the company’s ability to continue as a going
concern.
In the present case, loss of a major market or a key customer is one of the operating indicators that may cast significant
doubt on the company’s ability to continue as a going concern.
However, this matter is duly disclosed by the management of TUV Ltd. in the financial statements for the year ended
31.03.2023.
As such, considering that the going concern assumption is appropriate but a material uncertainty exists with respect
to identification of new customer, CA Saroj should deal with this matter in his auditor’s report in the above mentioned
manner.

195 SA 570
8. Reporting when Going Concern is Inappropriate
Sun Moon Ltd. is a power generating company which uses coal as raw material for its power generating
plant. The company has been allotted coal blocks in the state of Jharkhand and Odisha. During the FY
2022-23, a scam regarding allotment of coal blocks was unveiled leading to a ban on the allotment of
coal blocks to various companies including Sun Moon Ltd. This happened in the month of December
2023 and as such entire power generation process of Sun Moon Ltd, came to a halt in that month. As a
result of such ban, and the resultant stoppage of the production process, many key managerial personnel
of the company left the company. There were delays in the of payment of wages and salaries and the
banks from whom the company had taken funds for project financing also decided not to extend further
finance or to fund further working capital requirements of the company.
Further, when discussed with the management, the statutory auditor understood that the company had
no action plan to mitigate such circumstances. Further, all such circumstances were not reflected the
financial statements of Sun Moon Ltd. What course of action should the statutory auditor of the company
consider in such situation? (Module)
Ans:
(i) Provision: category VI point (i) & (ii) and then auditor’s reporting Point A
(ii) Correlation & Conclusion :
In the present case, the following circumstances indicate the inability of Sun Moon Ltd. to continue as a going concern:
-Ban on the allotment of coal blocks
-Halt in power generation
-Key Managerial Personnel leaving the company.
-Banks decided not to extend further finance and not to fund the working capital
requirements of the company.
-Non availability of sound action plan to mitigate such circumstances.
Therefore, considering the above factors it is clear that the going concern basis is inappropriate for the company.
Further, such circumstances are not reflected in the financial statements of the company. As such, the statutory auditor
of Sun Moon Ltd. should
Express an adverse opinion as per SA 705 and follow the above mentioned provision.
The auditor is also required to report as per clause (xix) of CARO 2020 (Explain the clause)

9. Joy Ltd. is an entertainment company which runs a circus and travels around the country to entertain
the masses. The circus began losing its popularity over the past few years and attendance has reportedly
dropped by as much as 75% in the current financial year. Animal rights activists continuously targeted
the circus for its use of animal creatures like elephants in the show. The CEO noted that the audience
seemed to be abandoning the circus due to their expanding entertainment options. The high cost of
moving the show from city to city eventually made the business model untenable. As a result, many
key managerial personnel of the company left the company, there were delays in the payment of wages
and salaries, and the bank from whom the company had taken funds also decided not to extend further
finance or to fund further working capital requirements of the company. When discussed with the
management, the statutory auditor understood that the company had no action plan to mitigate such
circumstances (Use of going concern assumption is inappropriate).
Further, all such circumstances were not reflected in the financial statements of Joy Ltd. What course of
action should the statutory auditor of the company take in the auditor's report in such situation? [May
23 CA FINAL (5 Marks)]
Ans.: (i) Provision : As per SA 570 "Going Concern" write objective
Then write category VI Auditor’s conclusions point (i) & Auditor’s Reporting Category A

SA 570 196
(ii) Correlation : In the present case, the following circumstances indicate the inability of Joy Ltd. to continue as a
going concern:
(a) Expanding entertainment options of the audience
(b) High cost of moving the show
(c) Key Managerial Personnel leaving the Company.
(d) Banks decided not to extend further finance and not to fund the working capital requirements of the Company.
(e) Non availability of sound action plan to mitigate such circumstances.
(iii) Conclusion: Considering the above factors it is clear that the going concern basis is inappropriate for the Company.
Further, the fact that such circumstances are not reflected in the financial statements of the Company is irrelevant as
adverse opinion would have been given even if disclosure was made. As such, the statutory auditor of Joy Ltd. Should
express an adverse opinion and follow the abovementioned procedure

10. CA Sooraj finds that key financial ratios of a company, like current ratio, debt-service coverage ratio,
inventory turnover ratio, and trade receivables turnover ratio, are in red and have deteriorated
considerably as compared to last year. The company is also not able to pay to its creditors on time. The
company is requesting time and again to its bankers to grant additional credit facilities, but bankers are
not listening.
There have been significant losses to the company due to the lack of response of the company’s products
in the market. As a result of it, many products are sold at below cost price. There have been situations
where the company is not able to pay the salaries of staff on time.
All these negative findings have led him to conclude that the use of going concern as the basis of
accounting is not appropriate. He brings this matter to the knowledge of CFO of the company. What is
reporting duty cast upon him in such a scenario?
The CFO informs him that the management, in turn, is ready to include in the disclosures the
inappropriateness of its use of going concern assumption of accounting.
How should it impact the auditor’s opinion in case management itself discloses the inappropriateness of
its use of going concern assumption of accounting now?[CA FINAL MODULE TYU] [VVIP]
Ans: (i) Provision : category VI Auditor’s conclusions point (i) & Auditor’s Reporting Category A
(ii) Correlation & Conclusion : In the given case, CA Sooraj finds that key financial ratios of the company are in red
,also they are not able to pay to its creditors on time, the company is requesting time and again to its bankers to grant
additional credit facilities, but bankers are not listening.
There have been significant losses to the company due to the lack of response of the company’s products in the market.
The company is not able to pay the salaries of staff on time. All these negative findings have led him to conclude that
the use of going concern as the basis of accounting is not appropriate.
The CFO informs him that the management, in turn, is ready to include in the disclosures the inappropriateness of its
use of going concern assumption of accounting.

