FRC revises going concern audit standard
The Financial Reporting Council (FRC) has revised its going concern standard in response to a number of corporate failures where auditors failed to warn that the companies were in distress.
The revised standard (ISA UK 570) follows concerns over the quality and rigour of audit and increases the work auditors are required to do when assessing an entity against the standard. According to the FRC, it means UK auditors will follow significantly stronger requirements than those required by current international standards.
The FRC hopes that UK experience will lead to further strengthening of requirements at the international level.
"High-quality audit protects the public interest, meets the needs of users of financial statements and underpins investor confidence. Recent corporate failures have, for good reason, adversely affected that confidence," said Stephen Haddrill, FRC chief executive.
The FRC's revised standard requires greater work on the part of the auditor to more robustly challenge management’s assessment 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; improved transparency with a new reporting requirement for the auditor of public interest entities, listed and large private companies to provide a clear, positive conclusion on whether management’s assessment is appropriate; and a stand back requirement to consider all of the evidence obtained, whether corroborative or contradictory.
"Our own enforcement work has demonstrated a need to strengthen existing going concern standards, which is a fundamental aspect of audit, so that investors can have confidence in audited financial statements and businesses’ financial prospects,” said Mr Haddrill.
The changes are effective for audits of financial statements for periods commencing on or after 15 December 2019. However, early adoption is permitted.