NFRA's Guidance on Going Concern Assessment Under SA 570 (Revised): What Auditors and Audit Committees Need to Know

Introduction

The National Financial Reporting Authority (NFRA) has released its Auditor – Audit Committee: Interactions Series 6, focusing on Going Concern Assessment under SA 570 (Revised). This publication forms part of NFRA's broader initiative to advance awareness of auditing and accounting standards and to strengthen overall audit quality across India.

The going concern basis of accounting underpins the preparation of most financial statements in India. It rests on the assumption that an entity will remain operational for the foreseeable future and will be in a position to realise its assets and settle its liabilities in the ordinary course of business. This assumption holds unless management either intends to liquidate the entity, cease operations, or has no realistic alternative but to do so.

What makes this assumption particularly significant is its pervasive reach. A departure from the going concern basis does not merely result in a footnote disclosure or an additional paragraph in the auditor's report — it fundamentally alters the measurement of every asset on the balance sheet and the classification of every liability. It is therefore the single most consequential judgement made in the preparation of financial statements and one that must be revisited during every reporting period.

The going concern assessment also carries consequences beyond the entity's shareholders. Suppliers extending trade credit, lenders sanctioning loan facilities, employees dependent on continued employment, and small vendors whose financial exposure to the entity may be concentrated and involuntary — all are affected by this judgement. Moreover, it is inherently forward-looking, which means that the evidence gathered — whether by management or by the auditor — cannot be entirely conclusive and will, by its nature, rest on assumptions about the future.

Regulatory Framework: Who Is Responsible for What?

Going concern obligations arise from distinct regulatory frameworks and apply to four separate groups. Their respective responsibilities are outlined below.

Management

Management bears the primary obligation to assess whether the entity can continue as a going concern. Under Ind AS 1, this assessment must encompass all available information about the future, covering a minimum period of twelve months from the end of the reporting period. Any material uncertainties identified must be disclosed. For entities not applying Ind AS, the going concern assumption operates as a fundamental accounting assumption under AS 1.

Everything else in the going concern framework depends on the quality with which management discharges this responsibility.

Board of Directors

Under Section 134(5) of the Companies Act 2013, the Board of Directors is required to confirm, through the Directors' Responsibility Statement included in the Board's Report, that the annual accounts have been prepared on a going concern basis.

Audit Committee

Under Section 177 of the Companies Act 2013 and Regulation 18 of the SEBI Listing Obligations and Disclosure Requirements (LODR) Regulations 2015, read alongside Part C of Schedule II, the Audit Committee is required to review the annual financial statements in consultation with management before these are placed before the Board. This review specifically encompasses the matters to be covered in the Directors' Responsibility Statement — which means the Audit Committee carries a distinct obligation to examine and assess the appropriateness of the going concern assumption.

Statutory Auditor

The statutory auditor's obligations in this context arise from SA 570 (Revised). The auditor must obtain sufficient and appropriate audit evidence to reach a conclusion on whether management's use of the going concern basis is appropriate, and must further determine whether any material uncertainty exists.

Key point: The standard expressly provides that it is not the auditor's responsibility to remedy a deficiency in management's analysis. The auditor's role is to evaluate — not to prepare — the going concern assessment.

This distinction is critical. Where management has not conducted an adequate assessment, the auditor cannot substitute their own analysis for that of management. Instead, the auditor must report on the consequences of that deficiency.

What SA 570 (Revised) Requires: Six Possible Situations and Their Reporting Outcomes

SA 570 (Revised) acknowledges the diverse circumstances that may exist within any given entity and provides structured guidance for each. The standard adopts a sequential approach — the answer to each stage of assessment determines what question arises next and what the auditor must ultimately report.

At the risk assessment stage, the auditor first considers whether any events or conditions exist that may cast significant doubt on the entity's ability to continue as a going concern. Even where none are identified, the auditor must still reach a conclusion on the appropriateness of the going concern basis. Where events or conditions are identified, additional procedures are mandated, following which the auditor concludes whether a material uncertainty exists.

The table below captures the six distinct situations under SA 570 (Revised) and their corresponding reporting outcomes: