We are auditing a company that is struggling financially. Management have asserted that it is a going concern because they have the support of the parent company and we have received a letter of support to this effect. What further audit work do we need to do? 

Where a company is reliant on ongoing support from its parent entity or owner-manager a letter of support is often a key piece of audit evidence. However, this written representation is not typically sufficient appropriate audit evidence on its own. 

Auditors need to challenge this support and ensure they are comfortable that the parent is financially able to offer that support and is intending to continue that support. This can mean:

• discussions with the management of the parent, and potentially their auditors; 
• assessment of the parent’s financial statements and the availability of the funds promised;
• review of correspondence and meeting minutes to gain comfort over management’s plans and attitudes towards that ongoing support.

This is not intended to be an exhaustive list and no single suggestion is always the most appropriate to all situations and scenarios.

As well as challenging parent company support, auditors need to document the considerations in making their assessment of whether the company is a going concern, and whether any material uncertainties require disclosure. 

Additional guidance on auditing going concern can be found in the following ICAEW helpsheets:

What good looks like – going concern

Audit reports – going concern

We have an audit client that is a sub-group within a larger corporate structure. They usually take exemption from consolidating in line with Section 401 of the UK Companies Act 2006 (CA06), which exempts a UK intermediate parent with a non-UK parent from preparing consolidated accounts in certain conditions. This year there has been a change in ownership, and it is unclear at this point whether the requirements under s401 will be met. The client is keen for the financial statements to be signed off as soon as possible because they need to provide these to the bank to meet their covenants. What are our options? 

Options are a little limited here and it is hard to see an easy or simple route that pleases all parties. 

If the company cannot rely on the exemption from consolidating provided by s401 of the Companies Act 2006 then they would need to prepare consolidated accounts in line with s399 of CA06. If there is uncertainty over whether the company will be able to comply with the requirement of s401, the only way to progress at this time is for the entity to prepare consolidated accounts and the auditor to audit them.

This will of course require additional work and may not be possible within the timeframe set by the bank covenants. 

It may be possible to speak to the bank to ask for an extension on the deadline either for this additional work to be completed, or to allow for the company to wait until they are clear on whether the s401 requirements can be met. 

An entity can only have one set of financial statements so it is not possible for the company to issue one set of financial statements for the bank’s purposes and then issue a second set later for further filing. 

It may be possible to audit management information, rather than financial statements and provide an audit report under ISA 805 Special Considerations – Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement. However, it should be noted that it would need to be explicit that this information was not the financial statements and was purely management information. This may not meet the requirements of the bank covenants as these may well require audited statutory financial statements. 

We are currently finalising the audit of a group of companies and have recently uncovered that one of the subsidiaries has incorrectly filed unaudited accounts at Companies House. This subsidiary should have been audited because it was not able to take advantage of any of the exemptions from audit under the UK Companies Act 2006. What are the implications for the group audit report? 

As group auditors your audit report is looking at the consolidated and parent company accounts. You are not providing an audit report or opinion on the individual subsidiaries – although in many cases group auditors are also engaged to audit the subsidiaries in the group, these audits provide separate audit reports on each subsidiary.

So, this matter of non-compliance in the subsidiary may have no impact on the group audit report. Auditors would need to review whether the non-compliance is likely to attract any financial penalties that would be material to the consolidated accounts and therefore require disclosure. 

The subsidiary itself would need to consider how best to deal with the error made. It may choose to refile amended accounts under s454 of Companies Act 2006, but this would be a choice for the directors to make. 

Additional guidance can be found in the following helpsheet: Defective accounts and reports.