Covid 19 – Impact for audits


Covid-19 has had wide ranging impacts on the world. So far as the going concern concept for financial statement and in particular the audits thereof are concerned however, nothing has changed. The auditor continues to be bound by the same rules as they were before the outbreak a point which has been reinforced by the Audit Regulators and the ICAEW.

What has changed however is the level of focus and attention that company Directors and management need to give to their future financial expectations in order for auditors to undertake the procedures required by the audit standards. Financial statements are to be prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading or has no realistic alternative but to do so. To make this assessment, companies are, and always have been, required to look forward at least 12 months from the date of signing the accounts. Management often have a reasonably well thought out process of how they will navigate through the coming months and the potential implications on their business of the various uncertainties thrown up by the pandemic.  Now more than ever, this look forward financial planning must include documenting the thought process and specifically the assumptions that underpin it. Furthermore the sensitivity of these assumptions to various changes must be clearly thought through and documented. Management need to expect their Auditor to ask them ‘why do you think the business will be able to trade through the next 12 months’ and should be prepared to answer with granular and well thought through scenarios that stand up to robust review and scrutiny.

It is expected that more companies will disclose “material uncertainties” to going concern in current circumstances. Material uncertainties refers to ‘uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern’. In other words, if boards identify possible events or scenarios that could lead to failure, then these should be disclosed. When identifying such events or scenarios, boards may take account of realistically possible mitigating responses open to them. These assessments are significantly more difficult currently given the uncertainties about the impact of Covid-19. Boards should consider the potential impact of these matters on the company’s specific circumstances, paying attention to their current and potential cash resources, access to existing and new financing facilities, access to government support schemes or other mitigating circumstances. To the extent that there are assumptions and areas of uncertainty within that ‘look forward’ then these need to be assessed and adequately disclosed in the accounts along with the available and planned mitigation.

The impact on an audit opinion comes into play either where such areas of material uncertainty exist and are adequately disclosed, or where the auditor disagrees with the conclusions drawn by or disclosures made by management. Either of these situations would lead to some form of modified audit opinion.

If you need assistance in preparing and documenting future cash flow models to support either going concern considerations for audit purposes or to help secure additional financing, please contact Stephen Garbett, Corporate Finance Director at