COVID-19 has affected the cash flows of many public sector entities. Their ability to earn revenue may have decreased, potentially permanently, and they are implementing cost reduction strategies. This increases the importance of the going concern assessment that management performs and which auditors test. Financial statements may need more disclosure relating to cash flows, assumptions and going concern assessments this year.
What are management’s responsibilities?
Each year, management determines whether the going concern assumption is appropriate in the preparation of financial statements. The wide-ranging impacts of the pandemic will bring increased focus on the assumption that entities will continue to have sufficient cash to operate for the 12 months after financial statements are certified.
This year, it is important to perform the assessment of going concern with increased rigour and timeliness.
The economic and operational impacts of COVID-19 may affect an entity’s current and future cash flows. The cash flow forecasts may be more volatile and more difficult to estimate with a reasonable level of certainty.
Where there are material uncertainties in cash flows, this can affect an entity’s conclusion on its ability to continue as a going concern. Financial reports may need disclosures on the judgements and estimates used to form this conclusion.
This includes reporting on material uncertainty where needed, so readers can understand the magnitude of any potential impacts and likelihood of occurrence. This helps readers to form their own judgement on the fair presentation of the report, and to ensure that the financial reporting is not misleading. Please discuss your own circumstances with your QAO engagement leader.
Management’s assessment may consider the following:
- identifying the business risks and indicators of possible going concern uncertainties (for example, operating losses and the extent of the effect on future revenue, including revenue that may be reliant on easing of travel and other restrictions)
- preparing cash flow forecasts that include a sufficient and possible range of scenarios. This should cover a period of at least 12 months following the date of the auditor’s report
- documenting plans for future actions to mitigate any identified going concern risks and indicators (for example, cost reduction strategies, restructuring and refinancing)
- considering the impact on the going concern assessment of any events that occur after the end of the reporting period until the date of signing the financial statements
- preparing relevant disclosures in financial statements about the nature of possible going concern uncertainties, significant judgements and assumptions made, and the nature of any mitigating factors.
What are auditors’ responsibilities?
Auditors will need to test and conclude on management’s assessment of going concern and whether any material uncertainty exists. To reach their conclusion, auditors will need to obtain sufficient, appropriate audit evidence, which includes:
- evaluating the reliability of the underlying data used in the cash flow forecasts and determining whether the assumptions are supportable. The data will need to be verified to external sources, where possible. Testing includes performing sensitivity analysis on a range of scenarios
- requesting written representations from management
- determining the adequacy of financial statement disclosures and the implications of inadequate disclosures on the auditor’s report
- maintaining regular and effective communication with those charged with governance
- evaluating management’s assessment and the feasibility of its plans for future actions, while exercising professional scepticism.
We will also consider any changes to the auditor’s report, depending on the entity’s nature and circumstances. This may include a paragraph on material uncertainty related to going concern, modifications of the auditor’s opinion and reporting of new key audit matters in response to additional work required.