FRC consults on tougher going concern rules

The Financial Reporting Council (FRC) is consulting on plans to revise the International Standard on Auditing (ISA) (UK) 570 Going Concern, which will mean requirements for UK auditors will be significantly stronger than those required by international standards

The standards setter says the move follows concerns about the quality and rigour of audit and well-publicised corporate failures where the auditor’s report failed to highlight concerns about the prospects of entities which collapsed shortly after, as well as findings from recent FRC enforcement cases.

The proposals will require auditors to make greater effort to more robustly challenge management’s assessment of going concern, thoroughly test the adequacy of the supporting evidence, evaluate the risk of management bias, and make greater use of the viability statement.

The revised standard requires the auditor to obtain an understanding of certain aspects of internal control and requires the auditor to understand the method that management uses to make its going concern assessment and factors that may be relevant in obtaining that understanding (eg, oversight by those charged with governance, or the interaction of management’s going concern assessment with the entity’s risk assessment process). The FRC says such an understanding is particularly relevant given the increased complexity of the business environment and technological advancements.

In circumstances where management has not yet performed an assessment of the entity’s ability to continue as a going concern, the auditor is required to request management to make an assessment.

The revised standard will include a new reporting requirement for the auditor to provide a conclusion on whether management’s assessment is appropriate, and to set out the work they have done in this respect, to improve transparency.

There will also be a ‘stand back’ requirement to consider all of the evidence obtained, whether corroborative or contradictory, when the auditor draws their conclusions on going concern.  The new standard includes a definition of ‘management bias.

Mike Suffield, the FRC’s acting executive director of audit and actuarial regulation, said: ‘If the UK is to attract high-quality global investment, investors have to have confidence in audited financial statements and the prospects of businesses. 

‘Our proposals will significantly expand the work required of auditors – however, we believe this to be an important investment in the quality of the work that underpins what is a cornerstone of audit. This revised standard has been designed to better meet the needs of users and protects the public interest.’

The consultation period closes on 7 June.

Exposure Draft: Proposed ISA (UK) 570 (Revised) - Going Concern is here.

Report by Pat Sweet

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