In this article, we look to answer some questions you may have related to revisions the FRC’s made to the audit standard on going concern.
When are the new requirements applicable?
The September 2019 version of ISA (UK) 570 is mandatory for UK audits of financial statements with accounting periods commencing on or after 15 December 2019. Early adoption is permitted. For most auditors, December 2020 year ends will be the first audits under the revised standard.
Will the new standard require us to do more work?
The short answer to this is yes, although the extent of this will vary from firm to firm.
Evaluating this in more detail, the impact assessment undertaken by the FRC suggests that for a non-PIE engagement, additional costs of compliance would lead to a 0.25% increase of audit hours. Further, we are also aware that many firms have enhanced their work in respect of going concern in response to the COVID-19 pandemic, given the heightened risk this created. Therefore at face value, the level of extra work required at fieldwork appears to be minimal. However further consideration at the planning stage will be required.
However, the FRC has stated the new standard is intended to prevent ‘delivery gaps’, which it hopes will be achieved by setting out a more robust process, with the revised standard giving clearer requirements for what is expected from an auditor when considering going concern. Therefore, for some firms the delivery gap which needs to be bridged will be larger than others depending on how robust their current approach is, even after factoring in enhancements made in response to the COVID-19 pandemic.
So what does this more ‘robust process’ mean for me?
The standard now sets out the requirements for auditors in much more granular detail, with expanded application material to support these and therefore looks (on paper at least) quite different to the standard it replaces. The key areas where requirements have been made more explicit are:
- Linkage to the auditors understanding of the entity: There are more explicit requirements regarding areas that the auditor must understand when performing risk assessment procedures relating to the going concern audit objectives, building on the requirements set out in ISA (UK) 315. This is intended to encourage auditors to think beyond just the clearly visible and obvious factors, which some already do.
- Evaluation of management’s assessment: Not surprisingly, the standard is more explicit in its requirements when it comes to the work needed to evaluate and critique management’s going concern assessment. In particular the revisions drive at the need to demonstrate scepticism and consider the presence of management bias.
- Stand-back requirements: Similar to other recent audit standard revisions, a ‘stand-back’ requirement has been made more explicit, with the need to consider corroborative and contradictory evidence when the auditor is drawing their conclusions on going concern.
- Documentation: While drawing on what some will see as best practice when combing the requirements of ISA (UK) 570 and ISA (UK) 230, the revised standard gives clear requirements for what should be retained within documentation on audit files regarding work performed on going concern.
When baselining the work we see currently on going concern during audit quality reviews, a good going concern section will broadly have already covered these more prescriptive requirements, with only minor refinements being needed to uplift work to be compliant with the new standard. However, work on going concern is quite often an area we flag as needing improvement (even on a generally sound audit file) under the current, less onerous, requirements. Therefore it is likely most firms will need to re-evaluate their existing approach to ensure these requirements are met going forward.
The FRC have made it clear that the intention of these changes is not to create a checklist mentality, however the new more prescriptive requirements are likely to draw attention to areas of work some currently overlook.
Are there any updates to reporting requirements for auditors?
The biggest change for most auditors within the 2019 revisions is in respect of how conclusions regarding going concern are presented in the audit report. This now requires a positive conclusion to be made, rather than reporting by exception as we saw under the outgoing standard.
For those who audit PIEs, other listed entities, UK Corporate Governance Code Adopters, or an entity subject to governance requirements of The Companies (Miscellaneous Reporting) Regulations 2018, the revised standard does also some additional requirements for such organisations. These include having to explain in the audit report how you have evaluated management's assessment of the entity's ability to continue as a going concern and, where relevant, the key observations arising with respect to that evaluation.
These revisions seem to have come at an unusual time, shouldn’t this have waited until we could fully digest and reflect on the outcome of the Brydon review or even until the FRC has transition to ARGA?
While such feedback was posed to the Financial Reporting Council (FRC) after their consultation on a revised version of the going concern audit standard, their response made it clear that given the number of high-profile corporate failures and the public response to these, they had to take action now to address weaknesses it had already identified. In particular they noted that waiting would have only lead to increased scrutiny from public stakeholders should another audit failure arise in this area had no action had been taken.
The revised version of ISA (UK) 570, includes requirements that differ significantly from both the outgoing UK standard and the equivalent international version of the standard on which it is based. It remains to be seen what further revisions may be prompted light of Sir Donald Brydon’s review.
Have you be updated the UK Mercia Audit Methodology for this change?
Yes, we have issued updated methodology products that reflect the changes set out in respect of going concern. These updates also reflected the requirements of the new ISA (UK) 540 on accounting estimates, as well further revisions to other standards published in November 2019 following the FRC’s post implementation review of its 2016 audit and ethical standards, with the many of the revisions made taking effect for audits of financial statements for periods commencing on or 15 December 2019.
Where can I find out more about the changes to going concern audit requirements?
Subscribers to our Audit Manual Package will be able to access some short online training modules, which guide users through the key changes made to the methodology in light of the revisions to audit standards, one of which focuses on the updates made in respect of going concern. Further, throughout 2021 we will be running a number of audit update courses, which will be available as both live or as a downloadable sessions, which will cover the changes to the going concern standard in more detail, as well as the other updates made to the auditing standards.