Going Concern Assessment

By Nupur Mittal

Co-founder at OCTA — works with accounting firms on month-end close and reconciliation automation.

A going concern assessment evaluates whether substantial doubt exists about an entity's ability to continue operating for at least 12 months after the financial statement date, and whether management's plans are sufficient to alleviate that doubt. It's required under US GAAP (ASC 205-40) or IFRS/ISA 570 whenever adverse conditions are present. This page walks through the full assessment step by step, the financial and qualitative indicators a reviewer watches for, and how firms produce the going-concern memo faster with OCTA Flow while a person reaches the final conclusion.

Why going concern assessment matters, and where it goes wrong

Going concern is one of the few judgment calls in accounting with consequences that reach far beyond the financial statements. A conclusion that substantial doubt exists — disclosed in a footnote and potentially referenced in the auditor's report — can affect a company's ability to raise capital, retain customers, or refinance debt. A conclusion reached too casually, in either direction, is a real risk: understating doubt hides a genuine solvency problem from investors and lenders; overstating it can trigger a self-fulfilling crisis of confidence. The standard exists precisely because this decision has to be made the same rigorous way every time, not based on how the quarter "felt."

For the preparer, the difficulty is that the assessment pulls together several different kinds of evidence that don't naturally live in one place: financial ratios buried in the trial balance, loan covenants buried in a credit agreement, and management's stated plans buried in a memo or a board deck. Missing one input — an unrecorded covenant breach, a cash flow projection that quietly assumes an equity raise with no committed investor — produces a conclusion that looks complete but isn't. The goal is a documented, defensible conclusion that ties every adverse condition to specific evidence and walks through management's plans with the same rigor, not a one-line statement that "management believes the company will continue as a going concern."

The going concern assessment process, step by step

A rigorous going concern assessment follows a consistent sequence, whether it's performed by a preparer, a reviewer, or an audit team. The steps below are the full procedure OCTA Flow executes; they also stand alone as a best-practice process for anyone running the assessment manually.

1. Identify the framework and the look-forward period. Confirm the entity type and which standard applies — US GAAP (ASC 205-40) or IFRS (IAS 1, evaluated per ISA 570 on the audit side). Note the financial statement date. Under ASC 205-40 the look-forward period is a fixed 12 months from that date; under IFRS it's "the foreseeable future," which must be at least 12 months and is sometimes longer in practice.

2. Identify adverse conditions and events. Work through the financial statements and detailed trial balance for indicators in three categories:

• Financial — negative working capital, net losses for two or more consecutive periods, negative cash flows from operations, declining revenues, an accumulated deficit that exceeds paid-in capital, or an inability to pay obligations as they come due.
• Operational — loss of a key customer or contract, work stoppages, or legal proceedings that could result in a material judgment against the company.
• Other — regulatory action, loss of a key operating license, or an inability to comply with regulatory requirements.

3. Assess covenant compliance. Where a loan or credit agreement exists, compare its covenant terms — minimum current ratio, debt service coverage, tangible net worth, and similar tests — against the actual financial results. Identify any violation or probable violation, and confirm whether a waiver has been obtained and documented. An unwaived breach is one of the most serious indicators in the assessment, because it can give the lender the right to call the debt.

4. Evaluate management's plans. For every plan management has put forward to address the adverse conditions — an asset sale, a debt restructuring, a capital raise, a cost-reduction program — assess four things: Is the plan feasible given the facts (a planned asset sale needs an actual market for the asset; a debt restructuring needs a willing lender)? Is it within management's control to execute, or does it depend on a third party's decision? Is it realistically achievable within the look-forward period? And if it succeeds, does it actually resolve the condition that raised doubt in the first place, or only soften it?

5. Analyze cash flow projections. Where a 12-month cash flow projection exists, test the reasonableness of its assumptions, determine the projected cash position at the end of the period, confirm the projection actually incorporates the effect of management's plans (not just business-as-usual operations), and run sensitivity analysis on the assumptions most likely to be wrong — typically revenue growth, collection timing, and the success or timing of a planned financing event.

