November 24, 2020
Audit firms have implemented additional measures to enhance their evaluation of companies’ going concern assessments, since the start of the Covid-19 pandemic, according to a review of completed audits by the Financial Reporting Council (FRC).
The FRC reviewed a sample of eleven audits of the going concern assessments performed by the seven largest UK audit firms. The review found that the additional policies and procedures introduced earlier in the year had been substantially applied in practice.
The auditors demonstrated an appropriate level of challenge to company boards and management about their key assumptions, stress testing and disclosures in the financial statements.
In some cases, auditors needed to improve their consideration of the going concern assessment period, which was not always clear, and their approach to testing the integrity of the forecasting models.
Going concern assessments have become significantly more difficult for many companies and their auditors, given the uncertainties about the impact of Covid-19 on the economy.
Boards are responsible for assessing whether a company is a going concern and whether any material uncertainties to going concern exist.
The FRC’s review follows updated guidance issued to companies and auditors in March, an FRC Lab report on going concern, risk and uncertainty and a CRR report on the financial reporting of Covid-19.
The FRC’s Executive Director of Supervision, David Rule, said:
“The pervasive and uncertain impact of Covid-19 has made assessing whether companies have a material uncertainty to going concern much more difficult for many boards and their auditors. No-one has a crystal ball, but investors do expect appropriate consideration and disclosure of uncertainties.
“From the sample of audits reviewed, the FRC found that auditors had enhanced their procedures when auditing management’s going concern assessment. The audit procedures were proportionate to the risks facing the companies, which varied depending on the impact of Covid-19 on their businesses.”
The FRC’s review also includes areas of good practice which will be relevant for all audit firms undertaking going concern assessments, in particular for the forthcoming December 2020 year end audits.