The Going Concern That Nobody Wanted to Name

Assessment.

Under AASB 101 and ASA 570, management must assess going concern for at least twelve months from the reporting date. Management has done so, but the assessment rests on two assumptions that are both unverified and both favourable: 12% revenue growth in a company that just lost $6.2 million, and renewal of a facility that expires within the assessment period and has not been confirmed.

The indicators are serious and cumulative:

• Net loss of $6.2 million.
• Negative operating cash flow of $4.1 million.
• Net current liability position of $11.8 million.
• A facility expiring nine months after year end with no renewal commitment.

Individually, some of these might be manageable. Together, and with the facility renewal unresolved, they create a material uncertainty unless the bank confirms renewal or management can demonstrate a credible alternative. The 12% growth assumption is the weakest link - it is inconsistent with the current year's performance and needs evidence, not optimism.

Procedures required.

1. Obtain and challenge the cash flow forecasts. Test the reasonableness of the revenue growth assumption against recent actual results, order books, customer contracts and industry data. Recompute the forecasts and stress-test them - what happens at 0% growth? At negative growth?
2. Obtain direct evidence on the facility. Request the bank's written position, review correspondence and the loan agreement for covenants and default triggers, and consider a direct bank confirmation covering the renewal status. Do not accept management's assertion that renewal is likely.
3. Assess covenant compliance. If the facility has covenants, test whether they are met at year end and whether a breach would accelerate repayment.
4. Review post-year-end events up to the report date - new facilities, capital raisings, major customer losses or gains, and any bank correspondence.
5. Consider alternative sources of finance and management's contingency plans.
6. Obtain written representations on the going concern assessment, the forecasts and the facility status.
7. Review the adequacy of disclosure. If a material uncertainty exists, the financial report must disclose it clearly under AASB 101, and your report must include a Material Uncertainty Related to Going Concern section under ASA 570, placed after the basis for opinion.

The audit committee chair's comment. Her discomfort is corroborating evidence that the forecasts are contested. It does not change your obligation, and it does not justify signing early. If the evidence is not available by 20 March, the report date must move.

The opinion depends on whether the uncertainty is adequately disclosed and how pervasive it is.

If management refuses to disclose the material uncertainty. The financial report is materially misstated by omission. The effect is material and pervasive - the company's ability to continue as a going concern affects the financial report as a whole, not one balance. An adverse opinion under ASA 705 is appropriate, with a basis paragraph explaining that the facility will not be renewed and that the financial report does not disclose the material uncertainty.

If management discloses the uncertainty adequately. The financial report is not misstated. You issue an unmodified opinion with a Material Uncertainty Related to Going Concern section under ASA 570. This section is not a qualification - it draws attention to the disclosure, and the opinion paragraph remains unmodified. It must be titled and placed as ASA 570 requires, after the basis for opinion.

If the going concern basis itself is no longer appropriate. If the company cannot continue, the financial report should be prepared on a different basis. If management refuses, the misstatement is pervasive and an adverse opinion follows.

The distinction that trips candidates. A material uncertainty does not automatically mean a modified opinion. The question is always: has the entity disclosed it? If yes, unmodified plus the section. If no, modified - and because going concern is pervasive, the modification is adverse rather than qualified.

Also consider.

• Emphasis of matter is not the right vehicle here - ASA 570 has a specific section for going concern, and using emphasis of matter instead would be wrong.
• Communication with those charged with governance under ASA 260 is required before the report is issued.
• Documentation of your evaluation, the bank's response and the conclusion is essential, particularly given the audit committee chair's earlier comment.
• Report date. If the bank's position only becomes known after 20 March, you must consider whether the report can still be issued and whether the date must be deferred. You cannot sign on the basis of an unresolved question of this significance.