Which procedure is used to test going concern by assessing the reasonableness of cash flow forecast?

• A. Assess reasonableness of cash flow forecast
• B. Enquiries of directors, company bankers and company solicitors
• C. Review aged receivables analysis
• D. Review latest management accounts

Answer: (A)

Testing going concern by assessing the reasonableness of the cash flow forecast means examining whether the forecast is credible, well-supported, and capable of showing the entity can meet its obligations for at least 12 months from the date of the financial statements. The key here is the forward-looking judgment: you scrutinize the assumptions behind the forecast (revenue, timing of receipts, expected costs, capital expenditures), the availability of financing, and any management plans to address potential shortfalls, including sensitivity or scenario analysis to see how robust the forecast is under stress.

This approach is the best because it directly evaluates the survivability of the business in the near term, rather than just describing current or past performance. Enquiries of directors, bankers, and solicitors, while helpful for corroboration, do not in themselves prove the forecast is realistic. Reviewing aged receivables or the latest management accounts provides useful liquidity signals but does not test the forecast’s forward assumptions or its ability to sustain operations under various future conditions.