Trial Balance
On the job · Topic 5 of 8

Audit: going concern review

Review a client’s cash flow forecast and loan covenant, spot the warning signs, and brief your manager.

ACCA exams this helps with: AA Audit and Assurance AAA Advanced Audit and Assurance See the ACCA map

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Accounts are normally prepared on the basis that the business will keep trading. That is the going concern basis. If there is real doubt about that, readers need to know. Auditors test whether management’s assessment holds up, mainly by challenging the cash flow forecast and looking at the company’s borrowing.

Example. A company’s overdraft limit is £150,000, but its forecast shows it needing £190,000 in January. Unless the bank agrees to lend more, it may not be able to pay its bills.

Key words

Going concern
The assumption that a business will keep operating for at least the next 12 months and will not have to close or sell off its assets. Accounts are normally prepared on this basis.Example: If a company’s bank is about to withdraw its overdraft and it has no other money, it may not be a going concern.
Cash flow forecast
A prediction, month by month, of the cash the business expects to receive and pay, and its bank balance at the end of each month.Example: The forecast shows the bank balance reaching £190,000 overdrawn in January.
Covenant
A condition in a loan agreement that the borrower must keep to. If it is broken, the lender may be able to demand the money back.Example: “Operating profit must be at least 3 times the interest cost.” A result of 2.63 times breaks the covenant.
Headroom
The amount by which an asset’s recoverable amount is higher than its value in the accounts. Small headroom means a small change could cause an impairment.Example: Goodwill of £84m and recoverable amount of £90.2m gives headroom of £6.2m (about 7%).
Material uncertainty
A serious doubt about whether a business can continue operating for the next 12 months. It must be explained in the accounts, and the auditor highlights it.Example: The bank has not confirmed it will renew the overdraft the company needs, so there is a material uncertainty.

Your brief and documents

You are on the audit of Tidewell Events Ltd, a company that runs conferences and exhibitions (a fictional company). The year end is 30 September 2026. The directors must assess whether the company can keep trading for at least the next 12 months, and the auditor reviews that assessment.

Document 1: Management’s monthly cash flow forecast (£000)

MonthOctNovDecJanFebMar
Net cash flow(30)(45)(20)(55)1035

Opening balance at 1 October: £40,000 overdrawn. The bank overdraft limit is £150,000.

Document 2: Other information

  • The company has a bank loan. Its terms require interest cover of at least 3 times (operating profit ÷ interest).
  • The forecast for next year shows operating profit of £420,000 and interest of £160,000.
  • The overdraft facility is due for renewal in June 2027. The bank hasn’t confirmed it will renew.
  • The company’s largest customer, which provides 30% of revenue, has said it will not renew its contract when it ends in March 2027.
  • The company bought £12,000 of new office furniture in September.
  • The budget includes a 3% pay rise for staff from January.

Watch it explained

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Videos from YouTube tutors

These videos are made by independent tutors on YouTube, not by Trial Balance. Some use US terms or older exam names (for example F7 for FR), but the principles are the same.

How a senior would approach it

  • Don’t accept the forecast at face value. Build the running cash balance month by month yourself, and compare it with the facility available.
  • Covenants matter as much as cash. If a covenant is breached, the bank may be able to demand repayment of the loan, even if the company still has cash.
  • Look for events, not just numbers: losing a major customer, facilities up for renewal, legal claims, key staff leaving.
  • Challenge the assumptions. Is the recovery in February and March realistic? Does the forecast already assume the lost contract’s income?
  • The outcome is about disclosure. If there is a material uncertainty, the directors must disclose it clearly. The auditor then includes a “Material uncertainty related to going concern” section in the report. If the directors won’t disclose it, the opinion is modified.

Your tasks

Work through the tasks in order, using the documents in your brief. Each task is checked when you press Check answer.