The Financial Reporting Council (FRC) has revised ISRE (UK) 2410 in the context of changes to auditing standards, particularly ISA (UK) 570 ‘Going Concern’. The aim of the revision of ISRE (UK) 2410 was to ensure it remained fit for purpose in the current environment and to address a potential lack of clarity in relation to going concern when performing a review of interim financial information.
But why did the FRC decide to make amendments to ISRE (UK) 2410 now? James Ferris, Director UK Auditing and Assurance Standards at Financial Reporting Council, responds: “We had two objectives in mind. The first was around going concern, because going concern has obviously been a high-profile topic for some time and we were concerned that the previous version of ISRE (UK) 2410 hadn't kept up with developments elsewhere.”
He continues: “Also, the standard hadn't been updated since 2007, so we thought there was an opportunity to have a slightly broader discussion around what interim reviews involve, test the water in relation to what people understand about the assurance they're getting, and also thinking about the recent audit market reviews and the government’s response. After all, the government’s consultation document thinks about the auditor’s role in relation to information other than that which is in the financial statements. So, again, this was an opportunity for us to be in a discussion as those proposals move forward.”
When asked about the key changes to the standard, Ferris is clear that the FRC is not saying that someone performing an interim financial review has to do an audit of going concern under ISA (UK) 570. “What we're saying is that standard is a potentially important source of guidance, because ISA (UK) 570, quite apart from anything else, is driving market expectations about what auditors are doing and saying about going concern,” says Ferris. “I think that's really important, particularly when there have been occasions when the very last piece of published financial information a company has produced before it got into serious trouble has been an interim review. Better alignment is really important.”
He is referring to a situation whereby, at the point at which an interim review is reached, management changes its assessment of going concern. “So, we're asking auditors to do some specific additional review work to think about that assessment, the methods that have been chosen, and whether they're reasonable or not. In any review you have to update your understanding of an entity,” he says. “We're specifically saying that, as part of that update, you need to think about whether or not there's material uncertainty about going concern. So, the reviewer is performing their own risk assessment based on them updating their understanding of the entity, and then they're engaging with any change to management's assessment.”
Ferris is at pains to point out this is still not an audit and there are still no guarantees that a company won’t run into trouble despite an interim financial review, but there will now be additional work to do around going concern.
In some cases, it is probably inevitable that this revision of the standard will increase auditors’ workloads, especially as a consequence of the pandemic and its impact on going concern assessments. “I don't think it would be unreasonable to expect both management and reviewers to place more focus on going concern where there is a risk of a material uncertainty. And I think that's in line with external expectations,” says Ferris.
“If management has changed their assessment, we ask the auditors to look at the method selected, and any changes to those methods, compared with what was done in the last set of audited financial statements. We ask them to think about whether calculations are accurately applied. We ask them to consider whether underlying data is consistent with their understanding of the entity, and overall whether management's assessment is reasonable. Now, obviously, this is different from an audit because the predominant work effort in a review is inquiry and analytical review, and there's quite a lot of judgment to be made about the procedures a reviewer chooses to perform in an individual engagement. We haven't become very much more prescriptive than we were before, and a is still very different in nature from an audit.”
The revised standard applies to financial periods beginning on or after 15 December 2021, but early adoption is permitted. Ferris points out, however, that there may well have been a ramp-up of activity around going concern by audit firms anyway and this will just be maintained by the introduction of the revised standard.
In relation to the inclusion of material in the standard about director’s responsibilities, he is very clear that the FRC is not imposing new requirements on directors. “What we are simply doing is reflecting what is already in the listing rules,” he says.
ISRE (UK) 2410 is based on the IAASB Standard which has not been updated since it was first issued back in 2007. Why has the FRC not undertaken a more comprehensive review of the standard at this stage?
“It felt like this is the wrong time to do so because the government is consulting on its wider proposals about the scope of audit, and there are particular questions in the consultation document that talk about auditors needing to consider director conduct and wider financial information,” he responds. “We felt it was right to deal just with going concern at this stage.”
Preparers of interim financial information will also be interested in the FRC’s recent thematic review involving a limited scope desktop review of the interim reports of 20 entities listed on the main market of the London Stock Exchange, whose interim period ended between June 2020 and September 2020. “The review identifies a number of examples of good reporting practices, as well as areas for improvement, providing a timely reminder for companies as they approach June interim reports,” says Louise Sharp, Technical Manager, ICAEW’s Audit and Assurance Faculty.
In terms of good practice, the FRC was pleased by the quality of Alternative Performance Measures (APM) disclosures that were given in interims. “Everyone explained why APMs were presented, including providing reconciliations to the IFRS numbers and explaining the adjustments made,” explains Matthew Watson, Case Officer in the Corporate Reporting Review team at the FRC.
As for what could be done better, the review notes the importance of ensuring that management commentary details the key events in the period and how those have impacted financial statements, not only in terms of the effect on the primary statements but also the impact those events have had on the assumptions and estimates about the future (e.g. in the assessment of going concern or for impairment testing purposes).
The findings of the review were covered in a recent FRC webinar, the recording of which is now available on its website.