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FRC publishes results of review of audit firms going concern assessments

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27 Nov 2020

The Financial Reporting Council (FRC) has completed a review of the Audit of entities going concern assessments across the seven largest UK audit firms and documented its key findings.

The review found that the additional policies and procedures introduced by firms had been substantially applied in practice and auditors demonstrated an appropriate level of challenge to company boards and management about their key assumptions, stress testing and disclosures in the financial statements. The key findings identified good practice examples and where auditors needed to improve.

A summary of the key findings are as follows:

  • There was an appropriate level of consultation, which improved the extent of challenge by the auditors. There was good evidence of discussions held where consultations had taken place as well as challenges and requests made to the audit team and the conclusions reached.
  • The economic scenario-related assumptions were tailored to the specific risks of the entity. There was evidence that market relevant data was obtained to assist in assessing management’s forecast scenarios.
  • Reverse stress and scenario testing assisted in the assessment of whether there was a material uncertainty. These techniques are particularly useful in assisting with the assessment of whether there is a material uncertainty, given the increased uncertainty in a situation such as Covid-19. While a reverse stress test provides a “break” scenario, management and the auditors may also need to consider what a severe, but plausible, scenario is.
  • The length of the going concern assessment period was not always clear in cases where it went beyond a year. Where management has assessed going concern over a period that is longer than a year from the date of approval of the financial statements, the auditors should ensure that their audit procedures cover that same period and that the disclosures in the financial statements and the auditor’s report clearly state the period of the going concern assessment.
  • The consideration of the disclosures for material uncertainties was generally appropriate. There was evidence of good disclosures which were tailored specifically to the circumstances, and clearly explained the scenarios and assumptions that management had used in their going concern assessment and the nature of the material uncertainties, where relevant.
  • There was an inconsistent approach to testing the integrity of the going concern forecast models.  Given the complexity of some forecast models, it may be beneficial to use data analytical procedures to test the integrity of the cash flow models. In particular, the use of specific tools to check the mathematical and mechanical accuracy of the models can highlight matters such as circular references, formulaic anomalies and hidden cells/input fields.
  • Enhanced work papers assisted in evidencing the key aspects of the going concern assessment.  In the audits reviewed, the required work programs and work papers were used.
  • There was often good use of specialists. Internal specialists, such as transactions advisory, business recovery and economists, can contribute to the quality of the auditor’s going concern assessment, through their expertise in assessing the cash-flow forecast assumptions, including the ability to raise further funds.

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 report on the financial reporting effects of COVID-19.

A press release and the full report are available on the FRC website.

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