The role of the ISA 570 “Adverse key financial ratios” in going concern assessment in Italy

Abstract

This study aims to identify if financial ratios may be useful tools to assess whether an entity may incur in going concern matters and, as a consequence, in a Going Concern Opinion. Starting from an IAASB suggestion reported in the ISA 570 and our previous investigation establishing which financial ratios are most widely used in professional practice by auditors for this type of evaluation, our research is focused on verifying their effectiveness. In particular, an empirical analysis, based on a logit model and than a discriminant analysis, performed on a sample of Italian listed companies confirms the importance of the relations between the net financial position and the cash flow from operations, as well as the relevance of the equity on debts ratio. The results would help auditors and directors to focus on the synthetic indicators that are the most relevant in the financial sustainability evaluation, but they may also be considered by the Italian Legislator that is implementing the new Italian Insolvency Law Reform to fix the synthetic indicators which are able to warn stakeholders regarding the risk of insolvency.