AUDIT IN TIMES OF PANDEMIC

Ever since the world has been hit by Pandemic called COVID 19, the entire Industry, Financial Institutions, Banks et al have been thrown into complete quandary. The economy of the country has come to a grinding halt, result of which caused huge number of defaults by customers in meeting their financial commitments, job losses, companies closing down their shutters etc. 

The Covid 19 crisis is a black swan event that pushes companies into unknown territories. Companies uncover unforeseen risks & are uncomfortable with the changing landscape. Faced with a unique situation of total lockdown, companies as well as their auditors need to be flexible & creative to manage the crisis. The purpose of this article is to discuss the challenges that Auditors around the world are currently facing & to make recommendations to respond/overcome such issues.

As we navigate the impact of COVID-19, the auditor’s role as protector of the capital markets has never been more important. Just as clients are scrambling to secure needed funding and managing remote workforces, auditors are also facing challenges that many have never experienced.

Following are the areas/challenges; one may require looking at as an Auditor in the coming days:

Performing Work from Home/Own Office/ Conducting Remote Audit: 

For many auditors, conducting “field work” from home/ own office is a novel concept. Some have even questioned whether professional standards permit conducting audit work, away from their client site.

While the standards address what evidence an auditor needs to obtain, they don’t generally dictate how & from where these requirements needs to be gathered. When auditing remotely, one need’s to make sure one has the right technological infrastructure in place and that their staff members have been adequately trained in performing digital audit. Nowadays most of our clients maintain digital records. Hence if the client is amenable to hand over such records – strict norms need to be developed & put in place to ensure that such data is not compromised. On the other hand, if the client has its records maintained in Books & Paper – then a plan needs to be formulated by which such books/files are accessed by the auditor & his team & ensuring they are properly authenticated.

Going Concern Considerations:

The COVID-19 pandemic has caused the financial position of many organizations to deteriorate. For clients in certain industries (e.g., restaurants, hospitality, tourism etc) and in certain geographical areas, the entity’s ability to continue as a going concern may be called into question.

Start by assessing whether there are events or conditions, arising due to pandemic, which raises substantial doubt that the entity can continue as a going concern. Management is also required to evaluate the entity’s ability to continue as one. 

When such substantial doubts or conditions exist or are identified, the auditor should consider Management’s plan to alleviate such doubt. The Auditor should then carry out the following:

• If management’s plan alleviates such substantial doubt, an unqualified opinion may be issued.
• If the going concern basis of accounting is appropriate but substantial doubt remains, an insertion in the emphasis-of-matter paragraph should be made to that effect.
• If the going concern basis of accounting is not appropriate, an adverse/ qualified opinion should be issued.

Emphasis of Matter Paragraph:

Even if the Auditor is satisfied about an Entity’s ability to continue as a Going Concern – he may still insist on the inclusion of a paragraph on Emphasis of Matter.

As per SA 706(Revised), the term “Emphasis of Matter Paragraph” is defined as – A paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgement, is of such importance that it is fundamental to the user’s understanding of the financial statements.

In determining whether COVID-19 related disclosures meets the above mentioned definition for a given client,  the auditor should consider the circumstances of that particular client and exercise their professional judgment.

An EOM Paragraph is a way to draw attention/ highlight such disclosures to users of the financial statements, when the auditor considers it as a fundamental requirement for their understanding.

Planning – Risk Identification & Assessment:

The auditor’s understanding of the entity and its environment has most likely changed from previous periods due to the implications of Covid-19. There may be changes to the entity’s objectives, strategy, organizational structure, governance arrangements and business model and it is important that the auditor considers how these changes impact the audit. Changes may also be needed if the auditor has already completed planning and risk assessment before the onset of the Covid-19 pandemic and may also be necessary during the audit as the environment continues to evolve. Examples of risks increasing the susceptibility to risks of material misstatement that may be heightened in the current environment include:

• Inappropriate objectives or ineffective execution of strategies
• A failure to recognize the need for change or lack of expertise to deal with the changes
• Reduction or expansion of the business and demand has not been accurately estimated or appropriate due diligence undertaken on new products or services
• Loss of financing due to entity’s inability to meet requirements
• Regulatory requirements resulting in increased legal exposure
• Incentives and pressures on management, which may result in intentional or unintentional management bias
• Increased risks of fraud

Auditors should discuss with management as to how they have assessed the impact of Covid-19 on the business and evaluate whether there are new or changed risks that could be material. 

Key Audit Matters (KAM):

The impact of Covid 19 on the specific areas of the financial statements needs to be evaluated for the purpose of reporting in KAM. It should be noted that the auditor is not performing procedures to assess the impact of Covid 19, rather the procedures are being performed in respect of specific items of financial statements or assumptions.( viz. Going concern, impairment, expected credit loss, valuation etc). Hence that particular item/assumption would qualify to be a KAM, where the criteria set out in SA 701 are met.

Scope Limitations:

As auditors work with clients throughout the pandemic, there is a real possibility that limitations in audit scope will occur. For example, confirmations that are a key source of evidence may not be returned and alternative procedures may not be considered sufficient, or it may not be possible to evaluate the design and implementation of relevant controls at the client.

When assessing the impact of such scope limitations mentioned above, auditors should focus on whether they are material and ubiquitous. “Ubiquitous” effects are those that, in the auditor’s judgment, meet one or more of the following criteria:

• Are not confined to specific elements, accounts, or items of the financial statements.
• If they are confined, represent or could represent a substantial proportion of the financial statements.
• With regard to disclosures, are fundamental to the users’ understanding of the financial statements.

Scope limitations that are material but are not ubiquitous to the financial statements result in a qualified opinion, while scope limitations that are both material and ubiquitous result in a disclaimer of opinion.

Obtaining Audit Evidence:

Covid-19 has resulted in many challenges for auditors in obtaining sufficient appropriate audit evidence. For example, travel restrictions may have impacted physical access (e.g. attending inventory counts), the ability to obtain original documents (e.g. inspection of records for evidence of authorization as a test of controls) and availability of client staff.

If the auditor cannot obtain evidence in the way that the evidence was obtained before, consideration should be given to alternative procedures. When the auditor is unable to obtain sufficient appropriate audit evidence that is necessary for the auditor to be able to conclude, consideration will need to be given to the impact on the auditor’s report, including whether a qualified opinion is needed.

Auditors will need to exercise professional scepticism about the evidence obtained electronically and may need to design other audit procedures in order to test the reliability of electronic evidence in the absence of the original physical source document, as well as considering the controls over the process from which the electronic evidence was produced.

Other Information:

Other Information that accompanies with the Entity’s Annual Report might include the discussions on the risks associated with the Covid 19 pandemic that will provide the entity’s perspectives, not captured in the financial statements.

Whilst going through the Other Information, the auditor should thoroughly go through the information provided with regard to the impact of Covid 19 on entity’s operations & should ensure that there exists no new information that may affect the financial statements or the Auditor’s report.

Acknowledgement:

Key Audit Considerations amidst COVID 19 – issued by Auditing & Assurance Standards Boards (AASB) – The Institute of Chartered Accountants of India.