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13.2 Going Concern Evaluation (AU-C 570)

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AICPA CPA Exam — Auditing & Attestation AUD

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1 Chapter 1: Orientation & the Auditing Regulatory Environment

1.1 CPA AUD Exam Structure, Scoring & Blueprint Strategy 1.2 Regulatory Authorities & Auditing Standards Hierarchy 1.3 Preconditions for an Audit & Engagement Letters (AU-C 210)

2 Chapter 2: Professional Ethics & the AICPA Code of Conduct

2.1 AICPA Code of Professional Conduct & Conceptual Framework 2.2 Independence Rules: AICPA vs. SEC and PCAOB Standards 2.3 Independence Under Government (GAGAS) & Employee Benefit (DOL) Standards 2.4 Professional Skepticism, Professional Judgment & Client Confidentiality

3 Chapter 3: Quality Management at Firm & Engagement Levels

3.1 Firm System of Quality Management: SQMS No. 1 3.2 Engagement Quality Reviews: SQMS No. 2 3.3 Engagement-Level Quality Management: SAS 146 & AU-C 220

4 Chapter 4: Audit Planning, Strategy & Materiality

4.1 Audit Planning & Overall Audit Strategy (AU-C 300) 4.2 Materiality, Performance Materiality & Tolerable Misstatement (AU-C 320 & 450) 4.3 The Audit Risk Model & Risk Assessment Mechanics

5 Chapter 5: Entity Understanding, Inherent Risk & Internal Control

5.1 Understanding the Entity, Environment & Inherent Risk Factors (SAS 145 / AU-C 315) 5.2 Economic Conditions, Industry Factors & SOX Corporate Governance 5.3 COSO 2013 Internal Control Framework: 5 Components & 17 Principles 5.4 IT General Controls (ITGCs) & Application Controls 5.5 Evaluating Design & Implementation of Controls

6 Chapter 6: Fraud Risk, Laws & Specialized Resources

6.1 Fraud Risk Assessment & Auditor Responses (AU-C 240) 6.2 Consideration of Laws, Regulations & Non-Compliance (AU-C 250 & NOCLAR) 6.3 Group Audits: AU-C 600 and the SAS No. 149 Transition 6.4 Using the Work of Internal Auditors (AU-C 610) & Specialists (AU-C 620)

7 Chapter 7: Audit Evidence Fundamentals & General Procedures

7.1 Audit Evidence: Sufficiency, Appropriateness & Management Assertions (AU-C 500) 7.2 Audit Data: Relational Databases, Measurement Scales, Extraction & Reliability 7.3 Types of Audit Procedures & Audit Data Analytics (ADA) 7.4 Substantive Analytical Procedures (AU-C 520)

8 Chapter 8: Audit Sampling Concepts & Attribute Testing

8.1 Audit Sampling Principles & Sampling Risk (AU-C 530) 8.2 Attribute Sampling for Tests of Controls 8.3 Non-Statistical Sampling & Dual-Purpose Testing

9 Chapter 9: Variables Sampling & Monetary Unit Sampling (MUS)

9.1 Classical Variables Sampling Methods (MPU, Ratio, Difference) 9.2 Monetary Unit Sampling (MUS / PPS) Mechanics & Sizing 9.3 Evaluating Variables Sampling Results & Upper Misstatement Limits

10 Chapter 10: Substantive Testing: Revenue, Receivables & Confirmations

10.1 Auditing the Revenue and Receivables Cycle & Cutoff 10.2 External Confirmations: Positive, Negative & Non-Responses (AU-C 505) 10.3 Allowance for Credit Losses (CECL) & Valuation of Receivables

11 Chapter 11: Substantive Testing: Purchasing, Inventory, Cash & Long-Term Assets

11.1 Purchasing, Accounts Payable & Search for Unrecorded Liabilities 11.2 Inventory Observation & Valuation (AU-C 501) 11.3 Auditing Cash, Bank Reconciliations & Interbank Transfers (Kiting) 11.4 Auditing Property, Plant & Equipment, Debt & Equity Cycles

