Revision to ISA (UK) 570, Going Concern
The Financial Reporting Council (FRC) has recently issued a revised International Standard on Auditing (ISA (UK)) 570, Going Concern, to strengthen the role of auditors in assessing whether a material uncertainty related to going concern exists; and the appropriateness of management's use of the going concern basis of accounting in the preparation of the financial statements
Recent high-profile corporate failures (most notably BHS, Carillion and now Thomas Cook) have prompted the FRC to revise International Standard on Auditing (ISA (UK) 570 Going Concern), in response to widespread criticism that the auditors did not do enough to highlight concerns about the future prospects of these entities prior to their collapse.
Effective for accounting periods commencing on or after 15 December 2019, with early adoption permitted, the revised standard significantly strengthens the requirements for UK auditors in comparison with the equivalent international auditing standard.
Some of the key changes to the revised standard include the following:
Revised ISA (UK) 570 now includes a definition of the term ‘management bias’ as well as an extensive definition of the expression ‘material uncertainty related to going concern’.
These definitions are considered helpful additions to the new standard.
Increase in the work effort of the auditor
The work effort of the auditor has been strengthened in the updated standard. In many cases, it demonstrates what currently happens in practice in terms of performing a robust evaluation of management’s assessment of the going concern status of the entity. However, it places a greater need for the auditor to demonstrate how they have challenged management’s going concern assessment and the rigour with which they have tested this assessment and the evidence and supporting documentation obtained.
For many smaller entities, an educational/communications exercise may be required with management at the planning stage of the audit to ensure they are fully aware of the nature and extent of information needed by the auditor to enable him/her to conclude on management’s going concern assessment.
Increased documentation requirements
The increase in the auditor’s work effort based on the revised standard will inevitably increase the amount of documentation needed to support the auditor’s evaluation of management’s going concern assessment.
The audit documentation will be expected to detail the enquiries made of management over their assessment of the entity’s ability to continue as a going concern. The auditor’s evaluation of management’s assessment, details of any tests that were performed and the auditor’s conclusions thereon will also need to be documented.
While most of this was required under the previous version of the standard, the revised ISA 570 (UK) includes more detail as to the types of procedures and testing that might be required.
There is also a new stand back requirement in the revised ISA (UK) which requires the auditor to consider all the evidence obtained before concluding on the appropriateness of management’s use of the going concern basis or whether a material uncertainty related to going concern exists. This stand back step of the audit process will also need to be documented.
Enhanced auditor reporting requirements
- A statement that the auditor has not identified a material uncertainty that may cast doubt on the entity’s ability to continue as a going concern for a period not less than 12 months from the date of approval of the financial statements.
- A conclusion that management's use of the going concern basis of accounting in the preparation of the entity's financial statements is appropriate.
- If management's assessment of the entity's ability to continue as a going concern covers a period less than 12 months from the date of approval of the financial statements, the auditor is required to ask management to extend its assessment period to at least 12 months from that date.
- If the auditor considers that a ‘material uncertainty related to going concern’ should be included in the auditor's report, or that it is necessary to issue a qualified, adverse or disclaimer of opinion in respect of matters related to going concern, he/she is required to determine whether law, regulation or relevant ethical requirements:
(a) require he/she to report to an appropriate authority outside the entity;
(b) establish responsibilities under which reporting to an appropriate authority outside the entity may be appropriate in the circumstances.
PIEs, listed entities and those entities applying the UK Corporate Governance Code:
In addition to the above, the revised ISA has incorporated enhanced auditor reporting requirements for these entities in the face of the increasing criticism the auditing profession has faced for their failure to raise concerns about the possible demise of some familiar High Street names. These are:
- A new requirement for the auditor to explain how he/she evaluated management’s assessment of the entity’s ability to continue as a going concern.
- A statement that the auditor has nothing to add or draw attention to what management has reported in relation to their assessment of the entity’s ability to continue as a going concern.
ICAS is supportive of the overall objective of the revised ISA - to encourage more transparency and clarity around the auditor’s work in his/her evaluation of management’s going concern assessment. However, we are concerned about the increased work effort that will be required of the auditor, particularly in some audits of very small entities, where management’s assessment may not contain the necessary level of detail to enable the auditor to perform such an evaluation. This will require a comprehensive educational exercise with those in charge of some of these entities to ensure that they fully understand, and are aware of, their responsibilities and the auditor’s needs. We do not believe that the benefits of this additional work effort will necessarily match the anticipated additional costs that are likely to be incurred.
This once again raises the issue about whether the current ISAs are, in fact, sufficiently scalable and proportionate and strengthens the need for a global solution for audits of Less Complex Entities.