6. Reach a conclusion. Under ASC 205-40, this is a two-step test:

• Step 1 — before considering management's plans: Do the conditions and events identified in Step 2, taken together, raise substantial doubt about the entity's ability to continue as a going concern for the look-forward period?
• Step 2 — after considering management's plans: If Step 1 raised doubt, do management's plans (assessed in Step 4) alleviate it?

That produces one of three possible conclusions: (a) no substantial doubt exists; (b) substantial doubt exists but is alleviated by management's plans, which still requires disclosure; or (c) substantial doubt exists and is not alleviated, which requires disclosure using "substantial doubt" language in the notes and, on the audit side, may affect the auditor's report.

7. Compare to the prior period. Where a prior-period going concern conclusion exists, assess whether the entity's condition has improved, stayed stable, or deteriorated. A conclusion that flips from "no doubt" to "substantial doubt" in a single period — or the reverse — needs a clear narrative explaining what changed.

Financial indicators of going concern doubt (worked example)

The financial indicators are the most citable, evidence-based part of the assessment because each one is a ratio or fact that can be tested directly against a threshold. Here's a worked example for a private company as of December 31:

Five of six financial indicators are flagged, and the sixth — the covenant breach — is unwaived. Taken together, these conditions clear the bar for Step 1: substantial doubt exists before considering management's plans.

Management's stated plan is a sale-leaseback of the company's headquarters, expected to generate roughly $12 million in proceeds. A letter of intent is signed and buyer due diligence is underway, which supports feasibility, but the deal isn't closed and financing contingencies remain — a reasonable likelihood assessment lands around 65%, not high enough on its own to fully alleviate doubt about the next 12 months. Step 2 conclusion: substantial doubt exists and is not fully alleviated by management's plans as currently documented, which requires disclosure using substantial-doubt language in the financial statement notes.

Key controls and red flags

A rigorous going concern assessment looks past the obvious losses and checks for the indicators that are easy to miss:

• Negative working capital — current liabilities exceed current assets
• Consecutive operating losses with no credible turnaround plan — losses alone aren't disqualifying; losses with no plan are
• Covenant violations without an executed waiver — a breach that hasn't been formally waived carries the lender's full contractual remedies
• Management's plans that depend on uncertain future events — a planned equity raise with no committed investor, a sale with no signed agreement, a refinancing with no term sheet
• Cash projections that reach zero within 12 months even after management's planned actions — the plans aren't enough on the numbers, regardless of how they're described narratively
• A significant adverse change from the prior period — a swing from "no doubt" to "substantial doubt" (or vice versa) that isn't fully explained

Catching these consistently — and documenting the evidence behind each one — is what separates a defensible conclusion from a one-paragraph assertion.

What a completed going-concern memo produces

A finished going concern assessment isn't a checklist buried in a spreadsheet — it's a formal memorandum a reviewer and engagement partner can sign off on, built to be filed as audit or advisory documentation. A complete going-concern memo includes:

How OCTA Flow automates going concern assessment

OCTA Flow pulls together the financial ratios, the covenant terms, and management's stated plans into one assessment and drafts the memo — leaving the conclusion and the sign-off with your team. The workflow mirrors the process above:

1. Pick the Going Concern Assessment Skill. Flow already knows the procedure: identify the applicable framework, scan for adverse conditions, test covenants, evaluate management's plans, analyze cash flow projections, and apply the two-step conclusion test.
2. Connect your data. Point Flow at the client's financial statements and trial balance, management's written going concern assessment, and — where available — the cash flow projection and loan agreement.
3. Run. Flow tests the financial ratios against standard thresholds, flags covenant breaches against the loan terms, and assesses each of management's plans for feasibility, control, timing, and likelihood.
4. Review findings by severity. Instead of a blank page, Flow surfaces every adverse condition and plan assessment ranked by severity, each with a recommended action: escalate a covenant breach to the engagement partner, notify the auditor of substantial doubt, or draft the required disclosure. Your team reviews the judgment calls; Flow has already done the evidence-gathering.
5. Sign off. Once the conclusion is reached and reviewed, Flow assembles the going-concern memorandum with the full audit trail intact — every indicator, every plan assessment, and every override documented.

