Audit teams should expect going concern assessments to receive closer scrutiny where entities face liquidity pressure, refinancing risk, customer concentration, supply chain disruption, or reliance on shareholder and group support.
In the current environment, going concern work should be supported by robust evidence, stress-tested forecasts and clear, entity-specific disclosures.
Key Development
Economic uncertainty, geopolitical disruption, inflation, interest rate movements and changes in financing conditions continue to affect companies’ ability to forecast cash flows and meet obligations as they fall due. Recent going concern guidance also emphasises that companies should assess solvency and liquidity risks, prepare proportionate but sufficiently robust assessments, and provide meaningful disclosures where uncertainty or significant judgement exists.
The practical message is clear: going concern cannot be addressed only at final review stage. It should be considered from planning, updated throughout the audit, and revisited up to the date the financial statements are approved.
Analysis of Impacts
Financial reporting impact
Management remains responsible for assessing whether the financial statements should be prepared on a going concern basis. The going concern basis is generally used unless management intends to liquidate or cease operations, or has no realistic alternative but to do so. The threshold for moving away from the going concern basis is high.
In practice, this means that Singapore companies with losses, net current liabilities or capital deficiency may still prepare financial statements on a going concern basis if there is sufficient evidence that the entity can continue operating. However, the conclusion must be supported by facts, not optimism.
Disclosure impact
Where material uncertainty exists, the financial statements should explain the events or conditions giving rise to that uncertainty and management’s plans to address them. Disclosures should be specific to the entity rather than generic.
Even where management concludes that no material uncertainty exists, additional disclosure may still be required if the conclusion involved significant judgement. Examples include reliance on refinancing, covenant waivers, asset disposals, restructuring plans, cost reduction measures or shareholder support.
Audit impact
Auditors must obtain sufficient appropriate audit evidence to conclude whether management’s use of the going concern basis is appropriate and whether any material uncertainty exists and has been properly disclosed.
The auditor’s work should include challenging management’s assessment, testing the reliability of underlying data, assessing the reasonableness of assumptions, considering management bias, and evaluating whether future plans are feasible.
Business operations impact
Going concern assessment is not only an accounting exercise. It requires management to understand cash flow timing, working capital pressure, financing availability, supplier terms, customer credit risk, tax obligations, covenant requirements and future operating plans.
Companies with weak cash headroom may need to engage earlier with banks, shareholders, landlords, suppliers and customers to obtain evidence supporting their forecast assumptions.
Practical Issues
Cash flow forecasts require detailed audit challenge
Management forecasts should be tested against actual results, bank balances, post-year-end management accounts, receivables collections, supplier payment terms, loan repayment schedules and known commitments. Forecasts should not include unsupported inflows such as government grants, new loans, asset sale proceeds or shareholder support unless there is credible evidence.
Cash flow forecasts should also consider the matching of projected inflows and outflows, including tax payments, loan repayments, pension or employee-related obligations and other commitments.
Forecast assumptions must reflect current conditions
Assumptions on revenue, margins, collection periods and costs should reflect current market conditions. Areas requiring closer review include inflation, labour costs, transport costs, exchange rates, interest rates, customer failure, supplier disruption, geopolitical developments, government policy changes and availability of financing.
Stress testing should be more than a formality
Where headroom is tight, base case forecasts are unlikely to be enough. Management should prepare downside scenarios or stress tests to show the impact of adverse but plausible outcomes.
Examples include slower collections, loss of a major customer, failure to obtain refinancing, higher interest costs, covenant breach, reduced revenue, loss of supplier credit, or delay in expected funding. Sensitivity analysis, scenario analysis and reverse stress testing are recognised techniques for assessing whether a business can withstand adverse conditions.
Financial support letters need evidence of both intent and ability
Support letters from parent companies, related entities or shareholders are common in Singapore, especially for subsidiaries, dormant companies and start-ups. However, they should not be accepted at face value.
Audit teams should assess:
- whether the support is legally enforceable or only a statement of intention;
- the period covered by the support;
- whether existing debts will be recalled;
- whether the support is conditional;
- whether the support provider has sufficient liquid resources;
- whether the provider has competing obligations to other group entities; and
- whether there is a history of actual support being provided.
For group situations, directors should consider the need for parent or fellow subsidiary support, the ability and intention of the supporting party, and risks arising from arrangements such as cash pooling or cross-guarantees.
Assessment period may need to extend beyond the minimum
A 12-month assessment may not be sufficient where major debt repayments, refinancing events, covenant tests, capital commitments or key contract expiries fall shortly after the minimum period. Guidance notes that the assessment should not be limited mechanically to 12 months if significant events beyond that period may affect the going concern conclusion.
Documentation must support the conclusion
Both management and auditors should document the basis for the going concern conclusion. This includes key assumptions, evidence obtained, contradictory information considered, stress-test results, mitigating actions and the rationale for disclosures.
Where there is significant judgement, documentation should explain why management concluded that the going concern basis remains appropriate and whether a material uncertainty exists.
Conclusion and Action Points
Going concern work in Singapore audits should be approached as a continuous risk assessment rather than a year-end compliance step. The key action points are:
- identify going concern indicators early during audit planning;
- request management’s assessment and cash flow forecast promptly;
- test forecasts against actual data and external conditions;
- challenge unsupported assumptions and optimistic scenarios;
- assess financing, covenant compliance and support letters critically;
- perform sensitivity analysis or stress testing where headroom is limited;
- ensure disclosures are specific, complete and proportionate; and
- update the assessment up to the date the financial statements are approved.
A robust going concern assessment protects both audit quality and financial reporting credibility. In an uncertain environment, professional scepticism and clear evidence remain essential.