The requirement for an auditor to express an adverse opinion applies regardless of whether or not the financial
statements include disclosure of the inappropriateness of management’s use of the going concern basis of accounting.
Therefore, even if management discloses that its use of going concern assumption of accounting is inappropriate, it
would have no impact on auditor’s opinion. He would still
express an adverse opinion.

11. During the audit of a company, CA Kartik has noticed that company’s turnover has fallen drastically as
compared to last three years due to loss of its major markets and key customers. The company is in need
of funds for new product development, but bankers are not willing to lend financial support. Which

197 SA 570
 additional audit procedures need to be performed by CA Kartik in accordance with SA 570 when such
events or conditions are identified? (RTP JAN 25)
Ans: Category V Compulsory procedures

12. ABC Pvt. Ltd., a manufacturing company, is facing significant financial difficulties due to downfall
in market and increase in cost of production. CA Ram, the auditor of ABC Pvt. Ltd. has identified the
following conditions:
- The company has defaulted on a major loan repayment.
- Current liabilities exceed current assets by 50%.
- Sales revenue has declined by 30% compared to the previous year.
Management has not yet performed an assessment of the company’s ability to continue as a going
concern, but they provided assurance for implementing corrective measures, including cost-cutting
initiatives and discussions with creditors for restructuring the loan.
Which additional audit procedures need to be performed by CA Ram as per SA 570 when such events or
conditions are identified?(MTP JAN 25 SRS 2) (5 Marks)
Ans: Step 2 Category (VI) A

13. CA Sameer is the statutory auditor of Tram Fram Ltd. for the FY 2022-23. While concluding the audit CA
Sameer decided to issue an unmodified opinion, though he also concluded that a material uncertainty
exists with respect to the company’s ability to continue as a going concern on account of a pending
litigation related to labour laws. He is of the view that the company has made appropriate disclosures
with respect to such pending litigation in the notes to accounts annexed to the financial statements of
Tram Fram Ltd. for the FY 2022-23. Explain how CA Sameer will deal with the above situation in his
auditor’s report (draft the relevant portion of the auditor’s report.) (CA FINAL MODULE)
Ans: Explain provision B (i)
In the given situation, auditor, CA Sameer decided to issue an unmodified opinion, though he also concluded that
a material uncertainty exists with respect to the company’s ability to continue as a going concern on account of a
pending litigation related to labour laws. Also he is of the view that the company has made appropriate disclosures
with respect to the same. Thus, he is required to include in the audit report an additional paragraph titled as "Material
Uncertainty Related to Going Concern" so as to state the fact related to going concern in that paragraph.

Drafting of relevant portion in audit report

Material Uncertainty Related to Going Concern

We draw attention to Note 10 in the financial statements, which indicates that the outcome of a litigation on account
of labour laws is pending in case of the company during the year 31 March, 2023. As stated in Note 11, this event
or condition, indicate that a material uncertainty exists that may cast significant doubt on the Company’s ability to
continue as a going concern.
Our opinion is not modified in respect of this matter

EXTRACTS (Just read)

Extract of Independent Auditor’s Report
(i) Adequate Disclosure of a Material Uncertainty is Made in the Financial Statements

Opinion
Basis for opinion

SA 570 198
Material Uncertainty Related to Going Concern
We draw attention to Note XX in the financial statements, which indicates that the Company incurred a net loss of ZZZ
during the year ended December 31, 20X1 and, as of that date, the Company’s current liabilities exceeded its total
assets by YYY. As stated in Note 6, these events or conditions, along with other matters as set forth in Note XX, indicate
that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going
concern. Our opinion is not modified in respect of this matter.

(ii) Adequate Disclosure of a Material Uncertainty is Not Made in the F.S

(a) Qualified Opinion

Qualified Opinion
We have audited …..

In our opinion and to the best of our information and explanations given to us, except for the incomplete disclosure of
the information referred to in the Basis for Qualified Opinion section of our report, the aforesaid standalone FS give a
true and fair view …..

Basis for Qualified Opinion

As discussed in Note YY, the Company’s financing arrangements expire and amounts outstanding are payable on April
30, 20X2. The Company has been unable to conclude re-negotiations or obtain replacement financing. This situation
indicates that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a
going concern. The financial statements do not adequately disclose this matter.
We conducted our audit in accordance with ….. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.

