Memo Structure That Passes

  1. Assessment period and basis.
  2. Conditions aggregated (not cherry-picked).
  3. Forecast: P&L, cash, covenants monthly — tie to Cash-Flow and Financial Analysis.
  4. Mitigations with probability and timing evidence.
  5. Conclusion + disclosure draft.

Pair with Year-End Close, Q1 Prep, SOX 404, and Enterprise Risk.

Forecast Discipline

  • Monthly cash by driver, not annual plug.
  • Covenant headroom with rate sensitivity — see Debt Financing.
  • Subsequent receipts/disbursements to report date — see Bank Rec.
  • Board approval minuted; retain model version — see Audit Procedures.

Link debt to Working Capital and Treasury.

Disclosure Tiers

Conclusion Action
No doubt No disclosure, retain memo
Doubt alleviated Disclose conditions + plans
Doubt remains Explicit going-concern note + auditor emphasis

Coordinate with Audit Committee before finalizing language.

Worked Example: The Covenant Breach That Wasn’t Disclosed

December year-end, $8m revolver with minimum-liquidity covenant of $1.5m tested quarterly. Forecast:

Month Cash + availability Covenant Headroom
Jan $2.1m $1.5m +$0.6m
Feb $1.7m $1.5m +$0.2m
Mar $1.2m $1.5m −$0.3m breach

Management’s memo concludes “no substantial doubt” citing “expected sales recovery.” The auditor’s response: a forecast that breaches a covenant in month 3 without a signed waiver is substantial doubt until mitigated — either a waiver letter, refinancing commitment, or credible, costed, board-approved cuts that restore headroom. An unsigned term sheet and a sales hope are neither probable nor timely. The company obtains a temporary waiver through Q2 plus a $1m equity backstop letter from its lead investor — documented, dated, committed — and the conclusion moves to “doubt alleviated” with disclosure of the breach risk and the waiver terms. Same facts, different evidence, different opinion outcome.

Sensitivity Analysis Auditors Expect

Run the forecast against three cases and show the break-even:

  1. Base: management plan with documented assumptions (growth tied to pipeline coverage, not last year’s hopes).
  2. Downside (−15% revenue, +100bps rates): does liquidity survive? If not, at what month, and which mitigation triggers?
  3. Break-even: what revenue level exactly breaches covenants or zeroes cash? That single number focuses the board discussion.

Tie assumptions to Cash-Flow Forecast methodology and Burn/Runway discipline. Forecasts that beat history require a bridge (“why is next year different?”): new contracts signed, churn reduced by X with evidence, costs cut with termination letters — not adjectives.

Mitigation Evidence Checklist (Probable + Timely)

  • Committed financing: signed facility or backstop, funds available within the assessment period — not a term sheet.
  • Cost cuts: board-approved, with execution evidence (notices issued, leases terminated), quantified monthly savings.
  • Asset sales: buyer identified, price indicated, closing timeline inside the window.
  • Covenant relief: signed waiver/amendment covering the forecast breach period.
  • Subsequent cash: post-year-end collections and financings tied to bank — see Subsequent Events.

File the memo, model version, and board minutes together — see Board Minutes — before fieldwork, not during the opinion meeting.

FAQ

How far to forecast?

At least 12 months from report/approval date monthly, with 13-week cash detail when tight.

What kills credibility?

Unapproved cost cuts, uncommitted raises, and forecasts beating history without bridge.

Next Steps

  1. Freeze forecast and covenant schedule this month.
  2. Evidence mitigations with signed docs, not decks.
  3. Draft disclosure with counsel and auditor early.