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Auditors strengthen going concern assessments, FRC finds

Audit firms have taken additional measures to enhance their evaluation of companies’ going concern assessments since the start of the pandemic, according to the FRC’s latest audit review. 

The FRC reviewed a sample of eleven audits of the going concern assessments performed by the seven largest UK audit firms. It found that additional policies and procedures introduced earlier in the year had been “substantially applied” in practice.

Auditors demonstrated an “appropriate level of challenge” to company boards and management about their key assumptions, stress testing and disclosures in financial statements, according to the findings.

In some cases, auditors needed to improve their consideration of the going concern assessment period, however, as well as their approach to testing the “integrity” of the forecasting models.

According to the FRC, going concern assessments have become “significantly more difficult” for many companies and auditors, due to the uncertainties over the ongoing impact 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.” 

He added: “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 follows the updated guidance issued in March, an FRC lab report on going concern, risk and uncertainty, as well as a CRR report on the financial reporting of Covid-19.

The review also includes areas of good practice which will reportedly be relevant for all audit firms undertaking going concern assessments, in particular for the forthcoming December 2020 year end audits.

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