Coronavirus, going concern and the auditor’s report
17 March 2020: ICAEW’s Technical Advisory Service considers the potential impact of coronavirus on going concern and the auditor’s report.
The definition of going concern, management and auditor responsibilities relating to going concern and the implications for the audit report have not changed as a result of the coronavirus pandemic.
Coronavirus will nevertheless have a significant impact on a large number of businesses. Some entities which were previously a going concern may no longer be. Many that continue to be a going concern may now face material uncertainties relating to their ability to continue as such. It is unlikely to be appropriate to take a blanket approach or use boiler-plate wording: each entity must be assessed based on its own situation.
Is an entity a going concern?
An entity is a going concern unless management either intends to liquidate the entity or to cease trading or has no realistic alternative but to do so.
For some entities, the impact of coronavirus may leave management with no realistic alternative but to liquidate or cease trading. Others may need to scale back operations or seek additional finance and some may not be significantly affected.
It is the responsibility of management to make the assessment as to whether the entity is a going concern. In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the date when the financial statements are authorised for issue. The assessment will be specific to the entity’s circumstances.
In making its assessment, management would generally be expected to prepare detailed forecasts which, given the rapidly evolving nature of the pandemic, will need to be updated regularly until the financial statements are authorised for issue. These forecasts should reflect potential scenarios and management’s plans.
Management should be considering the impact of coronavirus on customers, suppliers and staff. For example, could the entity continue to operate if staff were not able to physically be present, and how long could the entity survive given the availability of cash resources and the flexibility of its cost base? Management should also consider whether the entity’s insurance policies cover any losses arising from the coronavirus and if so, how long it might take for a pay-out to be received.
Should the financial statements be prepared on a going concern basis?
If the entity is a going concern, the financial statements should be prepared on a going concern basis. If not, they should be prepared on a basis other than going concern.
An entity shall not prepare its financial statements on a going concern basis if events after the end of the reporting period result in the going concern basis becoming inappropriate. An entity with a year end of 31 December 2019 may have been a going concern at its balance sheet date, but if now, because of the actual or potential impact of coronavirus, the entity is no longer a going concern, and the financial statements have not yet been authorised for issue, the going concern basis shall not be used.
What about material uncertainties?
When management is aware, in making its assessment, that the existing or potential impact of coronavirus results in there being material uncertainties which may cast significant doubt upon the entity’s ability to continue as a going concern, both FRS 102 and IFRS require those uncertainties to be disclosed in the financial statements.
There is an expectation that management’s going concern assessment should take into consideration the existing and potential effects of coronavirus on the activities of the business. Given the potential impact of coronavirus and how rapidly the responses to coronavirus pandemic are developing, it is likely that the management, of many more entities than before, will now consider there is a material uncertainty relating to going concern. Again though, this will depend on the specific entity concerned.
The auditor’s responsibilities
ISA (UK) 570 (Revised June 2016) Going concern confirms that the auditor’s responsibilities are to obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements, and to conclude, based on the audit evidence obtained, whether a material uncertainty exists about the entity’s ability to continue as a going concern.
The auditor will only be able to form a conclusion relating to going concern once management has made its own assessment. The auditor should inquire of management and those charged with governance as to what information available about the future, and determine whether this has been appropriately considered as part of management’s assessment. The auditor should apply similar considerations to those of management, as discussed above, in assessing the appropriateness of the going concern assumption.
If events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern, the auditor shall obtain sufficient appropriate audit evidence to determine whether or not a material uncertainty exists.
This should, for example, include a detailed and robust review of up to date forecasts, cash flows, sensitivity analyses and reviews of coronavirus contingency plans and impact assessments conducted by management.
Implications for the auditor’s report
The implications for the auditor’s report will depend on the audit evidence obtained, the basis of preparation adopted and the disclosures made by management in the financial statements.
For example, consider the situation where management concludes the entity is a going concern but is aware there is a material uncertainty: if the auditor agrees that the entity is a going concern, and the material uncertainty is adequately disclosed in the financial statements, in the auditor’s report, the ‘conclusions relating to going concern’ section should be removed and instead a ‘material uncertainty related to going concern’ section shall be included.
If management is unwilling to disclose material uncertainties, then the auditor may need to consider issuing a modified auditor’s report.Given the unpredictable nature and impact of the outbreak, it might be appropriate to consider the possibility of delaying the approval of the financial statements until more certainty about the impact of coronavirus is known.
Guidance, including a flowchart, on the implications of going concern in the auditor’s report is available in the helpsheet Audit reports – going concern. The coronavirus pandemic does not change these requirements.
Further guidance and resources in connection with coronavirus are available on ICAEW’s Coronavirus hub.
ICAEW members, affiliates or members of staff in an eligible firm with member firm access may discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250.