IAASB Opens Public Consultation on Revisions to ISA 570 Going Concern

In April 2023, the International Auditing and Assurance Standards Board (IAASB) published ED-570, proposed revisions to ISA 570 Going Concern. The consultation remains open until 24 August 2023 with a final standard expected before December 2024.  

As we have come to expect from ISA revisions of late, the proposals grow ISA 570 from 26 paragraphs to 40, with the application guidance lengthening from 35 to 93 paragraphs. In this article, we take a look at some of the key changes.

Pervasive Changes

Unsurprisingly, and consistent with revisions to other ISAs, the proposals place greater emphasis on professional scepticism and incorporate more consideration of indicators of bias and fraud.

There are also new stand back requirements to consider all audit evidence obtained, including audit evidence that is consistent or inconsistent with other audit evidence, and regardless of whether it appears to corroborate or contradict the assertions in the financial statements.

Definition of Material Uncertainty

The proposals seek to introduce a definition of ‘material uncertainty (relating to going concern)’ into the main body of the standard with the meaning of ‘may cast significant doubt’, a term used within the definition, added into the application material.

These terms are consistent with those used in common financial reporting frameworks.

Risk Assessment

There is much greater linkage with ISA 315 Identifying and Assessing the Risks of Material Misstatement. The requirements for risk assessment in relation to going concern are elevated.

Rather than simply considering whether there are events or conditions that may cast doubt on the entity’s ability to continue as a going concern, the proposals require the design and performance of risk assessment procedures to obtain audit evidence that provides an appropriate basis for the identification of events or conditions relevant to the auditor’s conclusion – a much higher bar.

The application material includes enhanced and modified examples of events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern.

Management’s Assessment of Going Concern

The proposals include more specific requirements to request management to make its assessment of going concern if such an assessment has not yet been performed, and to design and perform audit procedures to evaluate management’s assessment of the entity’s ability to continue as a going concern.

Rather than falling back on the requirements of the applicable financial reporting framework or legal requirements, management’s assessment must extend to at least 12 months from the date of approval of the financial statements and the auditor must request management to extend its assessment if this is not the case.

If management is unwilling to extend its assessment, there are more specific requirements to determine the implications for the audit (not just the auditor’s report).

The revisions require the auditor to evaluate the method, assumptions and data used by management to make its assessment of going concern and strengthen requirements for the auditor to evaluate management’s plans for future actions where conditions that may cast significant doubt on the entity’s ability to continue as a going concern have been identified.

This includes requirements to evaluate whether management has the intent and ability to carry out the specific courses of action, and to evaluate the intent and ability of third parties or related parties to maintain or provide necessary financial support, where applicable.

Those Charged With Governance (TCWG)

The proposals include a new requirement for the auditor to obtain an understanding of how TCWG exercise oversight over management’s assessment of going concern and strengthened communication requirements with TCWG.

Auditor’s Reports

The revisions also propose changes to the wording of the audit report in connection with going concern, requiring positive statements to be included.

What Does This Mean For The UK?

As with all the international versions of the ISAs published by the IAASB, the FRC will review ED-570 and the final revisions made to ISA 570, and will seek to revise the UK version of the standard.

The FRC makes amendments and adds additional requirements, where it considers appropriate – these are colloquially referred to as ‘UK-pluses’ and are shaded in grey on the UK version of the standard. Users of the extant UK version of ISA 570 will be well aware that it contains a significant number of ‘UK-pluses’, so many in fact that it might as well be printed on grey paper!

This might well be useful to UK auditors though, as a number of the changes and additions proposed by ED-570 are already in the extant UK version of the ISA and are requirements we are well versed with.

We already have the definition of material uncertainty relating to going concern, some of the enhanced requirements in connection with risk assessment, some of the requirements in connection with management’s assessment and positive wording relating to going concern in the auditor’s report, for example.

We will, however, have to wait and see what the FRC proposes when it reviews the UK standard.