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Going Concern

06 Mar 2019 | David Williams The Financial Reporting Council (FRC) has issued a revised exposure draft focusing on the role of an auditor in considering the position of an entity and its environment when assessing whether an organisation is a going concern.

Over the last year there have been major concerns, and debate, as to the role of the auditor in establishing whether an organisation is truly a going concern. Following the collapse of a number of large companies, the FRC has issued an exposure draft for consultation on the work of external auditors in confirming whether an organisation is a going concern.

The UK’s accounting framework typically requires organisations to confirm that they are a going concern, except in circumstances ‘when management intends to: liquidate the entity; cease trading; or has no realistic alternative to liquidate or cessation of operations.’

The concept of going concern is based on the entity having sufficient resources to continue to operate for the foreseeable future. The collapse of a number of large companies has raised concerns about the standards of auditing as the organisations concerned had received clean audit opinions and there was no warning of the risk of collapse. In addition, the FRC’s own investigations of enforcement cases have raised further questions about the work of auditors.

The exposure draft also follows considerable discussion and debate at recent hearings of the House of Commons Business, Industry and Energy Committee about the future of the audit industry and the extent to which auditors might be expected to discover fraud.

As a result of current debate about auditing, the FRC believes that it is in the public interest to strengthen the international standards of auditing as they apply to the UK. It suggests, amongst other things, the public interest will be supported by the following outcomes:

  • Fostering an appropriate independent and challenging mindset in the auditor – emphasising that professional scepticism is at the core of the work of an auditor
  • Transparency – e.g. providing those charged with governance with greater insight into the audit process through enhanced audit reporting
  • Enhancing documentation of the auditor’s judgements – the audit file should appropriately demonstrate the auditor’s decision-making processes, including essential interactions and key judgments made.

The FRC states that the revised exposure draft contains ‘more robust requirements regarding the nature and extent of procedures that the auditor should perform to obtain sufficient appropriate audit evidence about whether a material uncertainty related to going concern exists and management's use of the going concern basis of accounting is appropriate.’ This strengthens the need for the auditor to understand the entity and its environment, and the extent to which these factors may give rise to uncertainty as to whether there is a risk of the entity continuing as a going concern.

An interesting question is how might the revised requirements, assuming they are agreed and come into force, impact the higher education sector? 

If auditors are going to be more questioning about, for example, the assumptions underpinning a provider’s financial statements and future performance, this is likely to lead to increased scrutiny of, say, the underpinning assumptions with regard to student recruitment (both home and international). On this matter, previous comments by the Office for Students (OfS), suggest a tendency by some higher education providers to over-state their likely future recruitment, and incorporate such assumptions in their future forecasts. In future, if the auditor looks more closely at the underpinning assumptions – applying appropriate professional scepticism – some providers could find their auditors qualifying their audit opinion.

Responses on the exposure draft should be sent to and marked for the attention of Kate Dalby. Responses should be received by 5pm (GMT), Friday 14 June 2019.


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