Questions over FRC’s going concern audit standard
LSCA Technical Committee chair Jamie Tomlin questions whether the time is right to introduce a revised going concern auditing standard and what the impact will be as it diverges for international standards.
The FRC has issued its latest revised auditing standard on going concern, ISA UK 570 Going Concern. It is effective for audits of financial statements for periods commencing on or after 15 December 2019.
This standard is possibly the most important change to auditing since the introduction of the “clarity” ISAs 10 years ago. It has, and no doubt will continue to, generate much debate. In this article I consider just three questions.
- Is the time right?
Is the time right for a new standard on going concern? With the establishment of the Audit, Reporting and Governance Authority (ARGA), and the uncertainty over how the many reviews of the profession may progress, there is a question mark over whether a new standard should be issued now.
For a matter such as going concern, with its obvious relevance to users of financial statements, if an auditor can improve their audit, and reporting, then it must be to the benefit of all that change is made sooner rather than later.
The risk could be in the future. Should this standard have a short life there must be a danger that the benefits of the revisions will be lost as too much change in a short period may leave all parties - preparers, auditors and users, struggling to adapt. This will be a challenge for the future. Whether the time is right may well depend upon what happens in the future!
- Can a reader evaluate the material uncertainty and management’s response?
Does the new ISA go far enough? Financial statements lack dynamics, they present events or transactions as a single figure. Where a material uncertainty which could impact upon going concern exists, this is brought to my attention through disclosure of what the event or condition is together with management’s plans to deal with this.
The eventual impact will depend upon how likely it is the uncertainty will materialise and how effective management expect their responses will be. I appreciate that these are highly subjective, but in the absence of disclosure about where in the spectrum of possible outcomes the uncertainty sits, then as a user I remain in the dark. Would “appropriate disclosure under the ISA” include this, or rather is its absence appropriate disclosure? There is a debate to be had here.
- Will the UK drag the rest of the world along?
By taking the UK further away from the international auditing standards how will the rest of the world respond? Will we see overseas components of a UK group audit adopt the additional requirements? Will overseas component auditors struggle to get to grips with these requirements? They will not have been subjected to the same learning processes that UK management and auditors will be expending in adopting, understanding and applying the changes?
A group audit questionnaire is not going to suffice here!
Details of the revised ISA can be found here
Jamie Tomlin is chair of the LSCA Technical Committee and director of audit and accounting at Crowe
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