Changes to going concern audit procedures will hit smaller audit firms
Key changes are being considered to help avoid company collapses in the future – but are they properly targeted?
Given the fundamental importance of going concern in a set of financial statements and the findings arising from a number of the FRC’s enforcement cases, the FRC believes it is in the public interest to now propose revisions to this standard with the view to driving necessary improvements in audit quality. FRC recently released a draft exposure draft of a revised ISA (UK) 570.
The key issues addressed in the draft are:
fostering an appropriately independent and challenging mindset of the auditor
transparency – to provide investors and other stakeholders
enhancing documentation of the auditor’s judgements
keeping ISAs (UK) fit for purpose
reinforcing the need for robust communication and interactions during the audit.
Major changes resulting from the above:
Sufficiency of audit evidence
In other ISAs (UK) the auditor is required to obtain sufficient appropriate audit evidence. The existing ISA (UK) 570 only requires sufficient appropriate audit evidence to be obtained on the appropriateness of management's use of the going concern basis of accounting, but not in respect to other important aspects of going concern, including whether a material uncertainty exists related to going concern. Therefore the draft contains more robust requirements regarding the nature and extent of procedures that the auditor should perform to obtain sufficient appropriate audit evidence about management's use of the going concern basis of accounting being appropriate (see ED ISA (UK) 570 paragraphs 12-1 and 12-2).
Enhancing auditor reporting
The draft contains a new requirement for the auditor’s report to include various statements relating to the work carried out on management's assessment of the entity's ability to continue as a going concern. The observations would include:
a conclusion that management's use of the going concern basis of accounting is appropriate; and
where no material uncertainty has been identified, a statement that the auditor has not identified a material uncertainty related to going concern.