India's accounting watchdog is pushing for closer scrutiny of companies' financial health, cash flow forecasts, promoter support and future funding plans. Here's what the latest guidance means for businesses, auditors and audit committees.
A company's financial statements may look healthy on paper, but can it continue operating over the next year and beyond? Is it generating enough cash to meet its obligations? Are its future funding arrangements reliable, or is its survival dependent on promises that may never materialise?
These are some of the critical questions that India's National Financial Reporting Authority (NFRA) wants audit committees and statutory auditors to examine more closely.
In a recent staff publication under its Auditor–Audit Committee Interaction Series, NFRA has outlined 35 questions that audit committees may ask statutory auditors while reviewing a company's ability to continue as a going concern.
The publication focuses on the requirements of SA 570 (Revised) – Going Concern and highlights several areas that deserve closer attention, including cash flow projections, management assumptions, financial covenant breaches, promoter support, future borrowing arrangements and regulatory risks.
The message is clear: accepting management's assurance or relying entirely on the statutory auditor's conclusion is not enough. Companies must have a properly supported assessment of their financial position and their ability to continue operations.
Why NFRA Wants Audit Committees to Look More Closely at Going Concern
Going concern is one of the most important assumptions used when preparing financial statements. It essentially means that a company is expected to continue its business operations for the foreseeable future rather than being forced to shut down or liquidate its assets.
The assumption has consequences that go far beyond shareholders. Banks and financial institutions rely on it when making lending decisions. Suppliers extend credit based on their expectations of continued business. Employees depend on the company for their livelihoods, while smaller vendors may have a substantial part of their business tied to a single corporate customer.
Recognising these wider implications, NFRA has highlighted the need for a more meaningful discussion between audit committees and statutory auditors.
Its latest publication sets out 35 possible questions covering different situations that may arise during a going concern assessment under SA 570 (Revised).
Importantly, the NFRA publication does not introduce a new accounting or auditing standard or create additional statutory obligations. It is an awareness document intended to help improve audit quality and communication between auditors and audit committees.
Instead, it explains how existing responsibilities under the Companies Act, 2013, SEBI regulations, applicable accounting standards, SA 570 (Revised) and CARO 2020 should be examined in practice.
Management, Board, Audit Committee and Auditor: Who Is Responsible for What?
One of the important messages in NFRA's publication is that responsibility for assessing a company's ability to continue as a going concern cannot be transferred entirely to the statutory auditor.
Each stakeholder has a separate role.
Management must prepare the assessment. It is responsible for evaluating the company's financial position, future cash flows, available resources, expected liabilities and business plans. The assessment should be based on reasonable assumptions supported by relevant information.
The Board of Directors must take responsibility for the financial statements. Under Section 134 of the Companies Act, 2013, the Directors' Responsibility Statement includes a declaration that the directors have prepared the annual accounts on a going concern basis.
The Audit Committee must independently review the assessment. Section 177 of the Companies Act, 2013, read with Regulation 18 of the SEBI Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015, provides the framework for its review of financial statements and related matters before they are submitted to the Board.
The statutory auditor must independently evaluate management's assessment. Under SA 570 (Revised), the auditor is required to obtain sufficient appropriate audit evidence to determine whether management's use of the going concern basis is appropriate and whether a material uncertainty exists.
In simple terms, management prepares the assessment, the audit committee reviews it, the Board takes responsibility for its statements and the auditor independently tests the evidence.
The auditor should not prepare management's going concern assessment on its behalf.
Cash Flow Forecasts and Future Financial Plans Face Greater Scrutiny
Cash flow projections are among the most important elements of a going concern assessment.
A company may report profits but still struggle to pay its lenders, suppliers and employees if cash is not available when payments become due.
NFRA's questions therefore encourage audit committees to examine whether the auditor has properly evaluated the information and assumptions behind management's financial forecasts.
Some of the key areas include:
- Whether management's going concern assessment covers the required period, generally at least 12 months from the end of the reporting period.
- Whether the assumptions used in cash flow forecasts are reasonable and supported by reliable information.
- Whether the auditor has examined the process followed by management to prepare the assessment.
