Q: We have just completed and signed off an audit of a non-PIE company and the directors have now informed us that they are appointing new auditors. We are not resigning in this case, so do I need to send a section 519 statement?

A: Whether you are choosing to or have been asked to resign from your post as auditor, you need to go through the same thought process in applying the resignation procedures under Company Law.

The first consideration needs to be whether this is in fact a resignation or not and that will come down to who you were originally appointed by as well as the time frame in which the client has appointed new auditors.

If you were originally appointed by the directors, as opposed to the shareholders by means of a members’ resolution, then there will be no deemed reappointment which means that you would need to be re-appointed each year. So, without a formal re-appointment, you would not be in a resignation situation and the client simply has a casual vacancy to fill.
However, it is generally advisable to still send a disengagement letter to the client to ensure clear communication about the end of the relationship, but you need look no further into the resignation process or consider a s519 statement.

Where you were appointed by shareholders and no new auditors have been appointed by the end of the period for appointing auditors (28 days from the date on which the accounts are sent to members/required to be sent to members – CA06 s485) then you are deemed re-appointed and, if subsequently the client informs you they intend to appoint new auditors, then this would be a resignation.

Conversely, where originally appointed by members and the client appoints new auditors within the time frame for appointing auditors, there will have been no deemed or actual re-appointment and as such, this would not amount to a resignation.

Guidance on auditor’s responsibilities and the considerations regarding resignation and s519 statements can be found on the Technical Advisory Service helpsheet:

• Auditor resignation – Auditor responsibilities

Q: We are auditing a subsidiary that is reliant on their parent for financial support. We have reviewed a letter of support provided to the directors of the subsidiary by their parent entity and have concluded that the parent is sufficiently financially stable to provide this support and as such have concluded there is no material uncertainty over going concern. Given the nature of the reliance, we propose including an emphasis of matter in our audit report regarding this. Would you agree with this approach?

A: The fact that the subsidiary entity is reliant on support from their parent is an indicator that there may be a material uncertainty relating to going concern. A letter of support is rarely legally binding, acting more like a letter of intent which can always be retracted should they wish.

ISA (UK) 570 defines a material uncertainty related to going concern in para 9-2(b). This talks about events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern, where appropriate disclosure is necessary for the accounts to not be misleading due to the magnitude of the potential impact and the likelihood of its occurrence.

This means the magnitude and likelihood of the impact of the uncertainty must be assessed in considering whether there is a material uncertainty in relation to going concern. There may be some instances where the likelihood of parent support being withdrawn is remote, (and therefore conclude that there is no material uncertainty), for example where the subsidiary produces a key element used in production around the group, without which the group could not continue to trade, so the particular circumstances must be considered in each case.

ISA (UK) 570 tells us that a paragraph headed “Conclusions relating to going concern” should be included where the going concern basis of preparation is appropriate and there are no material uncertainties (para 21-1), or a section headed “Material uncertainty related to going concern” is used where the going concern basis of preparation is appropriate but there are material uncertainties (para 22). As ISA 570 is prescriptive over the inclusion of these paragraphs, it is not appropriate to use an emphasis of matter paragraph in place of these sections to flag possible uncertainties.

The use of an emphasis of matter paragraph in relation to going concern, where it is concluded that the entity is a going concern with no material uncertainty relating to going concern, is not common, but it is not unheard of. If the auditor feels an emphasis of matter is necessary, they should carefully consider why that emphasis is felt to be required and whether that is an indicator that there are in fact material uncertainties that require disclosure and specific comment in the auditor’s report in accordance with paragraph 22 of ISA (UK) 570.
The Financial Reporting Council has produced guidance on The Going Concern Basis of Accounting for Small Companies and Micro-entities.

ICAEW resources on Going concern are also available.

Q: Our audit client is an intermediate parent undertaking and their prior year financial statements, as audited by us, disclosed they had taken the s401 exemption from preparing consolidated accounts. We have subsequently found that the ultimate parent undertaking of this client never prepared consolidated accounts and does not intend to. What does this mean for the current year audit?

A: One of the conditions for the exemption, conferred by s401 of Companies Act 2006 (CA06) from an intermediate parent preparing consolidated accounts, is that the entity is included in group accounts of a higher group entity. Those group accounts must be audited and a copy filed alongside the intermediate parent’s accounts. If these, along with the other conditions of the exemption, have not been met then those prior period accounts are defective because they took an exemption they were not entitled to, so are not compliant with CA06.

The directors do have the option under the defective accounts regime to file revised accounts correcting the error, in this case this would mean preparing and filing compliant consolidated accounts. However, the directors can take the option to correct the error in the next set of financial statements prepared. They would need to prepare consolidated accounts with comparatives and make the necessary disclosures regarding this prior period error and adjustment. The directors should consider their duties to only approve compliant accounts in making their decision on how to proceed and may wish to seek legal advice.

Assuming the directors elect to resolve the error in their next set of accounts, your audit report will need to include an Other Matter paragraph detailing that the prior period consolidated statements were unaudited (ISA 710 para 14/19). It must be made clear however, that the parent entity primary statements and related notes were audited.

It is worth noting that an “other matter” paragraph is needed whenever the prior period was unaudited, not just in a case when it should have been but wasn’t.

Consideration will also need to be given to the audit evidence available over the consolidated opening balances and whether there is any impact on your audit opinion for the current year consolidated primary statements.

An audit report concludes upon the primary statements and related notes and disclosures within a set of financial statements, so the appropriateness of the disclosure claiming the s401 exemption from preparing consolidated accounts should have been considered as part of the prior period audit. It may be beneficial for the auditor to review their prior period audit files to consider any shortfalls in the prior period audit work and therefore the opinion expressed previously. Where an auditor discovers they have issued an incorrect audit opinion it may be beneficial to notify their PII provider

The Technical Advisory Service helpsheet on audit report implications of prior period being unaudited may be of some assistance.