Audit firms introduce range of additional measures to enhance their evaluation of companies’ going concern assessments
FRC review reveals audit firms have introduced a range of additional measures to enhance their evaluation of companies’ going concern assessments, since the start of the COVID-19 emergency.
The Financial Reporting Council (FRC) has published the findings of its review of the seven largest UK audit firms’ policies and procedures in relation to going concern, in light of the COVID-19 pandemic. The review covered requirements related to audited financial statements, rather than interim review procedures.
The FRC believes that the key findings and messages of its review are also relevant to audit more broadly in the current circumstances, as well as to those audit firms that were not included within the scope of its review.
- Each of the firms reviewed enhanced their audit policies and procedures relating to going concern from the end of March 2020. This was when the consequences of COVID-19 began to increase the risk of material uncertainties relating to going concern for many companies. In particular, this included a significant increase in required consultations at most firms, increased guidance and more regular communications with audit teams. The FRC notes that some firms have described this as “emergency measures”.
- The focus of the firms has been on improving the consistency of execution in the audit of going concern, largely through providing additional central support in light of the increased uncertainty in the going concern assessments. The FRC considers this to have been an appropriate response by the firms, and one that needs to be proportionate to the particular circumstances of individual entities, which will vary considerably in terms of the impact on business and financial resilience.
- Increased central oversight was necessary because, when the UK lockdown commenced, a number of audits were in an advanced stage of completion (including December 2019 year ends). The potential benefits included:
- Providing additional support to audit teams, given the high degree of uncertainty and level of judgement in assessing the going concern assumptions and adequacy of the related disclosures.
- Upskilling audit teams on how to approach the assessment of going concern, in the context of the heightened risks.
- Increasing the level of challenge to audited entities about their assumptions, stress testing and disclosures in the financial statements.
- Drawing conclusions, including setting out the rationale for why there was a material uncertainty, or not.
- Some firms have incorporated into their guidance certain aspects of revised ISA (UK) 570 (September 2019), Going Concern (effective for December 2020 year ends).
- The additional policies and procedures have been similar across the firms reviewed, with the intention of giving increased attention to responding to the heightened risks arising from COVID-19.
The FRC highlights the following key messages to the firms as well as identifying good practice in various areas:
The FRC has not yet reviewed any completed audits to see how the policies and procedures were applied in practice but will do so and plans to report on this later in the year.
Continue to perform an appropriate level of consultations on going concern and COVID-19 matters.
Continue to provide regular communications to audit teams on COVID-19 matters.
Continue to develop policies regarding the auditor’s report and focus on going concern disclosures.
Continue to perform central risk assessment procedures of entities with higher COVID-19 risks.
Increase the extent of guidance on how to assess economic scenario-related assumptions.
Increase the extent of guidance on reverse stress and scenario testing and related disclosures.
Increase the level of detail in COVID-19 specific work programs on going concern.
Increase the use of specialists and in-flight teams.
Start to monitor the number of delayed audit reports.