FRC toughens going concern requirements: Part 1
In light of recent criticism aimed squarely at the auditing profession, the FRC has beefed up its going concern requirements for audits commencing 15 December. In the first of a two-part series, Steve Collings takes a look at some of the changes.
In September 2019, the Financial Reporting Council (FRC) issued a revised version of ISA (UK) 570 Going Concern, which becomes effective for audits of financial statements for periods commencing on or after 15 December 2019. Early adoption is permitted.
This revised ISA (UK) has been extensively amended in light of the well-publicised criticisms of the auditing profession. ISA (UK) 570 (Revised September 2019) increases the work which auditors are required to do when auditing the going concern status of an entity.
This article examines some of the notable features of ISA (UK) 570 (Revised September 2019).
Responsibilities of the auditor
The previous version of ISA (UK) 570 stated at paragraph 6 that the auditor’s responsibilities are to ‘obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management’s use of the going concern basis of accounting … and to conclude, based on the audit evidence obtained, whether a material uncertainty exists about the entity’s ability to continue as a going concern.’
This responsibility still applies under the revised ISA (UK) 570 but paragraph 6 has been restructured so it is clearer to understand.
ISA (UK) 570 (Revised September 2019) contains defined terms in paragraph 9-2 which defines ‘management bias’ and a ‘material uncertainty related to going concern’ as follows:
Management bias – A lack of neutrality by management in the preparation of information.
Material uncertainty related to going concern – An uncertainty related to events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern, where the magnitude of its potential impact and likelihood of occurrence is such that appropriate disclosure of the nature and implications of the uncertainty is necessary for:
- in the case of a fair presentation financial reporting framework, the fair presentation of the financial statements; or
- in the case of a compliance framework, the financial statements not to be misleading.
Extended auditor’s responsibilities
The risk assessment procedures and related activities section of ISA (UK) 570 (Revised September 2019) has been significantly increased. ISA (UK) 570 (Revised September 2019) requires the auditor to obtain an understanding of:
- the entity and its environment;
- the applicable financial reporting framework; and
- the entity’s system of internal control.
In addition, if the auditor identifies events or conditions which may cast significant doubt on the entity’s ability to continue as a going concern which management has not previously identified or disclosed to the auditor, ISA (UK) 570 (Revised September 2019) requires the auditor to:
- request management to perform additional procedures to understand the effect of the events or conditions on management’s going concern assessment;
- inquire as to why management’s going concern assessment failed to identify or disclose the events or conditions; and
- perform additional audit procedures relating to the newly identified events or conditions.
Evaluating management’s assessment of going concern
The auditor is still required to obtain sufficient appropriate audit evidence to identify whether events or conditions exist which may cast significant doubt on the entity’s ability to continue as a going concern and identify whether a material uncertainty exists.
In addition, the auditor is also still required to obtain sufficient appropriate audit evidence concerning the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements.
The auditor’s responsibilities are extended further as ISA (UK) 570 (Revised September 2019) also requires the auditor to:
- evaluate the method used by management in assessing the entity’s ability to continue as a going concern, including determining if:
- the method selected is appropriate in the context of both the financial reporting framework and the auditor’s understanding of the entity;
- changes from the method used in prior periods are appropriate; and
- whether the calculations are applied in accordance with the method and are mathematically accurate;
- evaluate the relevance and reliability of the underlying data used to make the assessment;
- evaluate the assumptions on which management’s assessment is based which requires the auditor to determine whether there is adequate support for the assumptions underlying management’s assessment which includes determining:
- whether the assumptions are appropriate in the context of the applicable financial reporting framework and, where applicable, changes from the prior period are appropriate; and
- whether the assumptions are consistent with each other and with related assumptions used in other areas of the entity’s business activities, based on the auditor’s knowledge obtained in the audit;
- evaluating management’s plans for future actions in respect of going concern, including evaluating whether the outcome of these plans is likely to improve the situation and whether they are feasible;
- considering whether any additional facts or information have become available since the date on which management made its assessment; and
- requesting written representations from management and, where appropriate, those charged with governance, concerning their plans for future actions and the feasibility of those plans.
The auditor is also required to make greater use of the entity’s viability statement where one is produced.
Part two of Steve Collings’ examination of the revised standard, is available here.