Going concern and audit reports: What to expect

Before you can appreciate what information an audit report might be providing, you need to understand the definition of the going concern concept from a financial reporting perspective. The same definition is used in both UK GAAP and IFRS, as follows:

“An entity is a going concern unless management either intends to liquidate the entity or to cease trading or has no realistic alternative but to do so.”

In assessing whether this going concern assumption is appropriate, management takes into account all available information about the future, for at least 12 months from the date that a set of accounts are signed.

This means that accounts will be prepared on a going concern basis in most situations, probably even in the current Covid-19 scenario. This is because for most businesses, most of the time there will not be an intention or necessity to liquidate or cease trading. But what about all the grey areas?

Materiality uncertainty related to going concern

The next thing you need to know about is the idea that whilst accounts may legitimately be prepared on a going concern basis, there could still be material uncertainties. The auditing standard ISA (UK) 570 Going Concern states that a material uncertainty related to going concern is:

“An uncertainty related to events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern, where the magnitude of its potential impact and likelihood of occurrence is such that appropriate disclosure of the nature and implications of the uncertainty is necessary…”

It is easy to see how, in the current uncertain environment, many businesses could have experienced events or conditions which have cast significant doubt about their going concern status. Where this is the case it is essential that both the accounts and the audit report explain those uncertainties in sufficient detail so that users can make their own assessment of the risks.

Audit reports

So how does this all translate into audit reports? The answer is with a myriad of report types, which have strict rules about the headings that are used, and the information contained therein. The table below sets out a summary of the main examples.

If you are a user of audit reports then watch out for the key headings, shown in italics in the third column below, which act as a code for the meaning of the report.

If you are the auditor preparing the report, you can find further information in ISAs (UK) 570, 700 and 705 as well as in the FRCs Bulletins on the detailed requirement.

Type of audit report	What does this mean?	Key headings to look for
Unmodified opinion	The accounts give a true and fair view in all material respects and there are no material uncertainties regarding going concern.This is the most usual report in normal times but might become rare under Covid-19 scenarios.	Conclusions relating to going concern This paragraph will explain that the auditor has nothing to report regarding the going concern status or material uncertainty disclosures.
Unmodified opinion with a material uncertainty related to going concern	The accounts give a true and fair view in all material respects but there is a material uncertainty related to going concern which the user must understand. This is likely to be very common in the current Covid-19 situation.	Material uncertainty related to going concern This paragraph will cross-refer to a note in the financial statements that explains the uncertainty relating to going concern. It will also state that: these conditions indicate a material uncertainty which may cast significant doubt on the entity’s ability to continue as a going concern; but the audit opinion is not modified in respect of this. There will be further information for companies who follow the UK Corporate Governance Code.
Modified opinion – Adverse	The accounts do not give a true and fair view.This is very rare and will be used for example, if the entity is not a going concern in the auditor’s opinion but the accounts have been prepared on a going concern basis.	Basis for Adverse Opinion The reason for the disagreement will be explained in the audit report.
Modified opinion – Disclaimer	The auditor is unable to form an opinion due to a lack of sufficient appropriate audit evidence.This is very rare and will be used where the auditor is unable to gather evidence to such an extent that they cannot say whether the accounts are true and fair or not. For example, if the auditor could not access records.	Basis for Disclaimer of Opinion The reason for the inability to form an opinion will be explained.
Modified opinion – qualified (due to a lack of sufficient evidence)	The auditor is unable to form an opinion on particular material parts of the accounts, but otherwise is able to say the accounts are true and fair.This might happen if the auditor cannot attend a stock take for example, due to lockdown restrictions.	Basis for Qualified Opinion The reason for the inability to gather sufficient appropriate audit evidence will be explained.
Modified opinion – qualified (due to a disagreement)	The auditor disagrees with some aspect of the accounts or disclosures, but apart from this they are able to say the accounts are true and fair.A lack of proper disclosure about a material uncertainty relating to going concern would lead to this type of report.	Basis for Qualified Opinion The information which is missing or incorrect will be explained.