Auditors need to show they have robustly challenged management’s assessment of going concern, say new proposals from the Financial Reporting Council (FRC).
The watchdog is proposing to increase the work required of auditors when assessing whether an entity is a going concern. The consultation on important revisions to International Standard on Auditing (ISA) (UK) 570 ‘Going Concern’ follows worries about the quality and rigour of audit. In recent years there has been a number of well-publicised corporate failures where the auditor’s report failed to highlight concerns about the prospects of entities that collapse shortly after; a situation reinforced by the findings of recent FRC enforcement cases.
The FRC said it needed: “Auditors to make a greater effort to robustly challenge management’s assessment of going concern, thoroughly test the adequacy of the support evidence, evaluate the risk of management bias, and make greater use of the viability statement.”
In addition, it wants to see an improved transparency with a new reporting requirement for the auditor to provide a conclusion on whether management’s assessment is appropriate, and set out the work they have done in this respect.
Finally, the FRC is introducing a ‘stand back’ requirement to consider all of the evidence obtained, whether corroborative or contradictory, when the auditor draws their conclusions on going concern.
