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Auditors told to be stricter with going concern scrutiny

The Financial Reporting Council (FRC) has proposed to increase the work required of auditors when assessing whether a business is a ‘going concern’.

The consultation on revisions to International Standard on Auditing Going Concern follows industry-wide worries regarding the audit of well publicised corporate failures where the auditor’s report failed to highlight concerns about the future of the business which collapsed shortly after.

The high profile collapses of companies like BHS and Carillion have resulted in audit firms being put under investigation by the FRC. Last year, it was found that PwC auditors only spent two hours looking at BHS’ audits, resulting in PwC being fined a record £10m.

The FRC is asking auditors to make “greater effort” to challenge a company’s assessments 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.

Audit firms will also need to follow a new reporting requirement to conclude management’s assessment is appropriate. Furthermore, there will be a “stand back requirement” to consider all the evidence and draw conclusions from that.

In proposing these revisions, requirements on UK auditors will be significantly stronger than those required by international standards.

The consultation period for the new standard closes at 5pm on Friday 7 June 2019.

Mike Suffield, the FRC’s acting executive director of audit and actuarial regulation said: “Recent corporate failures and the FRC’s own enforcement work has shown the existing Going Standard needs to be strengthened. 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.”

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