We are close to signing off the audit report for a company that has a high level of staff due to the nature of the business. It has always operated on quite tight margins, but our testing on the company’s forecasts and going concern assessments have shown it is once again a going concern. However, one of the juniors on the audit team has noticed that the projections do not allow for changes that were announced in a recent UK Government Budget, including an increase in employers’ national insurance contributions. Is this something we should be considering? 

When a company considers the figures to be included in the financial statements, it looks at the conditions that existed at the balance sheet date in line with section 32 of FRS 102. The company would not provide for future costs such as a coming change to employers’ national insurance contribution (NIC) levels.

However, a going concern assessment for a company needs to be forward looking, considering what is coming in the future and how the company will cope with it. The NIC changes are likely to represent a significant increase in costs for the company and, while they may have a plan to cover this with increased prices or cost savings elsewhere, it would seem appropriate for this to be included in management’s assessments. If this has not been considered already, the forecasts could be stress tested with these changes in mind to gain a picture of whether there is headroom to allow for the rises. 

Depending on the impact of these changes to the going concern assessment, it could lead to changes in the disclosures in the financial statements and/or audit report if doubts are raised over the going concern position of the company. 

Key links

Audit reports – going concern – an ICAEW Technical Advisory Services helpsheet 

What good looks like – going concern – practical guidance

My firm has been appointed as auditor for a company that hires out equipment. The value of the equipment makes up approximately 80% of the balance sheet for the entity. As the equipment is always out at customer sites, we have not been able to verify its existence and gain as much audit evidence as we feel is appropriate. We knew this could be a problem when we accepted the engagement. Are we correct to disclaim our audit opinion and are there any other issues we need to consider? 

If an auditor is unable to obtain sufficient appropriate audit evidence over a matter in the accounts that is considered to be both material and pervasive, ISA (UK) 705 para 9 tells us that they must disclaim their opinion. Given we are talking about a balance that makes up the majority of the balance sheet there is a good argument here that this issue is material and pervasive. If there are no options that the audit team can explore to gain enough evidence to form an opinion on this balance, a disclaimer of opinion would seem appropriate. 

That said, as auditors, there are a few other matters here that also merit consideration.

As detailed in ISA (UK) 210 paragraphs 6 and 7, if the auditor knew this area of the balance sheet was going to be difficult to support when they took on the engagement, there could be a challenge here that they didn’t meet the preconditions for audit. If the limitation of scope was imposed by management or those charged with governance in the initial terms then the auditor should not have accepted the engagement, knowing this would lead to a disclaimed opinion. Typically this would be considered and documented during the planning phase of the audit, but it is worth revisiting this area to identify if any issues were overlooked and whether there are any lessons to be learned. There could be a quality management issue here and root cause analysis may help the auditor to establish the issues that should be considered and addressed.

Equally, if this limitation of scope has subsequently been imposed by management, then the auditor needs to look to ISA (UK) 705 para 11-14 because it may not be appropriate for them to continue as auditor and they may need to resign rather than issuing a disclaimer of opinion. 

Assuming the issues are not management imposed, the main challenge is then to justify that the auditor is unable to obtain sufficient appropriate audit evidence. The auditor needs to be clear that all reasonable options to verify the equipment have been explored. For example: 

• tracking movements of equipment and the income generated from them to gain some evidence of existence;
• making multiple visits to client sites to verify the equipment in stages;
• visiting a selection of customer sites to verify the equipment;
• using technology to support the verification of equipment by covering multiple sites via video call rather than physical attendance; and
• determining whether service records are sufficiently detailed to provide some evidence of ongoing usage.

As auditors, if the ideal approach to testing is not available, sometimes they can gain sufficient audit evidence by undertaking multiple alternative procedures. 

Key links

Preparing an audit report with a disclaimer of opinion

In the same scenario as question 2, above, if we are satisfied that the limitation of scope is not management imposed, and we have exhausted all reasonable options to gain sufficient appropriate audit evidence over the hire equipment, do we need to undertake audit work on the rest of the areas in the financial statements? We have already established we are going to disclaim so is there really any benefit to carrying out any work on other areas? 

Even though it has been established that a disclaimer of opinion is appropriate, an audit firm would still be expected to carry out its audit work on the rest of the file as planned. 

In preparing the disclaimed audit opinion, the auditors will detail, on the basis of opinion, the reasons they were unable to obtain sufficient appropriate audit evidence, according to ISA (UK) 705 paragraph 24. By completing the rest of the audit work, the team may identify further limitations that would need to be included in the basis of opinion, to give a full view. 

Also, the disclaimer doesn’t mean the auditors are exempted from the requirement to report any other issues identified. For instance, if another matter is identified which is materially misstated, the auditor must still report this in the basis of opinion. If the audit team does not complete the rest of the audit work, they will not have the opportunity to pick up any additional issues that need to be reported in line with ISA (UK) 705 paragraphs 20-27. 

Key links

Preparing an audit report with a disclaimer of opinion