A draft revision of Japan's auditing standards would require auditors to test whether a company can keep operating for at least one year after its financial statements are approved for publication, not from the balance-sheet date. The Business Accounting Council's audit subcommittee prepared the draft, which is among the materials for its 57th meeting, scheduled for October 2.
A longer look-ahead
The draft says current audit practice treats the reasonable period an auditor should examine as at least one year from the settlement date. It would move the start of that year to the approval date for publication. The draft's stated reason is that assessing later events and conditions makes audited statements more useful for decisions, and that the change matches the revised international auditing standards.
The draft also says some accounting frameworks may not use the term "approval date for publication". Where the applicable framework defines it, that definition applies. Where it does not, the auditor decides. Separately, the Accounting Standards Board of Japan is developing a going-concern accounting standard that would cover management's assessment and disclosure and is considering an assessment period running to one year after the approval date.
A going-concern section even without doubt
Under the current standard, an auditor issuing an unqualified opinion must describe going-concern matters in the audit report only where a material uncertainty exists. The draft keeps that requirement and adds a separate section for the case where no material uncertainty is found.
For audits of listed companies and similar entities, the draft says it is appropriate to follow the international standard: where management made significant judgments in concluding there is no material uncertainty, the report should explain how the auditor examined management's assessment. The draft says that explanation should carry information specific to the audit.
| Item | Current | Draft proposal |
|---|---|---|
| Audit look-ahead period | Practice: at least one year from the settlement date | At least one year after the approval date for publication of the financial statements |
| Report section, material uncertainty found | Separate section required with an unqualified opinion | Requirement unchanged |
| Report section, no material uncertainty | No separate section required | Separate section on going concern; auditor examines management's assessment first |
| Fraud | Fraud risk response standard in place | No change to audit standards; details left to practical guidance |
| Start date | Not applicable | Audits of financial statements for fiscal years ending March 2028 |
Fraud rules stay put
The draft proposes no change to the audit standards or to the fraud risk response standard, in force since audits of fiscal years ended March 2014. It says Japan's rules already contain the responses introduced in the revised international fraud standard. Procedures for suspected fraud, and headings that mark fraud-related key audit matters when they are reported, are left to practical guidance from the Japanese Institute of Certified Public Accountants.
Timing and open points
The revised standard would apply from audits of financial statements for fiscal years ending March 2028, and the draft says related laws and regulations should be adjusted. It asks the institute to produce the practical guidance promptly. The draft's date is left blank and it states that the council is publishing it to seek views from a wide range of parties. It gives no comment deadline.
One member who will miss the October 2 meeting submitted a written opinion. The member argues that the draft's preface should press the accounting standards board for a standard that requires management to assess and disclose going concern in line with international norms. The member also says the revised international fraud standard does not make fraud-related key audit matters mandatory across the board. The meeting is scheduled for 10:00 to 12:00 on October 2 and will be streamed on the FSA's YouTube channel.