Conducting robust testing in audit procedures for impairment involves deconstructing the models, assumptions, and data used by management.
Findings were raised for 6 of the 7 largest UK audit firms to address relating to impairment with the FRC’s audit inspection reports. This demonstrates how consistently complex it is to audit this significantly judgemental area.
Impairment assessments are a feature of audits of all sizes. All audit firms can glean valuable insights from these inspection results. They can, and should, take the best practices discussed here to improve quality.
Auditors must thoroughly consider impairment indicators through detailed searches and evaluating the results of other testing. Challenging the appropriateness of revenue and EBTIDA multiples and the reasonableness of forecasts is an important part of testing impairment.
Evidence is key. Look-back tests can provide perspective on the prior accuracy of management judgements. Ensure you are unpicking the various layers of impairment assessments to audit the different elements as well as assessing impairment at a macro level.
Determining Cash Generating Units (CGUs) precedes detailed goodwill impairment evaluation. Essential procedures include challenging management’s CGU
determination as well as the cash flow forecasts and sales assumptions at a CGU level.
Future growth rates are impossible to conclusively evidence, but short-term growth should more strongly correlate to recent results. Sensitivity analysis and look-back procedures allow auditors to critically review the overall goodwill assessment and the assumptions within.
Incorporate challenge of management in all areas of the audit of goodwill impairment assessments.
The recoverability of assets such as receivables may be heavily impacted by external events. The cashflow impact must be incorporated in impairment modelling. When auditing illiquid investments, it is important to involve experts to develop independent models to assess management’s models.
Ensure your overall engagement team has the appropriate skills to audit impairment assessments.
Complexities auditing impairment are common and all audit firms should be targeting quality improvements in this area. Tackling this area as early in the audit process as possible provides additional time to assess the models used, challenge management’s assumptions, and validate the accuracy of data and inputs to supporting evidence.
The various impairment takeaways to support your firm’s methodology improvements, or your next impairment audit test, are available in our detailed guide. Quick reference cheat-sheets to help you implement these tips quickly and easily are included. Find these 21 tips for auditing estimates in the free guide – a sample of impairment tips is included below.
General Impairment Assessments
Going Concern and Viability Assessments
Other Impairment Areas