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Last updated: 16 Dec 2020
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Focus on audit of going concern

Following high profile corporate failures such as Carillion and BHS, the Financial Reporting Council (FRC) in the UK has updated the auditing standard on going concern (ISA (UK) 570 (Revised September 2019) Going Concern, referred to below as 'the ISA'. 

In the Carillion and BHS cases, the auditor’s report failed to highlight going concern issues for entities that subsequently collapsed. The revised auditing standard, which applies to accounting periods that commenced on or after 15 December 2019, strengthens the role of auditors in assessing whether a material uncertainty related to going concern exists. This, together with the ongoing impact of COVID-19, may require management to provide the auditor with more information and for the auditor to ask more questions with respect to the entity’s assessment of going concern compared to previous years. 

Going concern basis

Your accounts should be prepared on a going concern basis unless you, as management, either intend to liquidate the entity or to cease operations, or have no realistic alternative but to do so.

What does that mean?

Under the going concern basis of accounting, the financial statements are prepared (by management) on the assumption that the entity is a going concern and will continue its operations for the foreseeable future.

In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the date when the financial statements are authorised for issue. (FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland).

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Katherine White

+44 (0)20 7556 1374
whitek@buzzacott.co.uk
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In the Carillion and BHS cases, the auditor’s report failed to highlight going concern issues for entities that subsequently collapsed. The revised auditing standard, which applies to accounting periods that commenced on or after 15 December 2019, strengthens the role of auditors in assessing whether a material uncertainty related to going concern exists. This, together with the ongoing impact of COVID-19, may require management to provide the auditor with more information and for the auditor to ask more questions with respect to the entity’s assessment of going concern compared to previous years. 

Going concern basis

Your accounts should be prepared on a going concern basis unless you, as management, either intend to liquidate the entity or to cease operations, or have no realistic alternative but to do so.

What does that mean?

Under the going concern basis of accounting, the financial statements are prepared (by management) on the assumption that the entity is a going concern and will continue its operations for the foreseeable future.

In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the date when the financial statements are authorised for issue. (FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland).

Management's going concern assessment

Management’s going concern assessment

As your auditor, Buzzacott is required to obtain your “going concern assessment”. This may be a formal document or a more informal statement to the auditor expressing why management believes that the entity being audited is a going concern.

Your assessment should consider if there are any circumstances that may cast significant doubt on the entity's ability to continue as a going concern.

The assessment may include review of cash flow forecasts and budgets as well as your consideration of options such as bank loans or other sources of finance if the entity is not able to generate sufficient cash from normal operations.

Although there is no requirement for you to have a formal going concern document, the ISA states “Where management has not yet performed an assessment of the entity's ability to continue as a going concern, the auditor shall request management to make its assessment.” We therefore recommend that a written assessment is prepared prior to your audit ready for the audit team to assess using the new ISA requirements. Preparing this in advance of the audit will help avoid any delays during this critical part of the audit process.

Going concern assessments, forecasts and projections

Forecasts

A going concern assessment would normally be based on forecasts and projections.

The FRC, in their October 2020 report Going concern, risk and viability, states that good practice in preparing concern assessments include sensitivity analysis and scenario planning. This is particularly relevant when there is significant uncertainty, for example due to the continuing impact of COVID-19.

The FRC state that useful forecasts for the audit may include:

  • Management’s base case forecast (covering at least 12 months from the date that the financial statements will be approved);
  • The key assumptions used in that forecast, such as revenue growth percentage and the basis for each assumption, such as analysis of past growth;
  • The sensitivity of the base case to movements in the key assumptions such as revenue growth being lower;
  • Plausible “best case” and “realistic worst case” scenarios;
  • Explanation of the controls that management has around the forecasts; and
  • The process for updating scenarios.
Reliance on the group for support

Reliance on the group for support

If the entity is reliant on financial support from its group, your assessment should consider how you have determined that the group is in a position to provide this support. This may include obtaining accounts and forecasts for the group or providing a going concern assessment for the whole group.

Auditing your assessment

Auditing your assessment

The audit team will then evaluate the going concern assessment, which involves the following:

  • Evaluating your method of assessing if the entity is a going concern;
  • Assessing the underlying data used in making this assessment;
  • Evaluating if the assumptions made in making the assessment are appropriate and consistent with each other and other information obtained during the audit;
  • Evaluating your plans for future actions and whether these are feasible; and
  • Considering if any circumstances have changed since you made the assessment.

We are required to apply “professional scepticism” which involves asking questions and critical assessment of audit evidence – for example we may not be able to accept explanations without viewing supporting evidence.

Furthermore, in times of uncertainty the number of questions we need to ask will necessarily increase.

In order to meet these enhanced requirements, please think about your going concern assessment and gather the supporting evidence that supports it before the audit starts.

Get in touch
Get in touch

If Buzzacott is already your auditor and you would like to discuss going concern, please get in touch with your usual Buzzacott contact. If you aren't currently audited by Buzzacott but would like to discuss going concern and its impact on your audit, please contact us via the form below and our team will be in touch shortly.

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