Maximising the benefits of reverse stress testing
The faculty’s new online guide outlines the concept of flipping traditional stress testing on its head and explains how it can help auditors and entities of all sizes enhance their assessments.
Reverse stress testing (RST) has much to recommend it, particularly during and after a period of unprecedented systemic uncertainty and risk such as the pandemic. Entities may find it a useful technique (see box) in their assessments of going concern, risks, resilience and viability, and their auditors will find it useful in accumulating sufficient appropriate audit evidence.
Traditional stress tests involve shifting the values of various parameters that would affect the financial position or performance of an organisation and determining the possible impacts. Reverse stress tests identify pre-defined outcomes, such as a business failing or a business model becoming unviable, then explore plausible scenarios that may lead to such outcomes. Evaluation of these scenarios can then help management to avoid, or at least mitigate, their impact.