If doubt arises about a company's ability to continue operating: which signs does the auditor look at, what does the auditor ask management and when does the report change?

"Chinobod Parket" LLC is preparing for its year-end audit. Director Jasurbek and chief accountant Gulshoda consider the statements ready. But at the very first meeting the auditor asked one question: "The bank loan has to be repaid in April. Where will the money come from?" The question is not accidental. The statements themselves rest on one silent assumption: the company will still be operating tomorrow. This article looks at exactly that assumption and how it is tested.

What is going concern and who assesses it?

Under paragraph 18 of NAS No. 1, when the statements are prepared management makes the assessment itself: is the company able to continue its activities without interruption? Unless management plans to liquidate the company or cease its activities (or has no realistic alternative but to do so), the statements are prepared on the going concern basis. If management is aware of a significant event or condition affecting the continuation of activities, it must describe this fact in the notes to the statements.

The auditor does not make this assessment in management's place: the auditor reviews management's assessment and checks that it is sound. In Uzbekistan, international standards on auditing are the standards of auditing activity (Law No. ZRU-677, Article 9); this topic is governed by ISA 570. The standard was revised in 2024 and the auditor's work on evaluating management's assessment was strengthened. Check on the website of the authorized body which version is in force in Uzbekistan.

Which signs does the auditor look at?

ISA 570 gives examples of indicators in three groups: financial, operating and other. The list of examples is not exhaustive; read its full text in the standard itself, as this article does not copy the list. Below we see what the auditor would look at in the figures of a hypothetical company.

An important point: an indicator on its own does not yet mean a "material uncertainty". For example (compiled by the author), if a major customer has been lost but the company has a new customer with a ready contract, the effect is softened. The auditor weighs both the indicators and the factors that offset them.

Two-year reporting data of "Chinobod Parket" (compiled by the author, million soum):

Calculations: 1 500 − 920 = 580; 1 850 − 1 960 = −110; 1 500 ÷ 920 = 1.63; 1 850 ÷ 1 960 = 0.94; (180 + 420) ÷ 920 = 0.65; (40 + 560) ÷ 1 960 = 0.31. Revenue fell from 5 200 to 4 300, that is by 17.3%.

These figures are not a verdict in themselves, but they give four signals: short-term liabilities exceed current assets, profit has turned into a loss, cash has fallen 4.5 times, and the bank loan has grown from 450 to 1 100. It matters especially that inventories rose from 900 to 1 250: there is an asset, but it is not cash, and the time needed to turn it into cash is uncertain.

Why does the auditor need management's cash forecast?

From the figures alone the auditor cannot say "it will not survive". The auditor asks for management's plan: how the debts will be repaid and where the money will come from. The strongest document here is a month-by-month cash flow forecast. Gulshoda prepared a table for the next six months (compiled by the author, million soum; opening balance at the start of the year 40, the bank loan of 1 100 is repaid in month 4):

Balance calculation: 40 + 390 − 380 = 50; 50 + 350 − 370 = 30; 30 + 330 − 360 = 0; in month 4, 0 + 300 − 350 − 1 100 = −1 150. In the second column, if the bank collects only 100 and defers 1 000: 0 + 300 − 350 − 100 = −150.

The table shows three things:

• The problem is on the loan repayment date. Until month 3 the company operates close to zero, and in month 4 1 100 goes out.
• The bank's extension is not enough. Even extending 1 000 leaves the balance at −150: operations themselves do not generate enough cash. Management needs another measure: cutting costs, selling inventory or raising funds from the owners.
• The plan itself must be supported by documents. The words "the bank will extend" are not enough; the bank's written agreement is needed. If the loan agreement contains covenants that must be met, also prepare the documents showing that they have been met (practical advice).

The auditor does not accept a forecast "on trust". The auditor reviews the assumptions in the forecast: receipts fall from 390 to 300, does that match the contracts with customers? Does the cost reduction rest on a real plan? That is why, together with the forecast, the auditor should be given its basis: contracts, the order book and correspondence with the bank.

What will the report look like as a result?

In the logic of ISA 570, three situations are possible depending on management's assessment and the completeness of the notes:

The conclusion from this table for management and the accountant: if an uncertainty exists, it should be disclosed, not hidden, and written clearly in the notes. If the disclosure is adequate, the opinion does not change; if it is not adequate, the opinion changes.

Possible content of the note (compiled by the author): the company incurred a loss in 2025, its current liabilities exceeded its current assets, the repayment date of the bank loan is approaching, management's plan (negotiations with the bank, cost reduction) and the doubt about continuing operations if this plan is not carried out. This is exactly what paragraph 18 of NAS No. 1 requires: management, being aware of significant circumstances, discloses them in the statements.

What if an event occurs after the reporting date?

NAS No. 16 for business entities pays particular attention to this situation. If an event between the balance sheet date and the date the statements are approved for issue shows that the going concern principle no longer applies, that is, the organization is insolvent, the value of assets and liabilities must be adjusted (paragraph 20). If the event only may show that the principle no longer holds, this matter is considered when the statements are approved (paragraph 22).

Example (compiled by the author): suppose that before the statements of "Chinobod Parket" are approved, a major customer went bankrupt and its debt can no longer be collected. This resembles the example in paragraph 21 of NAS No. 16 (an adjustment to bad debt losses can be made for an event confirming a customer's insolvency). If the event shows that the company itself is insolvent, the values are adjusted under paragraph 20; if it only raises doubt, the going concern question is considered at approval under paragraph 22. The auditor should also be informed of such events (practical advice).

Practical advice

• Prepare the forecast in advance. If the cash forecast is ready when the auditor arrives, the conversation takes 10 minutes. If it is not ready, the auditor will ask you for it and preparing it takes time (practical advice).
• Include the largest payment dates in the forecast. In the example this is the loan repayment month: if it is not visible in the forecast, the plan has no value (practical advice).
• Put the agreement with the bank in writing. A verbal "we will extend it" is not evidence for the auditor (practical advice).
• Write the note in advance. If there is significant doubt, prepare the note under paragraph 18 of NAS No. 1 before the auditor asks for it (practical advice).
• Calculate the ratios every quarter. See negative working capital at the end of a quarter, not at the end of the year.
• There are no journal entries in this article: assessing going concern is not an accounting entry but a matter of assessment and disclosure.

The other types of auditor's report and their meaning are covered in a separate article.