22 February 2021: As auditors turn their attention to 31 December 2020 year end audits, ICAEW’s Audit and Assurance Faculty reminds auditors of two key audit report changes affecting audits of financial statements of periods commencing on or after 15 December 2019.

These changes were brought about by the revisions to ISA (UK) 570 (Revised September 2019) Going Concern, and to ISA (UK) 700 (Revised November 2019) Forming an opinion and reporting on financial statements.

ISA (UK) 570 - ‘Positive’ going concern conclusions in the audit report

1. Periods commencing on or after 15 December 2019

Paragraph 21-1 of the revised ISA (UK) 570 changes the wording of the audit report for virtually all audits. 

Where the use of the going concern basis is appropriate (and no material uncertainty relating to going concern has been identified), the auditor uses the following wording:

Conclusions relating to going concern

In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate.

Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the [entity]'s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.

Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.

2. Periods commencing prior to 15 December 2019

The wording above is in contrast with the ‘old’ ISA 570, where the auditor reported by exception in accordance with paragraph 43-1 of ISA (UK) 700 (Revised June 2016):

Conclusions relating to going concern

We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: 

• the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or 
• the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue.

The FRC Bulletin: Illustrative Auditor’s Reports on United Kingdom Private Sector Financial Statements has been updated to reflect these revisions.

3. Reporting on material uncertainty related to going concern

The FRC Bulletin also provides an example for reporting on material uncertainty related to going concern using the new wording (Appendix 4), as set out below.

Material uncertainty related to going concern

We draw attention to note [X] in the financial statements, which indicates that [brief description of events or conditions identified that may cast significant doubt on the entity’s ability to continue as a going concern]. As stated in note [X], these events or conditions, along with the other matters as set forth in note [X], indicate that a material uncertainty exists that may cast significant doubt on the company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. 

In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. 

Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.

4. Additional requirements in ISA (UK) 570 (Revised) for auditors of larger entities

Paragraph 21-1 (d) of ISA (UK) 570 (Revised) includes additional requirements for auditors of Public Interest Entities (‘PIEs’), other listed entities, entities that are required and those that choose voluntarily, to report on how they have applied the UK Corporate Governance Code and other entities subject to the governance requirements of The Companies (Miscellaneous Reporting) Regulations 2018.

For these entity types, the auditor is required to include an explanation of how the auditor evaluated management’s assessment of the entity’s ability to continue as a going concern and this should be tailored to the individual circumstances of the entity. 

As illustrated in the FRC Bulletin, for these entity types, the words:

In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate.

will be followed by:

Our evaluation of the directors’ assessment of the entity’s ability to continue to adopt the going concern basis of accounting included [Explanation of how the auditor evaluated management’s assessment and the key observations arising with respect to that evaluation].

ISA (UK) 700 - Reporting on irregularities, including fraud

The revised version of ISA (UK) 700 Forming an Opinion and Reporting on Financial Statements also became effective for periods commencing on or after 15 December 2019. 

It introduced a new requirement for the auditor’s report to explain to what extent the audit was considered capable of detecting irregularities, including fraud (previously this requirement was only applicable to audits of PIEs), as follows:

Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below:

[Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud.]

The intention is that the auditor is expected to consider how this is tailored to each entity’s individual circumstances. The auditor needs to ensure that such an explanation reports matters of significance clearly and concisely, without the use of boilerplate text. 

The explanation, which should be tailored to the laws and regulations applicable to the particular entity, would be expected to cover how the auditor has assessed the risk of material misstatement in respect of irregularities, including fraud, and the auditor’s approach to responding to those risks as part of the audit.

Further information

• ICAEW’s Audit & Assurance Faculty’s guide How to report on irregularities, including fraud, in the auditor’s report – a guide for auditors, provides further information on reporting on irregularities, including fraud.
• The FRC’s Staff Guidance Note 02/2017 (Revised November 2018) provides guidance to auditors on explaining to what extent the audit was considered capable of detecting irregularities, including fraud.
• ICAEW’s Technical Advisory Service’s news article Revisions to auditing standards provides more detail on these changes as well as other changes to the UK ISAs.