NFRA Issues Guidance on Going Concern Assessment Under SA 570 (Revised) and Audit Committee Responsibilities

What Happened

The National Financial Reporting Authority (NFRA), India's independent regulator for auditing standards and practices, has published detailed guidance addressing the application of SA 570 (Revised) — "Going Concern" — a Standard on Auditing that aligns with International Standards on Auditing (ISA 570). This guidance specifically clarifies auditor obligations in assessing whether an entity can continue operations and emphasises the critical role audit committees must play in this evaluation process.

SA 570 (Revised) represents a significant enhancement to auditing procedures introduced to address gaps identified following corporate governance failures and insolvency events globally. The NFRA guidance provides Indian auditors and audit committees with interpretive frameworks to standardise application across listed companies, unlisted public companies, and large private entities where audit committees exist.

The guidance addresses several key dimensions: (1) the auditor's responsibility to obtain sufficient appropriate audit evidence about the appropriateness of management's use of the going concern assumption; (2) identification and assessment of events or conditions that may cast substantial doubt on an entity's ability to continue as a going concern; (3) evaluation of management's plans to address identified risks; and (4) the nature and extent of disclosures required when going concern uncertainties exist.

Why It Matters

Going concern assessment has emerged as a critical audit matter globally, particularly in India where governance frameworks have strengthened post-Satyam, IL&FS, and other major corporate failures. NFRA's guidance reflects a regulatory shift toward preventive assurance — where auditors serve as early warning indicators of financial distress rather than post-facto reporters.

For audit committees, this guidance elevates their role from passive oversight to active governance of going concern risk. Audit committees now bear responsibility for understanding the auditor's assessment methodology, challenging management's assumptions about entity viability, and ensuring financial statements appropriately disclose going concern risks. This represents a material shift from traditional audit committee functions and requires committees to develop greater financial acumen in stress-testing scenarios.

The timing of this guidance is significant. India's regulatory environment has become increasingly focused on audit quality and auditor independence following ICAI disciplinary cases and NFRA enforcement actions against audit firms. This guidance signals NFRA's commitment to raising audit standards and protecting financial statement users — creditors, investors, and the public — from unrealistic financial reporting that masks deteriorating solvency positions.

Practical Impact

**For Auditors:** The guidance mandates expanded procedures including detailed cash flow projections, covenant analysis, refinancing risk assessment, and explicit evaluation of management's plans for addressing liquidity or solvency stress. Auditors must now document their going concern assessment comprehensively and demonstrate how they challenged management's optimistic assumptions. This increases audit time and complexity, particularly for entities in cyclical industries or facing macroeconomic headwinds. Audit partners will need to ensure their teams are trained in sophisticated financial distress analysis rather than relying on standard checklists.

**For Audit Committees:** The guidance creates an explicit mandate for committees to engage substantively with auditors on going concern findings during audit planning and at completion stages. Committees must request detailed explanations of: (i) what specific indicators triggered going concern procedures; (ii) what assumptions management embedded in recovery plans; (iii) management's contingency actions if primary plans fail; and (iv) disclosure adequacy in financial statements. Committees lacking financial expertise may need to engage consultants or strengthen committee composition.

**For CFOs and Finance Teams:** Management will face heightened auditor scrutiny on going concern assertions. Entities must now maintain robust documentation of liquidity monitoring, covenant compliance tracking, and scenario planning. Finance teams should expect auditors to request detailed cash flow forecasts, sensitivity analyses, and evidence of board-level solvency discussions. This is particularly demanding for entities in stressed sectors, with declining profitability, or facing refinancing risk.

**For Listed Companies and Large Entities:** Where going concern uncertainties genuinely exist, financial statements require expanded disclosure of: (i) the nature of the uncertainty; (ii) management's assumptions and plans; and (iii) the inherent limitation of going concern assessment itself. Companies can no longer omit or minimise such disclosures. This has implications for credit ratings, debt covenant negotiations, and investor relations.

Key Takeaways

• →NFRA guidance elevates going concern assessment from a compliance checklist to a substantive financial distress analysis, requiring auditors to document detailed challenge of management's recovery assumptions and cash flow projections.
• →Audit committees now have explicit governance responsibility to engage with auditors on going concern findings and assess disclosure adequacy in financial statements — committees should schedule dedicated going concern review sessions at audit planning and completion.
• →Finance teams must maintain robust solvency documentation including liquidity monitoring, stress scenarios, and contingency plans, as auditors will request detailed evidence supporting management's going concern assertions.
• →Entities facing liquidity pressure, covenant compliance issues, or operating in distressed sectors should expect heightened audit procedures and may need to expand financial statement disclosures regarding going concern uncertainties to avoid audit qualification.
• →Audit firms should invest in training audit teams on financial distress analysis, covenant modelling, and refinancing risk assessment to comply with the elevated procedural expectations outlined in NFRA guidance.

Disclaimer: This update is for general information only and does not constitute legal, tax or professional advice. Regulatory positions may change. Please consult APRA & Associates LLP for advice specific to your business. Contact us.