Corporate collapses drive going concern audit standard moves

In the wake of a number of high profile corporate failures, the Financial Reporting Council is looking to strengthen ISA 570, the international auditing standard for going concern, writes Julia Penny.

April 2019

On 4 March 2019, the FRC issued a consultation on proposals to significantly strengthen the work on going concern required of UK auditors compared to the current international ISA requirements. As you might have guessed, these proposed changes are part of the reaction to recent corporate collapses, such as that of Carillion, HBOS and BHS which happened not long after an audit report was issued which did not identify any going concern issues.

The consultation closes on 14 June 2019 and it is expected that the new version of the standard will be effective for accounting periods beginning on or after 15 December 2019. 

The FRC has set out its aims in amending ISA 570, which in brief are as follows:

• foster an appropriately independent and challenging mindset of the auditor;
• increase transparency, with greater insight into the audit process;
• enhance documentation of the auditor’s judgement;
• keep ISAs fit for purpose, with robust requirements; and
• reinforce the need for robust communication and interactions between engagement partners, their teams and those charged with governance.

There will also be numerous other changes to ISAs and ethical requirements as indicated by the FRC’s recent position paper, all being prompted by recent audit failures or the perception of such failure.

Key changes

Having looked at the aims of the project, let’s now consider the main changes that have been proposed. These changes can primarily be considered under four headings:

1. Objectives
2. Planning
3. Evidence gathering
4. Reporting 

Much of the overall structure of the standard will still be familiar if the changes are implemented, but there are extensive additional sections enhancing all the areas listed above.

If we just touch upon the surface, you can get a rough idea of the proposed changes. For example, the objectives now include a specific one to consider whether there are any material uncertainties relating to going concern, as well as checking that the going concern basis is appropriate. Planning and evidence gathering have several new required procedures, spelling out the work that should be done.

Finally, the section on reporting is enhanced to provide a more nuanced description of the work done and clarification of the conclusions reached.

Many of the proposed new procedures would already be regarded as good practice, so you may want to ensure that you are implementing those now.

Julia Penny FCA is London ICAEW Council Member and Technical Director at SWAT UK @JSPenny

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