12 Chapter 12: Complex Estimates, Related Parties & Concluding Evidence

12.1 Auditing Accounting Estimates & Fair Value (AU-C 540) 12.2 Investments in Securities, Derivatives & Equity-Method Investees 12.3 Related Parties & Significant Unusual Transactions (AU-C 550) 12.4 Litigation, Claims & Assessments and Legal Inquiry (AU-C 501 / ASC 450) 12.5 Subsequent Events & Subsequently Discovered Facts (AU-C 560)

13 Chapter 13: Final Evaluation, Written Representations & Documentation

13.1 Evaluating Audit Findings & Misstatement Accumulation (AU-C 450) 13.2 Going Concern Evaluation (AU-C 570) 13.3 Written Management Representations (AU-C 580) 13.4 Audit Documentation, Assembly & Retention (AU-C 230)

14 Chapter 14: The Standard Audit Report & Opinion Modifications

14.1 The Standard Unmodified Audit Report (AU-C 700) 14.2 Audit Report Modifications: Qualified, Adverse & Disclaimer (AU-C 705) 14.3 Emphasis-of-Matter & Other-Matter Paragraphs (AU-C 706) 14.4 Key Audit Matters (AU-C 701) & Critical Audit Matters (AS 3101)

15 Chapter 15: Comparative Statements, Other Information & PCAOB Reporting

15.1 Comparative Financial Statements & Predecessor Auditor Reporting 15.2 Other Information, Supplementary Information & Special Purpose Frameworks 15.3 Reviews of Interim Financial Information (AU-C 930 & PCAOB AS 4105) 15.4 PCAOB Reporting & Integrated Audits of ICFR (AS 3101 & AS 2201)

16 Chapter 16: SSARS Engagements: Preparation, Compilation & Review

16.1 The SSARS Framework & Hierarchy of Services (AR-C 60-90) 16.2 Preparation of Financial Statements (AR-C 70) 16.3 Compilation Engagements (AR-C 80) 16.4 Review of Financial Statements (AR-C 90)

17 Chapter 17: SSAE Attestation, SOC Reports & Government Audits

17.1 The SSAE Attestation Framework: Assertion-Based and Direct Examinations and Reviews 17.2 Agreed-Upon Procedures Engagements (AT-C 215, SSAE No. 19) 17.3 Service Organization Controls: SOC 1 & SOC 2 Engagements (AT-C 320) 17.4 Reporting on Compliance: AU-C 806, AT-C 315 & AU-C 935 17.5 Government Auditing Standards (Yellow Book / GAGAS) & Uniform Guidance Single Audits

13.2 Going Concern Evaluation (AU-C 570)

Key Takeaways Explain This Topic AI

Under FASB ASC 205-40 and AU-C 570, management and the auditor must evaluate whether substantial doubt exists regarding the entity's ability to continue as a going concern for a reasonable period: one year beyond the financial statement issuance date, not the balance sheet date.

Under AU-C 570, the auditor considers going concern in risk assessment, evaluates management's evaluation, stays alert throughout the audit, and adds procedures when doubt arises.

When substantial doubt arises, the auditor evaluates management's mitigation plans under a two-part test: whether it is probable the plans will be effectively implemented, and whether it is probable the plans will alleviate the doubt.

If substantial doubt is alleviated by management's feasible plans, the auditor issues an unmodified opinion with required footnote disclosures, and no separate Going Concern section is required in the audit report.

If substantial doubt is not alleviated, the auditor issues an unmodified report containing a mandatory separate section titled 'Substantial Doubt About the Entity's Ability to Continue as a Going Concern' using those exact, explicit terms.

Last updated: September 2026

13.2 Going Concern Evaluation (AU-C 570)

Core Principle: Financial statements are prepared on the going concern basis of accounting, which assumes that the entity will realize assets and discharge liabilities in the normal course of business. Under AU-C 570 ( The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern ) and FASB ASC 205-40 , the auditor must evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time and ensure proper accounting presentation, footnote disclosure, and audit report modification.

