United Kingdom: ISA 570 Update – How Auditor Going Concern Conclusions Have Changed

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published on 4 November 2022 | reading time approx. 5 minutes

 

In September 2019, a newly amended version of ISA 570 was released and is man­da­tory for all UK audits relating to financial statements for accounting periods that began from 15th December 2019 onwards.
 
This update is relevant because auditors and businesses must be conscious of the revisions for trading periods to December 2020 and thereafter.
 

 

The impact of ISA 570 adjustments will vary between companies. Still, it is essential that auditors, and their clients, are aware of the requirements and what this will mean for their auditory compliance preparations.
 

How Has the ISA 570 Update Changed Auditing Standards?

ISA 570 relates to going concern standards, which require additional work and scrutiny over the reports assessing whether the business is a going concern, along with different reporting requirements for the auditor.
 
Directors are responsible for establishing going concern determinations and preparing accounts that present a true and fair view – a going concern appraisal incorporates everything directors should reasonably know about future trading over the subsequent year.
 
Financial statements are prepared on the basis that the business is a going concern unless the management has decided to liquidate, stop trading, or feels that either outcome is inevitable.
 
The complication for numerous audits may be that we are in a unique period, where countless organisations have revised business plans and forecasts in response to the COVID-19 pandemic and changes to cross-border trading post-Brexit.
 
Therefore, the revised standards come at a time when many organisations may be experiencing mitigating or unusual circumstances that affect their going concern reporting.
 
The Financial Reporting Council (FRC) estimates that for non-Public Interest Entity (PIE) audits, the updated requirements will require around 0.25 percent more audit hours to ensure compliance.
 
However, the planning and documentation stages behind the director’s going concern assessment may increase far more significantly.
 
Changes to ISA 570 are designed to mitigate “delivery gaps”, so the process is more robust, with greater clarity for auditors to know what is expected from them when considering the question of going concern.
 

Preparing for Audit Under Revised ISA 570 Rules

Management must consider a broad range of factors when preparing a going concern review, including:
  • The current and future trading climate
  • Changes to the sector or industry
  • Future forecasts and plans
 
A going concern report is intended to identify whether any aspects of trading, internal or external, are likely to give rise to any uncertainty, backed by analyses and reporting.
 

Components of a Going Concern Assessment

Auditors will expect to see a number of supporting documents, calculations, estimates and reports to quantify the information included within the director's going concern assessment.
 
Examples are as follows:
  • A business operational analysis, including the investment structure, planned disposals, sources of financing and the baseline business model.
  • Financial comparisons of year-on-year performance, identifying figures such as net current assets or lia­bi­li­ties, cash flow status for the year to date, and any funding agreements and how they have changed from the previous period.
  • Results from one year to the next, comparing turnover, financing and profitability.
  • Lists of any events or trading circumstances that management knows may impact their position as a going concern, such as changes in product demand or issues relating to organisational liquidity. In this scenario, management must include an action plan to address those issues.
 
Depending on the outcome, management may also need to provide their modelling, data sources and a sen­si­tivity analysis, which itemises assumptions made and information cited in determining whether the business is presenting accounts as a going concern.
 

ISA 570 From an Auditor Perspective

A challenge for auditors is that they need to ensure that the management in place has the tools and knowledge required to provide a verifiable going concern statement.
 
Many clients may find the requirements challenging, and in a period where companies are continuing to try and recover from the pandemic and ongoing economic issues, early engagement may be beneficial.
 
Companies must understand what evidence their auditor will need and how much input they are expected to provide during the audit process to answer questions and explain procedures.
 
Auditor requirements within the amended standards expand on the material they need to cite to support their conclusions, with key areas as follows:
  • Auditor understanding: auditors need to meet more stringent standards when understanding the organisation, how it operates, and the core risks to the operation.
  • Going concern evaluations: the requirements for evaluation and critique of the going concern assessment are more explicit and require auditors to consider management bias and work from a basis of scepticism.
  • Stand-back requirements: auditors are required to consider both corroborative and contradictory sources of evidence when concluding.
  • Documentation standards: the revised standard sets out extended requirements for audit documentation and the evidence auditors must store within their audit files.
 
Going concern assessments do not follow a template or prescribed approach. Management may have concluded that cash flow forecasts are not required, in which case the auditor will need to decide whether they believe this is sufficient to meet the ISA 570 standards.
 
Conversely, companies may rely on complex, highly detailed forecasting that draws on multiple data points, making it difficult for an auditor to understand the modelling and judge whether they have sufficient knowledge to provide a professional view.
 

The ISA 570 Going Concern Assessment Requirements

There are several complications, as many businesses have adapted to remote working environments and may need to make special arrangements to have management on hand to provide supporting information.
 
Auditors will look for several key factors when conducting their review:
  • Risk appraisals that highlight, quantify and address business risks that may affect their going concern status.
  • Explanations from management showing how they measure and analyse financial performance.
  • Details of how information is sourced and extrapolated to determine whether any events or trading conditions may impact the going concern assessment.
  • Guidance on how company management decides on the correct data analysis methods and metrics to make going concern assumptions.
 
Each part of the assessment should be properly documented and tailored to the size and nature of the organisation.
 
For example, if the company follows a linear business model and has high cash reserves, the auditor may not require in-depth cash flow forecasts. In contrast, these may form a crucial part of the going concern assessment review in another scenario.
 
Companies with complex structures must provide thorough reports to ensure their auditor can evaluate their risk review approach, future projections, funding analysis, and strategy to address key risk factors.
 

Practical Preparations for Stricter ISA 570 Audit Standards

For auditors, the ISA 570 standard revision means that they will require more time for the going concern ele­ment of the audit process. 
 
Greater professional judgement is needed when analysing the going concern assessment, considering the assumptions used, and deciding whether sufficient evidence is available.
 
Businesses may need to put more work into their audit preparations and potentially adjust processes, manage­ment input and evaluation approaches to ensure they have a robust going concern assessment with appropriate supporting information to corroborate their findings. 
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