- Whether previous financial forecasts were compared with actual business performance.
- Whether sensitivity analysis was carried out to understand how changes in important assumptions could affect the company's financial position.
For example, suppose a company expects to generate additional cash by selling an underutilised property.
Simply including the expected sale proceeds in a cash flow forecast may not be sufficient. The auditor may need to examine whether there is an identified buyer or a realistic market for the property, whether its valuation is reasonable, how much money the company is likely to receive after costs and when the transaction is expected to be completed.
Similarly, if the company expects to raise fresh loans, the auditor should examine whether the proposed financing is realistic and whether there is sufficient evidence to support the assumption.
The objective is to ensure that a company's survival plans are based on practical possibilities rather than optimistic projections.
Promoter and Parent Company Support Must Be Backed by Evidence
Many companies rely on financial assistance from their parent companies, promoters, group entities or other supporting parties when facing financial difficulties.
Such support may include additional funding, loans, guarantees or other financial commitments.
However, NFRA's publication makes it clear that auditors should examine the credibility of these arrangements rather than accepting them at face value.
Audit committees may ask whether the auditor has:
- Obtained written confirmation of the proposed support directly from the parent company, promoter or other supporting party.
- Examined the terms and conditions attached to the financial assistance.
- Considered whether the support arrangement is legally enforceable.
- Evaluated whether the supporting party has sufficient financial resources to provide the promised assistance.
- Examined whether the support will be available when the company actually needs it.
For instance, a financially stressed subsidiary may rely on its parent company to meet upcoming loan repayments.
If the parent company itself is facing liquidity problems, an informal assurance that funds will be made available may not provide sufficient comfort.
The auditor must examine the supporting party's financial capacity and the reliability of the commitment before considering it as a mitigating factor in the going concern assessment.
Financial Covenant Breaches Could Signal Serious Problems
Financial covenants are conditions imposed by lenders as part of loan agreements. They may require borrowers to maintain certain financial ratios, minimum net worth levels or other financial performance indicators.
A breach of these conditions can create additional pressure on a company's financial position.
For example, a company may breach a debt-service coverage ratio or fail to maintain the required level of net worth. This could allow lenders to demand corrective action, impose restrictions or, depending on the agreement, seek early repayment.
NFRA's framework encourages audit committees to question auditors about existing and potential covenant breaches.
The important issues include whether management has identified such breaches, how their consequences have been assessed and whether the auditor has independently evaluated the company's response.
The assessment should also consider whether lenders have agreed to waive the breach or provide additional time, and whether such arrangements are adequately supported by documentation.
Six Going Concern Situations Can Lead to Different Audit Reporting Outcomes
NFRA's publication explains how different circumstances can affect the auditor's conclusions and the wording of the audit report under SA 570 (Revised).
The reporting outcome depends on whether there are events or conditions that create significant doubt, whether a material uncertainty exists, whether the going concern basis is appropriate and whether the financial statements contain adequate disclosures.
The six broad situations can be understood as follows:
1. No events or conditions creating significant doubt are identified
If the auditor does not identify events or conditions that may cast significant doubt on the company's ability to continue operating, and concludes that the going concern basis is appropriate, no separate going concern reporting is generally required.
2. Events or conditions exist, but no material uncertainty is concluded
A company may face financial or operational challenges without those circumstances amounting to a material uncertainty. If the going concern basis remains appropriate and the relevant disclosures are adequate, the auditor may issue an unmodified opinion.
3. Material uncertainty exists and disclosures are adequate
Where the going concern basis is appropriate but a material uncertainty exists, the auditor must include a separate section titled Material Uncertainty Related to Going Concern in the audit report, drawing attention to the relevant financial statement disclosures.
4. Material uncertainty exists, but disclosures are inadequate
If the company fails to provide appropriate disclosures, the auditor may need to modify the opinion. A qualified opinion may be appropriate where the misstatement is material but not pervasive, while an adverse opinion may be required where it is both material and pervasive.
5. The going concern basis is inappropriate
If the company is not expected to continue operating and the use of the going concern basis is nevertheless inappropriate, an adverse opinion would generally be required if the financial statements have been prepared on that basis.