(b) Adverse opinion

Adverse Opinion
We have audited ….

In our opinion, because of the omission of the information mentioned in the Basis for Adverse Opinion section of our
report, the accompanying financial statements do not present fairly (or do not give a true and fair view of), the financial
position of the entity as at March 31, 20X1, and of its financial performance and its cash flows for the year then ended
in accordance with the Accounting Standards issued by the Institute of Chartered Accountants of India.

Basis for Adverse Opinion

The entity’s financing arrangements expired and the amount outstanding was payable on March 31, 20X1. The entity
has been unable to conclude re-negotiations or obtain replacement financing and is considering filing for bankruptcy.
This situation indicates that a material uncertainty exists that may cast significant doubt on the Company’s ability to
continue as a going concern. The financial statements do not adequately disclose this fact.

We conducted our audit in accordance with ….. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.

Note: Where the use of Going Concern Basis is appropriate then no special paragraph is required in the Auditors
Report mentioning the fact.

199 SA 570
 MISCELLANEOUS PPQ
1. Kundan, a CA student, is part of an engagement team conducting audit of an entity. The audit procedures
are nearing completion. He notices that engagement partner has asked for a cash flow forecast from
management for next twelve months from date of financial statements. Keeping in view above, answer
the following: -
(i) Discuss likely purpose of engagement partner in the above situation. Elaborate upon significance of
such testing being performed by engagement partner.
(ii) State any two audit procedures in relation to cash flow forecast likely to beperformed by engagement
partner. (RTP MAY 24) (JAN 25)
Ans: In the given situation, the engagement partner has asked for a cash flow forecast from management for next 12
months from date of financial statements. The audit procedures are also nearing completion.
(i) (a)Purpose of engagement partner : The purpose of engagement partner in requiring a cash flow forecast is :
Write objective as per SA 570
(b) The significance of testing going concern assumption
Hints: Write Q1 points 3,4 & 5

(ii) Two audit procedures in relation to cash flow forecast likely to be performed:
(a) Evaluate reliability of underlying data generated to prepare the forecast
(b) Determine whether there is adequate support for assumptions underlying the forecast
(hint : point c from compulsory procedures)

2. During course of audit of a company, CA. Varun Aggarwal notices that company is facing significant skilled
labour shortages resulting in hampering of operations of company. The company’s manufacturing is
dependent upon skilled labour coming from villages in certain districts of Eastern UP. However, due to
job opportunities available near villages now, many are not interested in going out from their native
villages.
Such a situation has led to company not being able to keep its commitments, losing out on orders and
fall in its revenues. Fixed costs of the company remain at a high level. As a result, company is facing a
liquidity crunch and is not able to pay its creditors on time. The bankers of company are also not willing
to help the company to tide over liquidity crisis. The auditor is having doubts over going concern status
of the [Link] should management of the company try to address auditor’s concerns? What audit
procedures may be performed by auditor in such a situation? [MODULE TYU] (MTP JAN 25 SRS 1) (4
Marks)
Ans: (i) Provision : Write about Indicators given in Q and then write about Additional audit procedures from step 2
category (V) intro + Point A : Compulsory procedures
(ii) Correlation & Conclusion: In the given case, Significant shortage of skilled labour, inability to pay creditors on time
and overall liquidity crisis faced by the company are examples of events or conditions that, individually or collectively,
may cast significant doubt on the entity’s ability to continue as a going concern.
In such a situation, management should try to address auditor’s concerns by preparing its future plan of action
including preparation of cash flow forecast showing inflow and outflow of cash. Such a cash flow forecast should
address auditor’s concerns regarding liquidity crisis being faced by the company.
The auditor should perform audit procedures to evaluate whether the data used to prepare the forecast is reliable and
whether the assumptions underlying the forecast are [Link] auditor should also consider whether any additional
facts or information have become available since the date on which management made its assessment.

SA 570 200
3. During the audit of a company, CA Atul noticed that company is facing significant skilled labour shortages
resulting in hampering operations of the company. The company’s manufacturing is dependent upon
skilled labour coming from villages in certain districts of Eastern UP. However, due to job opportunities
available near villages now, many are not interested in leaving their native villages.
The company failed to keep its commitments due to such situation, consequently lost orders and faced
decrease in its revenues. The fixed costs of the company remain at a high level. As a result, the company is
facing a liquidity crunch and is not able to pay its creditors on time. The bankers of the company are also
not willing to help the company to tide over liquidity crisis. The auditor has doubts over going concern
status of the company. How should management of the company try to address auditor’s concerns? What
audit procedures may be performed by auditors in such a situation?

MCQ
1. Which of the following is not an example of events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern?
(a) Adverse key financial ratios
(b) Inability to invest in modernisation of plant
(c) Inability to pay creditors on time
(d) Inability to pay salary of staff
Ans: (b)

Keywords:
Keywords :
- Going Concern , Material Uncertainty, mitigating factors,
- Events or Conditions or Indicators That May Cast Significant Doubt on the Entity’s
Ability to Continue as a Going Concern
- Financial , Operating & Other Indicators
- Entity’s ability to continue as a going concern

201 SA 570