An entity we audit is in negotiations to sell one of its companies post year end. The management of that company will stay on after the sale. It is a profitable entity with ready access to cash. How do I sign off that it is a going concern when I don’t know what the new owner’s plans are?

Management are required to assess the entity’s ability to continue as a going concern for at least 12 months after the date when the financial statements were authorised for issue. ISA (UK) 570 para 12-2 requires the auditor to perform procedures on management’s assessment, including considering the effects and feasibility of management’s future plans and the effects of subsequent events. 

When considering the impact of the potential sale as a subsequent event, procedures to gather audit evidence could include discussions with the entity’s management who are familiar with the potential purchasers and their understanding of their intended strategy, as well as forming an understanding of the potential purchaser’s business or even perhaps contacting the purchaser to seek some understanding of their plans, if permitted by management. Any flexibility in the timetable for the signing of the audit report could be considered if it would increase the availability of evidence. 

Given the entity is otherwise considered to be a going concern by management, the auditor would need to assess whether the potential sale and subsequent actions of the new owner represent a material uncertainty related to going concern. ISA (UK) 570 para A2-2 requires management to have assessed the likelihood of the events occurring, and their potential impact, to determine if disclosure is necessary. The auditor would need to evaluate this assessment and consider if management has made appropriate disclosures.

Where management assesses there are material uncertainties relating to going concern as a result of lack of knowledge of potential new management, and those material uncertainties have been disclosed appropriately in the auditor’s view, the audit report will need to reflect those material uncertainties. 

Guidance on the audit report implications of those material uncertainties is available in an Audit and Assurance Faculty Know-how guide Going concern – material uncertainty relating to going concern.

If auditors are unable to obtain sufficient appropriate audit evidence then they would need to consider their audit opinion. Guidance is available to help auditors assess the audit report implications of other going concern outcomes in a Technical Advisory Services helpsheet Audit reports – going concern.

We have an audit client whose functional currency is GBP, but has sales in Euros. The company has used the year end spot rate to translate the invoices, rather than the spot rate on the transaction date. It argues that the net profit is unaffected by this, but it has not correctly applied FRS 102 to the transactions and the effect is material. How does this affect my audit opinion?

For the accounts to give a true and fair view, each line item must be free from material misstatement, therefore the accounts in their current form are misleading. For users to understand the true financial performance of the company, each line item within the financial statements must be materially correct because the accounts may give a very different impression of performance if, for example, material foreign exchange gains were shown in revenue, as opposed to a credit to administration expenses. 

Likewise on the balance sheet. It would not be appropriate to say that if the net assets are materially correct, the allocation between current and non-current assets does not matter as – it is clear that – a material misallocation could influence users’ economic decisions about the financial position.

If the client does not make the required corrections and the accounts continue to show material misstatements, auditors will need to consider modifying their audit opinion. 

The auditor is required first to assess whether the misstatements found are material and then whether they have a pervasive effect on the financial statements. ISA (UK) 705 para 5(a) defines pervasive effects to the financial statements as those effects that, in the auditor’s judgement:

• are not confined to specific elements, accounts or items of the financial statements; 

• if so confined, represent or could represent a substantial proportion of the financial statements; or 

• in relation to disclosures, are fundamental to users’ understanding of the financial statements.

If the effect of these material misstatements is pervasive, an adverse opinion would be issued (ISA (UK) 705 para 8). 

If the auditor concludes that the effect of this error is not pervasive, then a qualified audit opinion would be appropriate (ISA (UK) 705 para 7(b)). 

Useful guidance is available in a Technical Advisory Services helpsheet Audit reports, modified opinions, emphasis of matter and other matter paragraphs.

The firm is refreshing its website and would like to include some testimonials from audit clients. Are we able to do this while maintaining our independence? 

Before you can use testimonials in your marketing, the client needs to have consented to the use of their comments in this way. As their relationship with your firm is confidential, it would be inappropriate to use their comments externally without their consent.

There is no specific prohibition on using the testimonials of audit clients. However, you need to consider whether a self-interest threat arises, such as would be the case if a client agreed to give a positive testimonial in exchange for a clean audit report, or a reasonable and informed third party could perceive that to be the case.

To mitigate such a self-interest threat, the timing of the testimonial would be key; needing to be after the audit report has been issued. This may be difficult to communicate clearly to the public in such a way that a reasonable and informed third party would understand how the threat has been mitigated. 

If the self-interest threat cannot be reduced to an appropriate level by safeguards, then you would need to avoid using testimonials from audit clients in your marketing material. 

A technical helpsheet is available to ICAEW members outlining key principles governing marketing of practice activities.