The Financial Reporting Council (FRC) has issued revised International Standards on Auditing (UK) (ISAs (UK)) which apply for periods commencing on or after 17 June 2016, writes Steve Collings.
Changes to ISAs (UK) are not the only changes that auditors need to be aware of as the FRC has also issued a revised ethical standard which replaces the previous suite of ethical standards into one document. Changes to the ISAs (UK) resulted from a number of revised ISAs issued by the international auditing and assurance standards board. Changes have also been made by the professional bodies in respect of audit regulations and guidance which reflect the updated regime.
The ‘effective from’ date for the revised ISAs (UK) and the ethical standard is for periods starting on or after 17 June 2016. In the majority of cases, the first audits that will apply the new regime will be in respect of financial statements with a year-end of 30 June 2017, although early adoption of the revised ISAs (UK) is permissible.
Future articles will consider some of the more notable changes in the various ISAs (UK). However, this article will consider two areas where changes are quite significant and which interrelate: auditor’s reports and going concern.
ISA (UK) 700 Forming an Opinion and Reporting on Financial Statements has been revised considerably in terms of the content and structure of the auditor’s report. The overall objective of the auditor according to ISA (UK) 700 is to form an opinion on the financial statements based on the conclusions drawn from the audit evidence obtained and to clearly express that opinion through the auditor’s report.
Over the years, the auditor’s report has received significant amounts of criticism from various commentators. This criticism has been largely due to the ambiguity of the report itself and the wording used.
The most notable changes brought about by ISA (UK) 700 are as follows:
- The first section of the report is the opinion paragraph (the opinion paragraph was towards the end of the report in ISA (UK and Ireland) 700.
- An unqualified auditor’s report now includes a ‘basis for opinion’ paragraph which, among other things, states that the auditor is independent of the entity in accordance with the relevant ethical requirements relating to the audit.
- The auditor is required to report by exception in respect of going concern (see later).
- For listed entities only, details of ‘key audit matters’ must be disclosed as per ISA (UK) 701 Communicating Key Audit Matters in the Independent Auditor’s Report.
- The responsibilities of those preparing the financial statements and assessing going concern and the auditor’s responsibilities for auditing those statements are described in separate sections of the auditor’s report, rather than combined with respective responsibilities of those charged with governance and auditors (which was the case in ISA (UK and Ireland) 700).
- Separate statements are required in respect of other reporting responsibilities which relates to both financial and non-financial information included in the financial statements.
It is hoped that the revised structure of auditor’s report will make it more meaningful – particularly in having the opinion at the top of the report, rather than towards the end.
The auditor’s responsibilities in respect of going concern have remained largely unchanged; although the wording in paragraphs six and seven of the ISA (UK), which outline the auditor’s responsibilities, is slightly different than the previous ISA (UK and Ireland) 570.
In addition, the auditor’s objectives outlined in paragraph nine are slightly different in that paragraph 9(c) in ISA (UK) 570 requires the auditor to report in accordance with the standard, whereas the previous ISA (UK and Ireland) 570 paragraph 9(c) required the auditor to determine the implications for the auditor’s report. Hence, ISA (UK) 570 is somewhat clearer than the previous version.
At the outset, it is important to re-emphasise that it is not the responsibility of the auditor to conclude on whether an entity is a going concern or not. This responsibility rests with management.
The auditor is responsible for obtaining sufficient appropriate audit evidence concerning the appropriateness of management’s use of the going concern basis of accounting (updated from the ‘going concern assumption’) and concluding on that appropriateness. The auditor is also responsible in concluding on whether audit evidence suggests that a material uncertainty exists about the entity’s ability to continue as a going concern.
In terms of reporting responsibilities, these may differ depending on the client’s facts and circumstances and the auditor’s reporting responsibilities have changed under ISA (UK) 570. The auditor’s reporting responsibilities will all depend on whether:
- There are no material uncertainties in respect of going concern and the auditor agrees.
- The going concern basis of accounting is appropriate but a material uncertainty exists in respect of going concern which has been adequately disclosed in the financial statements.
- There is a material uncertainty in respect of going concern which has not been adequately disclosed in the financial statements.
- The going concern basis of accounting is inappropriate.
No material uncertainties in respect of going concern and the auditor agrees
When management has prepared the financial statements using the going concern basis of accounting and no material uncertainty exists to which the auditor agrees, the auditor’s report will include a ‘conclusions relating to going concern’ section per the revised ISA (UK) 700.
Going concern basis of accounting is appropriate but a material uncertainty is present which has been adequately disclosed in the financial statements
If the financial statements have been prepared using the going concern basis of accounting and the auditor considers this appropriate despite a material uncertainty existing which has been adequately disclosed in the financial statements, the auditor still expresses an unqualified opinion.
However, the auditor will also include a separate section headed up ‘material uncertainty related to going concern’. This section draws attention to the material uncertainty and cross-refers to the relevant disclosure in the financial statements.
This is a notable difference from the previous ISA (UK and Ireland) 570, where the auditor would include an emphasis of matter paragraph underneath the opinion paragraph in respect of the material uncertainty.
Material uncertainty exists which has not been adequately disclosed
When a material uncertainty exists which has not been adequately disclosed, the auditor must consider whether the inadequacy is material or material and pervasive.
If the inadequate disclosure is deemed to be material, then a qualified opinion is expressed. If it is material and pervasive, the auditor expresses an adverse opinion. The ‘basis for qualified (adverse) opinion’ section of the auditor’s report will state that a material uncertainty exists which may cast doubt on the entity’s ability to continue as a going concern and that the financial statements do not adequately disclose this matter.
Going concern basis of accounting is inappropriate
The auditor may conclude that management’s use of the going basis of accounting is inappropriate. In such cases, the auditor expresses an adverse opinion.
The revised ISAs (UK) are effective for audits of financial statements for periods commencing on or after 17 June 2016 and auditors should ensure that their audit programmes reflect the revised standards.
In addition, auditors must also ensure that they are familiar with the revised ethical standard as this requires various documentation to be in place to demonstrate compliance. Future articles will examine the detail of the other revised ISAs (UK) and the ethical standard.
The revised ISAs (UK) can be downloaded free of charge from the FRC's website.
About Steven Collings
Steve Collings, FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd where Steve trained and qualified.