Written by Jonathan Millar, Product Manager (Audit)
On 30th September the Financial Reporting Council (FRC) published ISA (UK) 570 (Revised September 2019) – Going Concern1 under the scope of the auditor’s responsibilities in the audit of financial statements relating to going concern and the implications for the auditor’s report. The ISA will be effective for audits of financial statements for periods commencing on or after 15 December 2019.
The ISA makes clear that in the UK it is those charged with governance who are responsible for the preparation of the financial statements and the assessment of the entity’s ability to continue as a going concern. However, following the collapse of a number of high profile companies there has been continued questioning of the role of auditors who, prior to those collapses, had issued clean opinions on the financial statements.
In a recent article under the title ‘Strong medicine’ in Audit and Beyond2, Mark Babington (Acting Director, UK Auditing Standards and Competition at the FRC) described the changes that had been proposed in the, then, Exposure Draft of ISA (UK) 570 (Revised).
The FRC has taken this action as they decided the issue was too important to wait for at the international level. The article describes the changes as being designed to deliver the following outcomes:-
- Fostering an independent and challenging auditor mindset
- Enhancing documentation of the auditor’s judgements
- Keeping ISAs (UK) fit for purpose
- Reinforcing the need for robust communication during the audit.
The requirements of the revised ISA have strengthened the objectives to ensure that the auditor obtains sufficient appropriate audit evidence on whether a material uncertainty relating to going concern exists, and the appropriateness of management’s use of the going concern basis of accounting.
The requirements appear under the following headings:
- Risk Assessment Procedures and Related Activities
- Particularly in obtaining an understanding of the entity and its environment, the financial reporting framework and the system of internal controls and how these impact on the auditor’s responsibilities in respect of going concern
- Evaluating Management’s Assessment
- Focussing on the need to draw on a wide range of available information and to the need to perform a robust evaluation of the management’s going concern assessment
- Evaluating the Sufficiency and Appropriateness of Audit Evidence Obtained
- Including a ‘stand-back’ approach to consider all evidence obtained and to consider management bias
- Disclosures Related to Going Concern
- Requiring the auditor to improve their application of professional scepticism in assessing whether or not the financial statements appropriately and completely disclose all matters in relation to going concern
- Implications for the Auditor’s Report
- Requiring more detailed reporting of matters related to going concern including a specific statement to say that it has not identified a material uncertainty to going concern, it this is the case
- Communication with Regulatory and Enforcement Authorities
- Requiring the auditor to consider reporting any other matters to regulators if their report contains any problematic comment ongoing concern
Effect on CaseWare AuditAdvanced templates
We expect these changes to have a significant impact on the procedures and requirements in the AuditAdvanced templates. We are in consultation with our content suppliers and expect to apply the changes to the templates in the first half of 2020, in time for audits on periods commencing on or after 15 December 2019.
*These are the opinions of CaseWare Product Managers to provide information and insight to our products and should not be considered as a replacement to statutory guidance.
- Audit and Beyond, Issue 241, September 2019 – published by the ICAEW Audit & Assurance Faculty https://www.icaew.com/technical/audit-and-assurance/faculty/audit-and-beyond/audit-and-beyond-2019/audit-and-beyond-september-2019/how-the-frc-are-encouraging-auditors-to-use-going-concern (subscription required)