Change is coming to the world of Audit & Assurance

Accounting estimates

Accounting estimates vary widely in their nature and are subject to inherent uncertainty that can make them notoriously difficult to both calculate and to audit.

What’s changing?

The audit standard covering accounting estimates has been enhanced, which means more audit work is required. This updated standard applies to accounting periods commencing on or after 15 December 2019.

Where estimates are considered to be high risk – e.g. bad debt provisions made during a pandemic – more audit testing and more audit documentation will be required.

What do I need to do?

• Calculations – if an estimate has been calculated using a specific formula or model then ensure it is accompanied with plenty of detail about where the numbers and assumptions have come from.
• Documentation – if an estimate has been based on a specific document, such as a property valuation, then ensure that it is readily available for review.

Risk assessment

Identifying and assessing risk is a significant part of an audit. The number, type and significance of risks can vary greatly depending on the business being audited.

What’s changing?

The audit standard covering the identification and assessment of risk has been revised and significantly more work is now required to be undertaken when reviewing inherent risk and management’s risk assessment procedures.

This updated standard applies to accounting periods beginning on or after 15 December 2021. Whilst this change doesn’t apply for some time, it is prudent to plan ahead and think about making changes now that will benefit your business in the future.

What do I need to do?

• Risk assessment – start thinking now about what risk assessment procedures you have in place in your business and how these procedures are documented.
• Internal controls & IT environment – as the world embraces the cloud and working from home, the risk of IT-based fraud or error increases significantly. Give some thought to the controls you have in place in your business, particularly around IT – whether it’s passwords or two-step authentication – and whether they can be strengthened.

Going concern

Being a going concern means to continue in operational existence for the foreseeable future, which is usually at least 12 months from the date the accounts are signed.

Going concern is a fundamental accounting concept that affects the whole of the accounts.

What’s changing?

As an almost direct response to recent high-profile corporate failures (such as Carillion & BHS) the audit standard addressing going concern has been significantly strengthened.

This updated standard applies to accounting periods beginning on or after 15 December 2019, and more work is required by both auditors AND businesses.

What do I need to do?

Every year you must make a formal assessment of your business as a going concern before your accounts are signed off.

This assessment must: –

• Cover at least 12 months from approval/signing
  of the accounts;
• Identify specific events or conditions, such as Covid-19, that may affect going concern; and
• Include a cash flow forecast, covering at least 12 months from sign-off that includes a detailed list of supporting assumptions.

Top Tips

• Start thinking about this now – if making formal assessments or preparing detailed forecasts is something new for your business then starting early is always advisable.
• Don’t take it personally! – your audit team will be required to ask more questions and request more information than usual. This is all part of the new audit standard’s requirements.

If you have any questions about these changes please either contact me or one of my colleagues in our Audit & Assurance team.