Going concern and audit reports: What to expect<\/p>\n<\/p>\n
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:<\/p>\n
\u201cAn 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.\u201d<\/p>\n
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.<\/p>\n
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?<\/p>\n
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:<\/p>\n
\u201cAn uncertainty related to events or conditions that, individually or collectively, may cast significant doubt on the entity\u2019s 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\u2026\u201d<\/p>\n
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.<\/p>\n
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.<\/p>\n
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.<\/p>\n
If you are the auditor preparing the report, you can find further information in ISAs (UK) 570, 700 and 705<\/a> as well as in the FRCs Bulletins<\/a> on the detailed requirement.\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0<\/p>\n This paragraph will explain that the auditor has nothing to report regarding the going concern status or material uncertainty disclosures.<\/p>\n<\/td>\n<\/tr>\n This is likely to be very common in the current Covid-19 situation.<\/p>\n<\/td>\n This paragraph will cross-refer to a note in the financial statements that explains the uncertainty relating to going concern.<\/p>\n It will also state that:<\/p>\n There will be further information for companies who follow the UK Corporate Governance Code.<\/p>\n<\/td>\n<\/tr>\n The reason for the disagreement will be explained in the audit report.<\/p>\n<\/td>\n<\/tr>\n The reason for the inability to form an opinion will be explained.<\/p>\n<\/td>\n<\/tr>\n (due to a lack of sufficient evidence)<\/p>\n<\/td>\n The reason for the inability to gather sufficient appropriate audit evidence will be explained.<\/p>\n<\/td>\n<\/tr>\n (due to a disagreement)<\/p>\n<\/td>\n The information which is missing or incorrect will be explained.<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n Given all of these potential audit reports types, it is clear that care will be needed both in preparing, and interpreting them. \u00a0<\/p>\n<\/p><\/div>\n \u00a0<\/p>\n \u00a0<\/p>\n","protected":false},"excerpt":{"rendered":" In this strange new world, the matter of audit reports may not be top of your lists of concerns. However, getting them right and understanding them if you need to rely on them will be crucial.<\/strong><\/p>\n","protected":false},"author":2,"featured_media":5831,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[23],"tags":[],"_links":{"self":[{"href":"https:\/\/sloane.co.uk\/wp-json\/wp\/v2\/posts\/3689"}],"collection":[{"href":"https:\/\/sloane.co.uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/sloane.co.uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/sloane.co.uk\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/sloane.co.uk\/wp-json\/wp\/v2\/comments?post=3689"}],"version-history":[{"count":0,"href":"https:\/\/sloane.co.uk\/wp-json\/wp\/v2\/posts\/3689\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/sloane.co.uk\/wp-json\/wp\/v2\/media\/5831"}],"wp:attachment":[{"href":"https:\/\/sloane.co.uk\/wp-json\/wp\/v2\/media?parent=3689"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/sloane.co.uk\/wp-json\/wp\/v2\/categories?post=3689"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/sloane.co.uk\/wp-json\/wp\/v2\/tags?post=3689"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n\n
\n Type of audit report<\/strong><\/td>\n What does this mean?<\/strong><\/td>\n Key headings<\/em> to look for<\/strong><\/td>\n<\/tr>\n \n Unmodified opinion<\/td>\n The accounts give a true and fair view<\/strong> 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.<\/td>\n \nConclusions relating to going concern <\/em>\u00a0<\/p>\n \n Unmodified opinion with a material uncertainty related to going concern<\/td>\n The accounts give a true and fair view<\/strong> in all material respects but there is a material uncertainty related to going concern <\/strong>which the user must understand.\u00a0<\/p>\n \nMaterial uncertainty related to going concern <\/em>\u00a0<\/p>\n \n
\n Modified opinion \u2013 Adverse<\/td>\n The accounts do not give a true and fair view<\/strong>.This is very rare and will be used for example, if the entity is not a going concern in the auditor\u2019s opinion but the accounts have been prepared on a going concern basis.<\/td>\n \nBasis for Adverse Opinion<\/em>\u00a0<\/p>\n \n Modified opinion – Disclaimer<\/td>\n The auditor is unable to form an opinion <\/strong>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.<\/td>\n \nBasis for Disclaimer of Opinion<\/em>\u00a0<\/p>\n \n Modified opinion \u2013 qualified\u00a0<\/p>\n The auditor is unable to form an opinion on particular material parts<\/strong> 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.<\/td>\n \nBasis for Qualified Opinion<\/em>\u00a0<\/p>\n \n Modified opinion \u2013 qualified\u00a0<\/p>\n The auditor disagrees with some aspect of the accounts or disclosures<\/strong>, 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.<\/td>\n \nBasis for Qualified Opinion<\/em>\u00a0<\/p>\n