1. The Assessment Time Horizon: ASC 205-40 vs. Legacy Rules

A critical, frequently tested nuance on the CPA exam is the precise time horizon governing the going concern evaluation. +-------------------------------------------------------------------------------------------------------+

  • | THE GOING CONCERN EVALUATION TIME HORIZON |
  • | |
  • | Balance Sheet Date Audit Report / Issuance Date One Year Post-Issuance |
  • | (e.g., Dec 31, 2025) (e.g., March 15, 2026) (e.g., March 15, 2027) |
  • | | | | |
  • | +------------------------------------+=========================================+ |
  • | Fieldwork Period REASONABLE PERIOD OF TIME |
  • | (One Year Beyond Financial Statement Issuance Date) |
  • +-------------------------------------------------------------------------------------------------------+
  • The "Reasonable Period of Time"

Current GAAP Standard (FASB ASC 205-40): Management must evaluate whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued, for non-public entities).

Auditor's Responsibility (AU-C 570): The auditor must evaluate management's assessment over this exact same time horizon— one year beyond the financial statement issuance date .

The Exam Trap: Prior auditing standards defined the horizon as "one year from the balance sheet date." Answering "one year from the balance sheet date" on the CPA exam is incorrect under current GAAP and GAAS! If financial statements for the year ended December 31, 2025, are issued on March 15, 2026, the evaluation window extends through March 15, 2027 .

2. Auditor Procedures & Red Flag Conditions

Under AU-C 570, the auditor considers going concern conditions while performing risk assessment procedures, evaluates management's own evaluation, and remains alert for indicators throughout the audit. Many indicators surface through procedures performed for other purposes:

Analytical Procedures: Year-end analytical review revealing severe margin compression or liquidity deterioration.

Review of Subsequent Events: Post-balance sheet loan covenant defaults or loss of major contracts (AU-C 560).

Inquiry of Legal Counsel: Pending catastrophic product liability lawsuits or regulatory revocation of operating licenses (AU-C 501).

Testing Debt Compliance: Inspecting credit agreements, debt covenant calculations, and bank default notices.

Review of Minutes: Reading minutes of board and shareholder meetings detailing emergency liquidity measures. +-------------------------------------------------------------------------------------------------------+

  • | INDICATORS OF SUBSTANTIAL DOUBT (AU-C 570 CONDITIONS) |
  • | |
  • | CATEGORY SPECIFIC CONDITIONS AND EVENTS |
  • | Negative Financial Trends Recurring operating losses, negative cash flows from operations, |
  • | working capital deficiencies, adverse financial ratios. |
  • | Financial Difficulties Default on loans or debt covenants, denial of trade credit by vendors, |
  • | debt restructuring, arrearages in dividends, bond rating downgrades. |
  • | Internal Operational Crises Work stoppages, loss of key management/scientific personnel, uneconomic|
  • | long-term commitments, heavy dependence on a single unproven project. |
  • | External Adverse Factors Legal proceedings, loss of key patent/license/franchise, loss of |
  • | principal customer, uninsured catastrophe (earthquake, flood). |
  • +-------------------------------------------------------------------------------------------------------+
  • 3. Evaluating Management's Mitigation Plans

When conditions or events indicate that substantial doubt exists, management must formulate specific plans to alleviate the doubt. Under AU-C 570 and ASC 205-40, the auditor must scrutinize management's plans using a rigorous two-part probability test : THE TWO-PART MITIGATION PLAN TEST

  • |
  • +-----------------------------------------+-----------------------------------------+
  • | |
  • STEP 1: FEASIBILITY STEP 2: EFFECTIVENESS
  • Is it PROBABLE that management's plans will Is it PROBABLE that the plans, when
  • be EFFECTIVELY IMPLEMENTED within the implemented, will ALLEVIATE the substantial

one-year post-issuance window? doubt within the one-year window?

Scrutiny of Specific Management Plans

Management Plan Critical Audit Verification Procedures

Disposal of Assets Assess marketability of assets, verify absence of debt liens/pledges, evaluate regulatory restrictions, and assess operational impact of losing productive capacity.

Borrowing Money / Restructuring Debt Inspect signed binding lender commitments, term sheets, or debt standstill agreements. Oral promises or preliminary bank discussions are insufficient .

Reducing or Delaying Expenditures Verify feasibility of postponing capital expenditures, R&D projects, or marketing campaigns without damaging core operating viability or violating customer contracts.

Increasing Ownership Equity Inspect binding equity purchase agreements, underwriter commitments, or existing shareholder capital contribution commitments. Verify investor capacity to fund.

