ISA 570 - Going Concern

The auditing profession has come under substantial criticism in recent years in relation to high profile corporate failures and a perception that auditors are not doing enough to identify key weaknesses in business structures which may affect a company’s future.

Overview

The auditing profession has come under substantial criticism in recent years in relation to high profile corporate failures and a perception that auditors are not doing enough to identify key weaknesses in business structures which may affect a company's future.

In response, the FRC (Financial Reporting Council) has issued a revised audit standard (ISA 570 Going Concern). The aim is to strengthen the quality of audit evidence when considering management's use of the going concern assumption. The revised standard requires the auditor to improve in 3 key areas:

  • challenging management's assessment of going concern more robustly, evaluating the risk of management bias;
  • improved transparency in relation to public interest entities and large private companies; and
  • a requirement to consider all evidence obtained in the course of the audit in relation to going concern, whether corroborative of management's judgements or contradictory.

What does this mean for your audit?

If you have been trading for a while, you may have noticed in recent years auditors asking many more questions in relation to the future, with requests focusing on budgets and forecasts, together with a retrospective review of management's ability to forecast accurately. These requests are geared towards the first revision to the auditing standard. You may therefore find the auditor returning to assumptions made 12 months ago and querying what has changed in the meantime, to which the answer is often a lot.

With the current geopolitical landscape, plenty will have changed for many companies since the most recent annual budgets were prepared. There is often reasonable justification for variances in sales forecasts and employee costs. The role of the auditor is to challenge these justifications and assess the impact on management's use of the going concern assumption.

Many companies are reliant on group financing for continued support and development. Gone are the days where a letter of intention to support is sufficient, appropriate audit evidence. It may be expected that the group will continue to support its subsidiary companies, which are vital for global expansion.

However, the auditor must consider all of the evidence relevant to the group's ability to support those subsidiaries. As a result, the auditor's focus may be less on the subsidiary being audited and more upon the financial performance of the group as a whole. It is important for the auditor to understand whether evidence is corroborative or contradictory to management's assessment of going concern.

Expectation Gap

Companies will undoubtedly face uncertainties and external market forces will disrupt business in ways which cannot be forecast or mitigated, resulting in further corporate failures. However, it is important for an auditor to demonstrate that they have done all they can to challenge management on those areas within a company's control or which could have been foreseen.

Although the future is unpredictable, the audit profession needs to maintain its responsibility to provide reasonable assurance, whilst managing the public's expectation of an auditor's opinion, which is what we expect to do.

If you would like to know more about the revised audit standards or would like to discuss your specific audit requirements, please contact:

Louise Morriss, BFP ACA FCCA
Managing Director

Tel: +44 (0)20 7430 5892
Email: lmorriss@fl-crs.com