News July 2020 Audit firms implement ‘additional measures’ to enhance their evaluation of going concern assessments

Audit firms implement ‘additional measures’ to enhance their evaluation of going concern assessments

02 July 2020
Audit firms have introduced a range of additional measures to enhance their evaluation of companies’ going concern assessments, since the start of the Covid-19 emergency, according to a review initiated and undertaken by the Financial Reporting Council (FRC).

The FRC’s review covered the going concern policies and procedures of the seven largest UK audit firms required in accordance with ISA (UK) 570. The review found that the additional policies and procedures introduced were appropriate and reasonably consistent across the firms.  
 
Audit firms have increased the extent of required consultations and central guidance for audit teams, and have had regular communications with them, to ensure consistency in the audit of going concern. These additional measures also increased the level of challenge to company boards and management about their key assumptions, stress testing and disclosures in the financial statements.
 
Boards are responsible for assessing whether a company is a going concern and whether any material uncertainties to going concern exist. Going concern assessments have become significantly more difficult for many companies and their auditors, given the uncertainties about the impact of Covid-19, the extent and duration of social distancing measures and the impact on the economy.
                                           
The FRC’s review follows updated guidance issued to companies and auditors in March and a recent FRC Lab report on going concern, risk and uncertainty.
 
The FRC will review a sample of completed audits as the next stage of the review, to assess how the revised going concern policies and procedures are being applied in practice and will report on this later this year. 
 
The FRC’s Executive Director of Supervision, David Rule, said: 
 

“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.  No-one has a crystal ball, but investors do expect appropriate consideration and disclosure of uncertainties.  
 
“Our review found that audit firms have taken sensible steps to increase required consultations and offer more central support to audit teams. Audit procedures also need to be proportionate to the risks facing companies, which vary considerably depending on the impact of the pandemic on their businesses.”

 
The FRC’s review also includes areas of good practice which will be relevant for all audit firms undertaking going concern assessments.
 
The results of the review, which was issued as a letter to the audit firms, can be found here.

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