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2020/21 Reporting Season: audit firms enhance going concern assessments

25 November 2020: A review by FRC into audits conducted for 2019/20 year ends found that auditors had taken on board enhanced policies and procedures for assessing going concern.

A review of 11 audits from the UK’s largest seven audit firms has found that auditors are meeting the enhanced requirements for auditors with regards to going concern.

The Financial Reporting Council (FRC) undertook the review of financial statements from December 2019 to March 2020 year ends. It found that auditors had “substantially applied” enhanced policies and procedures, following the guidance for companies and bulletin for auditors from FRC, issued in March, and its July thematic review on COVID-19-related disclosure.

With pressure on firms to deliver robust assessments in 20/21 reporting season in light of the impacts of COVID-19, the results of the review are promising. FRC strongly encouraged firms to continue to look at areas for improvement as they start undertaking audits this season. 

“It’s encouraging to see that firms are improving going concern assessments, particularly in this time of significant challenge and uncertainty,” says Nigel Sleigh-Johnson, ICAEW’s Technical Strategy Accountability Group director. “ICAEW has called for a renewed focus on core audit areas including going concern. 

“The Financial Reporting and Audit and Assurance faculties continue to support companies and auditors in this area through a range of resources, including our COVID and going concern guides for preparers and auditors, our guide on reverse stress testing (referred to by the FRC) and our recent event, Going concern and resilience: Lessons learnt from COVID.”

In its letter issued today (24 November), FRC stipulated that while going concern is the responsibility of an entity’s Board, auditors are required to audit it in accordance with IAS (UK) 570 Going Concern, which is where the enhanced policies and procedures apply. 

The FRC’s review found evidence of appropriate levels of challenge from auditors, confirmed through conversations with the audit committee chairs of each entity. Consultation levels also met the enhanced requirements, and auditors applied risk assessments of scenarios tailored to the entity in question. Reverse stress testing was used to assist auditors’ consideration of disclosures for material uncertainties. 

The going concern assessment period, however, was not always clear and was flagged as an area for improvement. 

“The pervasive and uncertain impact of COVID-19 has made assessing whether companies have a material uncertainty to going concern much more difficult for many boards and their auditors,” says FRC executive director of supervision David Rule. “No-one has a crystal ball, but investors do expect appropriate consideration and disclosure of uncertainties. 

“From the sample of audits reviewed, the FRC found that auditors had enhanced their procedures when auditing management’s going concern assessment. The audit procedures were proportionate to the risks facing the companies, which varied depending on the impact of COVID-19 on their businesses.”

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