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Predicting the future

Audit files could benefit from better consideration and documentation of going concern, as Adrian Gibbons explains.

Going concern is a fundamental accounting principle relevant to all financial reporting. However, many of the audit  files that I have reviewed over the years have been weak on recording the audit team's consideration of it. This is partly because going concern is often dealt with just at the end of the audit (rather than at all stages), and partly because many auditors are confused about their responsibility for assessing going concern. I often see a conclusion that says: "In our opinion, the entity is a going concern."

So let's be clear: the Companies Act 2006 and the auditing standards make very clear that it is the director's responsibility to assess going concern and form an opinion that the going concern principle is appropriate. Under the International Standard on Auditing (ISA) 570 Going concern (which covers all stages of the audit from risk assessment onwards) the auditor has three key responsibilities:

  1. assess the quality of the information considered by the directors, and whether their conclusion is reasonable;
  2. consider the level of uncertainty associated with the going concern prediction made by the directors; and
  3. be happy with the disclosure in the accounts relevant to going concern.

Regardless of the size of the company, the audit file should record the auditor’s review of all of these three areas.

Defining Roles

"In my view, the audit working paper in this area should start with the phrase:"The directors have considered the following information relevant to going concern..." The file should then go on to list the information and documents reviewed by the directors. The working paper can then express the auditor's opinion on the quality of information reviewed.

This is an extract from an article in the June 2015 edition of Audit & Beyond, the magazine of the Audit and Assurance Faculty.

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