The result: the financial-indicator testing and evidence-gathering that used to take a full day happen in minutes, and your engagement partner spends their time on the conclusion itself — where the judgment actually has to sit.

Control and trust: Flow proposes, you approve

Going concern is not a determination any firm should let software make unsupervised, and OCTA Flow is built around that reality: Flow never reaches or files a going concern conclusion on its own. It gathers the evidence, tests it against standard thresholds, and drafts the memo language — a person on your engagement team reviews the analysis and reaches the conclusion.

That control model runs through the whole assessment:

• Findings, not a finished opinion. Flow raises the indicators, the covenant tests, and the plan assessments it found — your engagement partner decides what they mean.
• Severity and escalation built in. A covenant breach or a substantial-doubt indicator is flagged as critical and routed for escalation, never buried in a footnote no one reads.
• A complete audit trail. Every indicator tested, every plan assessed, every override, and every approval is logged, so the memo is fully traceable back to its source evidence.

You get the speed of automated evidence-gathering with the accountability that a going concern conclusion demands.

What the assessment draws on

To run a going concern assessment, Flow uses the same sources a preparer already works from:

• Financial statements — current and prior year, including the figures that reveal negative indicators (required)
• Trial balance — the current period's detailed trial balance (required)
• Management's going concern assessment — management's own written analysis and stated mitigating plans (required)
• Entity information — entity type, applicable framework, and the financial statement date (required)
• Cash flow projections — a 12-month forward projection, where one exists (optional)
• Loan or credit agreement — for testing stated covenant terms (optional)
• Prior-period going concern conclusion — to assess whether conditions are improving, stable, or deteriorating (optional)

Flow works from whatever your client or engagement file has connected — it matches each input by its purpose, so it doesn't matter what the files are named or which system they came from.

Related skills and terms

Frequently Asked Questions

What is a going concern assessment? It's the evaluation of whether substantial doubt exists about an entity's ability to continue operating for at least 12 months after the financial statement date, and whether management's plans are enough to resolve that doubt. It's performed under US GAAP (ASC 205-40) or IFRS, and reassessed by the external auditor under ISA 570 (or the equivalent US auditing standard) on an audited engagement.

What does "substantial doubt" mean under ASC 205-40? Substantial doubt is the standard's specific term for a conclusion that adverse conditions and events, evaluated together, indicate it's probable the entity won't be able to meet its obligations as they come due within the next 12 months. It's assessed twice — once before considering management's plans, and once after — and if it exists at either stage, it must be disclosed.

What's the difference between ASC 205-40 and ISA 570? ASC 205-40 is the US GAAP standard that puts the going concern evaluation on management, with a fixed 12-month look-forward period from the financial statement date. ISA 570 is the international auditing standard that governs how the external auditor evaluates management's own assessment, using a "foreseeable future" look-forward that must be at least 12 months. In practice, a US private company applies ASC 205-40 directly; an audited engagement under either framework layers the auditor's evaluation on top.

What are the most common going concern indicators? Financial indicators include negative working capital, two or more consecutive years of operating losses, negative cash flow from operations, and an accumulated deficit that exceeds paid-in capital. Operational indicators include loss of a key customer, work stoppages, and material legal proceedings. A covenant breach without a waiver is one of the most serious indicators of all, because it can trigger a lender's contractual remedies immediately.

Can a going concern assessment be automated? The evidence-gathering can — testing financial ratios against standard thresholds, checking covenant terms against actual results, and structuring management's plans for review. Reaching the actual conclusion and disclosure language stays a professional judgment call for the engagement team. That's the model OCTA Flow uses.

Does OCTA Flow issue the going concern conclusion or file the disclosure on my behalf? No. Flow gathers and tests the evidence and drafts the memo for your team to work from; a person on your engagement reviews the analysis, reaches the conclusion, and approves the disclosure language before anything is finalized. Nothing is filed automatically.

See how firms produce faster, better-documented going-concern memos with human sign-off → start a 30-day OCTA Flow trial.