Going Concern: In the spotlight

During the 2019 calendar year, the Financial Reporting Council (FRC) issued an update to the International Standard on Auditing (ISA) 570, Going Concern. This new-look 35-page standard was issued primarily to:

  • Increase the auditors’ role in assessing whether a material uncertainty exists for an entity.
  • Prompt the auditor to consider whether an assessment of management’s use of the Going Concern concept has been made.
  • Strengthen the auditors’ objectives with respect to obtaining sufficient appropriate evidence.

What caused the standard to be reviewed?

Several high-profile cases such as Thomas Cook and British Home Stores are likely to blame. Their respective auditors have been hit hard with criticism about the efforts made to uncover and highlight the truth about the health of these companies. It seems much more could have been done.

Assessing your business’ Going Concern

License holders and other audited entities on the Isle of Man should be familiar with auditors requesting assessment of their business’s Going Concern.

But now that we are in the throws of these changes, how can we all prepare for this better? We suggest the following:

  • Talk about it. It seems as if conversations about business performance and Going Concern were not being taken seriously enough. Start with a discussion between the auditor and management. The level of work, as always should be proportionate to the risk. For example, a company with excellent performance, continual growth and strong cash flows will not require as much investigation into Going Concern viability, vs a struggling company that relies on a shareholder guarantee.
  • Audited entities should increase the documentation available in advance of the audit. Being mindful of the type of questions auditors ask for each year and making this information readily available.
  • Management should provide a budget and projections of future cash flows from the signing of the balance sheet date. These can be excellent sources of audit evidence, providing they are reasonable and reliable.  Management should be prepared to justify projections and assumptions with detailed calculations and provide evidence to support these. An example of this would be a clear explanation on how the business intends to achieve projected sales and meet expenditure. Thereafter, the onus is on the auditor to assess whether or not these plans are reasonable.
  • The business plan, objectives and strategies are likely to be reviewed and requested by the auditor. If Covid-19 has affected the business, financially or in other ways, management ought to document this to reflect a considered impact.
  • Be aware of “Management Bias.” With ISA 570 now including a definition of this term, auditors must consider whether such a bias exists and the extent to which it might be concealing the potential for future operational issues.
  • Business risks may be called into question. The responses from management as to how the entity will address such risks may be key to assessing Going Concern.
  • With ISA 570 shining the spotlight on your entity’s internal control systems, the auditor is responsible for querying internal controls relating to going concern and assessing their adequacy.
  • The auditor may take a closer look at documented internal policies and procedures. If you’re currently sitting on any old manuals that haven’t been updated in a decade, now is a great time for an overhaul.

When change comes, make sure you’re always ready

This all may seem unnerving, but there’s some collaboration required.  It is down to the auditor to work with management to explain the requirements and to gather sufficient and appropriate evidence to enable drawing a conclusion. It is a Standard that all auditors must follow in order to be compliant with regulations and indeed to provide a good service.

If you would like to see how our team at Harding Lewis would approach auditing your business, please get in touch.

Disclaimer
This article is designed to spark conversation between auditors and management of audited entities. It is a discussion piece only and does not cover all of the information relating to ISA 570, nor does it cover all of the responsibilities of auditors and management with respect to Going Concern. It is believed to be correct at the time of writing. For more on the FRC’s updated ISA 570, please click here