The revised auditing standard ISA 570 “Going Concern”, applicable for accounting periods beginning on or after 15 December 2019, increases the auditor’s work around assessing going concern, with increased scrutiny over the directors’ going concern assessment and enhanced reporting requirements in the auditor’s report.
It is the responsibility of directors under Company Law when preparing the accounts to carry out an assessment to ascertain whether the company is a going concern. The assessment should take into account all available information about the future, covering at least 12 months from the date on which the accounts are approved and signed-off by the directors.
The areas directors must consider when preparing their assessment are wide-ranging and include risks facing the business (both internal and external, current and future), the business environment, developments in the industry, and future plans.
The purpose of the assessment is to determine whether certain events or conditions may cast significant doubt on going concern and whether those events mean that a material uncertainty exists.
In preparing and documenting their assessment the directors should give consideration to including details of:
- The processes and systems used to set budgets and cash flows, including any sensitivity analysis
- Procedures to reconcile these to actual
- How often budgets and cash flows are updated
- Procedures to identify where forecasts indicate current funding requirements may exceed facilities
- The identity of those preparing forecasts and the review and oversight process
- The regularity of communication to and review by those charged with governance of the cash flow forecasts
- The process undertaken to identify business risks relating to events that may give rise to going concern uncertainty
- How the significance of these risks is determined including both likelihood and potential impact
- The proposed actions to mitigate any risks identified
- How often going concern is reviewed
- The form and nature of documentation provided to support the going concern assessment
- The period of the review
- The nature of the documents prepared to support the going concern assessment
For directors where an assessment of going concern may not have been formally prepared and documented in previous years, the requirement is likely to be a step-change.
The assessment must be prepared and documented in all cases and should be tailored for the business. For some non-complex businesses with high levels of cash reserves, the assessment may not require detailed cash flow forecasts. In contrast, more complex entities will require a thorough assessment of current and future risks, forecasted cash flows, consideration of current funding available, and the identification and assessment of plans to address identified risks.
Where, following the assessment process, the directors determine that there is some uncertainty over the ability of the company to continue as a going concern, they should consider making additional disclosures in the notes to accounts and narrative reporting (Directors’ and Strategic Reports) so that a true and fair view is presented in the accounts.
Such disclosures may enable an unqualified audit opinion to be issued even where there are uncertainties over going concern. However, because audit reports are required to refer to any material uncertainties regarding going concern, even unqualified audit reports may include an additional paragraph relating to going concern. This additional paragraph is something which we expect to be increasingly common in the future, given the difficulties faced when making assumptions and assessing going concern.
If you have any questions regarding the going concern assessment and the potential impact on your accounts and audit report, then please do get in touch with our Head of Audit, Grahame Maughan, who would be delighted to help.