Assessing fraud and going concern risks together
Why the IAASB links fraud risk with financial distress, which indicators point both ways, and how to run one risk discussion with two sets of responses.
By Achekam · · 5 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
A company that is running out of cash gives its auditor two problems. The obvious one is whether it can keep going. The less obvious one is what the people running it might do to hide the fact that it cannot.
Audit files often treat these as separate subjects: a going concern paper near the end, a fraud paper near the start, written by different people at different times. The IAASB's latest revisions push firms to bring them together, and for good reason. This article explains the link, the indicators that serve both questions, and how to plan one discussion with two sets of responses.
Distress creates pressure to manipulate
When a business struggles, the people inside it feel it. An owner has given personal sureties to the bank. A manager's bonus, or job, depends on hitting a number. The finance team has been told the facility depends on a covenant. The incentive to make results look better than they are rises precisely when results are worst.
The forms that pressure takes are familiar: revenue recognised early, costs held back, provisions released, impairments avoided, liabilities left off the statement of financial position, and going concern disclosures written to reassure rather than inform. Each one also makes the company look more viable than it is, which is why the two risks feed each other.
The IAASB's package for fraud and going concern
The IAASB states that the ISA 240 (Revised) revisions align with ISA 570 (Revised 2024), Going Concern, recognising that fraud and financial distress are often interrelated risks that must be addressed together. It encourages jurisdictions to consider early adoption of ISA 240 (Revised), ISA 570 (Revised 2024) and the narrow-scope amendments for listed and public interest entities as a cohesive package, which its ISA 240 (Revised) page describes as a stronger, more coordinated response to the risks of fraud and financial distress.
The IAASB also states that both standards become effective in December 2026 and are included in its 2026 Handbook, and that ISA 570 (Revised 2024) significantly enhances the auditor's work in evaluating management's assessment of the entity's ability to continue as a going concern. Whatever the local adoption timetable, the direction is clear: the two assessments are meant to inform each other.
Indicators that point both ways
ACCA lists indicators that an entity may not be a going concern, including inability to pay dividends, major losses or cash flow difficulties arising since the reporting date, adverse key financial ratios, signs that the bank is withdrawing support, negative operating cash flows, major debt repayments the entity cannot meet, and pending legal or regulatory proceedings that may lead to claims unlikely to be satisfied. ACCA frames that list around ISA 570; for periods the revised standard covers, check it against ISA 570 (Revised 2024).
Read the same list as a set of fraud risk factors and each item raises a second question:
| Indicator | Going concern question | Fraud question |
|---|---|---|
| Negative operating cash flows | Can the business fund itself? | If profit is reported but cash is not following, is the profit real? |
| Adverse key ratios | Are covenants at risk? | Who benefits if the ratios look better than they are? |
| Bank support being withdrawn | Is finance available for the assessment period? | Is there pressure to show the bank what it wants to see? |
| Debt repayments that cannot be met | How will the repayments be funded? | Is there an incentive to hide or reclassify liabilities? |
| Pending legal or regulatory claims | Could claims exceed resources? | Are provisions and disclosures being understated? |
| Losses or cash difficulties since year end | Was the year-end position already weaker? | Were year-end results flattered before the slide? |
One risk discussion, two sets of responses
Hold one team discussion that covers both, and record it once. The people who know where the cash is short are the same people who can say where the figures could be bent.
Then design two sets of responses. For going concern, the work centres on management's assessment: the forecast, its assumptions, the financing it depends on and events after year end. For fraud, the work targets the places distress would push: journals around the year end, revenue cut-off, releases of provisions, related-party transactions and estimates that all lean the same way. Responding to revenue fraud risk covers the commonest of these.
The most useful single test sits between them: consistency. The forecast management uses to support going concern should rest on the same assumptions as its impairment testing and any other forward-looking estimate. Optimism in one place and caution in another, each chosen to give the convenient answer, is a signal worth chasing. For the going concern evaluation itself, see the auditor's going concern evaluation.
Viewing the papers by risk and consulting in Achekam
In Achekam, the Working Paper Control Centre shows the engagement's file as an index with progress by status, and can group the same papers by preparer, reviewer, risk or statement line. Grouping by risk lets the manager see, in one view, every paper that responds to the combined distress and fraud risk, and spot the area where the going concern work is advanced but the fraud response has barely started, or the reverse.
Difficult conclusions in this area deserve a second mind. Staff can take a technical consultation on the engagement from question to conclusion and closure, and where people disagree, for example over whether a material uncertainty exists or whether a pattern of adjustments suggests bias, the firm can record the difference of opinion with each party's position, the escalation and the resolution.
A joint risk checklist
- Has one team discussion covered both going concern and fraud, and is it recorded?
- Which indicators of distress are present, and what pressure does each create?
- Who in the entity is most exposed to that pressure, and what could they influence?
- Do the forecasts behind going concern, impairment and other estimates use consistent assumptions?
- Have journals, cut-off and provision movements near year end been tested with distress in mind?
- Have events after year end been examined for both purposes?
- Does the going concern disclosure match what the evidence shows?
- Has any difficult judgement been consulted on and recorded?
When a client's cash is tight, assume the two risks arrive together. Planning them together costs little extra and closes the gap where each paper assumes the other has it covered.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