6. An alternative basis of accounting is appropriate and has been used
In certain circumstances, management may prepare financial statements using another acceptable basis of accounting. The auditor must evaluate whether that basis is appropriate and whether the financial statements provide adequate disclosures. Depending on the circumstances, an Emphasis of Matter paragraph may be considered.
These distinctions are important because the presence of financial difficulties does not automatically mean that a company cannot continue operating. Equally, the absence of an immediate payment default does not guarantee that the business has a sustainable future.
CARO 2020 and SA 570: Why Auditors Must Treat Them Separately
Another important area highlighted by NFRA is the difference between the going concern assessment under SA 570 (Revised) and the reporting requirement under Clause 3(xix) of the Companies (Auditor's Report) Order, 2020, commonly known as CARO 2020.
Although both deal with a company's ability to meet financial obligations and continue operating, they do not examine exactly the same issue.
Under SA 570 (Revised), the auditor evaluates whether the going concern basis of accounting is appropriate and whether a material uncertainty exists that may cast significant doubt on the company's ability to continue as a going concern.
Under CARO 2020, Clause 3(xix), the auditor considers whether the company appears capable of meeting its liabilities existing at the balance sheet date as and when they fall due within one year from that date.
This assessment involves examining factors such as:
- Financial ratios.
- The ageing and expected realisation dates of financial assets.
- The expected payment dates of financial liabilities.
- Other information accompanying the financial statements.
- The plans of the Board of Directors and management.
The auditor must also report whether any material uncertainty exists, as on the date of the audit report, regarding the company's ability to meet its liabilities within the specified period.
Why can the conclusions differ?
Consider a company that has sufficient current assets and short-term financing arrangements to meet its existing liabilities over the next year.
On a CARO assessment, the company may appear capable of meeting those immediate obligations.
However, the same company may be experiencing recurring operating losses, a significant decline in net worth, the loss of a major customer, cancellation of a critical business licence or discontinuation of its main product line.
It may also have no committed funding available beyond its immediate repayment schedule.
These developments could raise serious concerns about its longer-term ability to continue operating under SA 570.
Therefore, a favourable conclusion under CARO 2020 does not automatically establish that the going concern assumption is appropriate under SA 570.
Auditors must independently assess both requirements and explain any differences in their conclusions.
Regulatory Compliance Is Also Part of the Going Concern Assessment
For companies operating in regulated industries, financial health cannot be assessed only by looking at cash flows, borrowings and profitability.
Compliance with applicable regulatory requirements can also have a direct impact on the company's ability to continue its business.
NFRA's publication encourages audit committees to examine whether auditors have considered:
- Compliance with applicable capital requirements.
- Solvency and liquidity requirements.
- Other relevant prudential norms.
- Existing or potential breaches of regulatory requirements.
- The impact of changes in laws, regulations or government policies that may adversely affect the company.
- Whether the financial statements adequately disclose any such breaches or risks.
For example, a financial institution may have adequate cash reserves but could still face serious business restrictions if it fails to meet regulatory capital or solvency requirements.
Similarly, an adverse regulatory decision or a change in government policy could affect the company's ability to operate profitably.
These risks must be considered when evaluating the company's future prospects.
Group Companies and Businesses Under Insolvency Proceedings Need Special Attention
NFRA also recognises that a standard set of questions may not be sufficient for every company.
The nature, size and complexity of an organisation can significantly influence how its going concern assessment should be examined.
For example, where a company depends on financial support from its parent or promoter, the auditor must evaluate whether that support is reliable and available when required.
In group structures, the assessment may need to consider the financial position and cash flow assumptions of material subsidiaries, joint ventures and associates, including whether the standalone and consolidated financial statements appropriately use the going concern basis.
Companies undergoing insolvency resolution may require additional scrutiny because their future operations could depend on the outcome of insolvency proceedings, funding arrangements and the implementation of a resolution plan.
Similarly, regulated entities may need a more detailed assessment of capital, liquidity and solvency requirements.