Key Takeaway: Management's intent alone is never sufficient. Management must possess the practical capability and legal authority to execute the plan, and the plan must be projected to generate sufficient positive cash flows to resolve the liquidity deficit within the one-year window.

4. The Two Reporting Outcomes Under AU-C 570

The auditor's reporting responsibilities diverge completely depending on whether substantial doubt is alleviated by management's plans: GOING CONCERN REPORTING PATHWAYS

  • |
  • +---------------------------------+---------------------------------+
  • | |
  • PATHWAY A PATHWAY B
  • SUBSTANTIAL DOUBT EXISTS SUBSTANTIAL DOUBT EXISTS
  • BUT IS ALLEVIATED BY PLANS AND IS NOT ALLEVIATED BY PLANS
  • | |
  • v v
  • UNMODIFIED OPINION - UNMODIFIED OPINION
  • Footnote disclosure required by GAAP - Footnote disclosure required by GAAP
  • NO separate Going Concern section required - MANDATORY separate section in audit report
  • under AU-C 570 (optional emphasis paragraph) titled: "Substantial Doubt About the Entity's
  • Ability to Continue as a Going Concern"

Detailed Comparison of Reporting Outcomes +-------------------------------------------------------------------------------------------------------+

  • | COMPARISON OF REPORTING OUTCOMES |
  • | |
  • | DIMENSION OUTCOME A: DOUBT ALLEVIATED OUTCOME B: DOUBT NOT ALLEVIATED |
  • | GAAP Disclosure Mandatory footnote disclosure of Mandatory footnote disclosure of |
  • | conditions and mitigation plans. conditions, plans, & substantial doubt.|
  • | Audit Opinion UNMODIFIED OPINION. UNMODIFIED OPINION (if disclosed). |
  • | Separate Report Section NOT REQUIRED under AU-C 570 MANDATORY separate section titled |
  • | (auditor may include optional "Substantial Doubt About the |
  • | Emphasis-of-Matter paragraph). Entity's Ability to Continue as |
  • | a Going Concern". |
  • | Mandatory Terms None. MUST include exact terms: |
  • | "substantial doubt" & "going concern"|
  • | Report Placement N/A. Usually after the Basis |
  • | for Opinion section. |
  • +-------------------------------------------------------------------------------------------------------+
  • Report Modifications for Departures from GAAP

Inadequate Disclosure: If conditions raise substantial doubt (whether alleviated or not) and management refuses to provide adequate footnote disclosure required by ASC 205-40, this constitutes a departure from GAAP . The auditor must issue a Qualified Opinion ("Except for") or an Adverse Opinion , detailing the omission in the Basis for Opinion section.

Disclaimer of Opinion: Under AU-C 570, if extreme financial distress and multi-faceted operational uncertainties exist, the auditor is permitted (though not required) to issue a Disclaimer of Opinion regarding the entity's ability to continue as a going concern.

5. Strict Wording Rules for the Going Concern Section

When substantial doubt is not alleviated , the wording of the separate Going Concern section in the audit report is strictly regulated by AU-C 570 and PCAOB AS 2415: ILLUSTRATIVE GOING CONCERN SECTION

  • Substantial Doubt About the Entity's Ability to Continue as a Going Concern
  • The accompanying financial statements have been prepared assuming that the Company will
  • continue as a going concern. As discussed in Note 3 to the financial statements, the Company
  • has suffered recurring operating losses, has a working capital deficiency of $14,200,000, and
  • defaulted on its senior revolving credit facility, which raise substantial doubt about its ability
  • to continue as a going concern. Management's plans in regard to these matters are also described
  • in Note 3. The financial statements do not include any adjustments that might result from the

outcome of this uncertainty. Our opinion is not modified with respect to this matter.

Forbidden Phrasing Rules

The Exact Magic Words: The section must explicitly contain both terms: "substantial doubt" and "going concern." Substituting synonyms (e.g., "significant uncertainty regarding corporate viability") violates auditing standards.

No Conditional Language: The auditor must not use conditional phrasing such as " If the company cannot obtain bank financing, substantial doubt will arise... " The evaluation must state an unconditional present conclusion that substantial doubt exists.

Explicit Cross-Reference: The section must directly reference the specific financial statement footnote that discusses the conditions and management's plans.