The questions raised by NFRA should therefore be considered in the context of the company's actual circumstances rather than treated as a routine checklist.
What Audit Committees Should Do Before Approving Financial Statements
NFRA's publication offers an opportunity for audit committees to make their review process more meaningful.
Instead of simply recording that the going concern assessment has been reviewed and noted, committees should seek clear explanations from management and auditors.
Some practical questions worth raising include:
Questions for management
- Has the company prepared a detailed written going concern assessment?
- Does the assessment cover at least 12 months from the reporting period-end?
- What are the most important assumptions behind the cash flow projections?
- How realistic are the expected revenue, collections and funding arrangements?
- Does the company depend on fresh borrowings, asset sales or financial support from its parent or promoters?
- Are there any existing or potential breaches of financial covenants?
- How closely did previous forecasts match actual financial performance?
Questions for statutory auditors
- What events or conditions were identified during the audit that could create significant doubt about the company's future?
- How did the auditor evaluate management's assumptions and financial forecasts?
- Was sensitivity analysis performed on critical assumptions?
- Were earlier projections compared with actual results?
- If promoter or parent company support was considered, was it confirmed directly and supported by evidence?
- Were the financial position and obligations of relevant group entities considered?
- Why was a particular conclusion reached under SA 570?
- How does the auditor's conclusion under SA 570 compare with the reporting under CARO 2020, Clause 3(xix)?
The audit committee should ensure that its minutes reflect the important questions raised, the explanations received and the conclusions reached.
A brief statement that the committee reviewed and noted the assessment may not adequately demonstrate the depth of its review.
Warning Signs That Should Not Be Ignored
There are several situations in which audit committees should seek additional clarification before accepting a going concern conclusion.
These include:
- Management preparing a short or superficial assessment without meaningful cash flow analysis.
- Forecasts relying on assumptions that have repeatedly failed to materialise.
- A company depending on informal assurances from promoters or parent companies without written commitments.
- Expected asset sales or future borrowings being treated as certain despite the absence of supporting evidence.
- Financial covenant breaches being overlooked or inadequately explained.
- Significant business losses or regulatory risks being ignored while concluding that no material uncertainty exists.
- Different conclusions under SA 570 and CARO 2020 without a clear explanation.
Such warning signs do not automatically establish that a company cannot continue operating. However, they should prompt a closer examination of the evidence supporting management's conclusion.
What the New International Auditing Standard Means for the Future
Going concern assessments are also receiving attention at the international level.
The International Auditing and Assurance Standards Board (IAASB) has issued ISA 570 (Revised 2024), which strengthens the international framework for auditing going concern assessments.
The revised standard is effective for audits of financial statements for periods beginning on or after December 15, 2026.
It places greater emphasis on the auditor's evaluation of management's assessment, the evidence supporting key assumptions, risk identification and the auditor's reporting responsibilities.
However, its application in India remains subject to adoption by the relevant Indian authorities. It should not be assumed that the international effective date automatically makes the revised standard applicable to Indian audits.
For Indian companies and auditors, NFRA's latest publication is an important reminder that going concern assessments must be supported by evidence, careful analysis and meaningful discussion among the people responsible for financial reporting and oversight.
The Bigger Picture: Going Concern Is More Than a Formal Accounting Exercise
NFRA's 35 questions highlight an important change in the way going concern assessments should be approached.
A company should not be considered financially secure simply because it has managed to meet its immediate payment obligations. Its ability to generate future cash flows, maintain access to finance, retain customers, comply with regulations and manage financial risks also matters.
At the same time, auditors must go beyond accepting management representations and examine whether the assumptions behind the assessment are reasonable and supported by sufficient evidence.
For audit committees, the responsibility is equally important. They must exercise independent judgement rather than treating the statutory auditor's conclusion as a substitute for their own review.
Although NFRA's publication does not create new legal requirements, its 35 questions provide a useful framework for more effective discussions and stronger financial reporting practices.
Ultimately, the objective is straightforward: identify financial risks early, question unsupported assumptions and ensure that a company's going concern conclusion reflects its actual financial position rather than simply its management's expectations.