Key challenges for audit during the coronavirus crisis
This article was first published in the July/August 2020 UK edition of Accounting and Business magazine.
Based on practical experiences shared by members of ACCA’s Global Forum for Audit and Assurance, a new report, The impact of Covid-19 on audit and assurance: Challenges and considerations, shines a light on a number of areas that auditors are required to focus on during these challenging times.
Antonis Diolas, ACCA’s head of audit and assurance, says: ‘Audit hasn’t stopped because of Covid-19 – auditors are still providing their services. But we need to focus on what the practical challenges are, and what needs to be considered when dealing with them.’
Diolas acknowledges that the auditing profession has already travelled some way down the road to embracing digitally transformative processes ahead of the Covid-19 crisis. As a result, auditors around the world have been able to adapt their processes effectively when face-to-face meetings and audit inspections are ruled out under various lockdown requirements.
‘A non-face-to-face environment showcases that audit can be carried out if both sides are working towards the same goal,’ Diolas says.
The report identifies eight major areas where auditors need to consider, or reconsider, how their work has been or will be affected by the pandemic. The areas are:
- identifying and assessing risks of material misstatement
- auditor’s response to assessed risks
- audit evidence
- auditing accounting estimates
- subsequent events
- going concern
- modifications to the audit report opinion
- emphases of matter in the audit report.
The ACCA report brings together responses from regulators and audit and accounting standard-setting bodies, such as the International Auditing and Assurance Standards Board (IAASB), with guidance on how particular standards should be applied during the coronavirus crisis.
Audit evidence will be high up on any auditor’s list of concerns as they work on March and June financial year-ends, as well as any interim reports they may be asked to carry out.
‘This is the key consideration and challenge, and can take various forms,’ says Diolas. ‘Stocktakes will be more challenging, and auditors may not be able to physically observe the process. Everything will need to be accessed remotely and electronically – some audited entities will be able to cope with this, but others might not.’
Accounting standards of particular relevance to the crisis that are highlighted by the report include:
- ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment. For audits that are under way relating to periods that end after 31 December 2019, the impact of Covid-19 is likely to require the auditor to revisit their risk assessment and the proposed response to identified risks. At the same time, the pandemic is likely to be a ‘triggering’ event, requiring more frequent impairment testing and greater scepticism.
- ISA 330, The Auditor’s Responses to Assessed Risks. Covid-19 in many cases will require auditors to consider if the design and implementation of their responses to the identified risks is still relevant or needs to be revised.
- ISA 500, Audit Evidence. Where it is not possible to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by performing alternative audit procedures, auditors will need to consider the implications for their audit opinion.
- ISA 540 (Revised), Auditing Accounting Estimates and Related Disclosures. Uncertainty in the light of Covid-19 creates challenges for management, and auditors are reminded they should remain sceptical when assessing management’s judgments.
- ISA 560, Subsequent Events. The Covid-19 outbreak was treated as a non-adjusting post-balance sheet event by most entities with December 2019 year-ends, but there is more doubt about whether for January or February reporting dates the consequences are adjusting or non-adjusting events.
- ISA 570 (Revised), Going Concern. Going concern is probably the most challenging area for both management and auditors because of the uncertainty caused by Covid-19. It is management’s responsibility to assess whether the going concern basis for accounting is appropriate, and for auditors to obtain sufficient appropriate audit evidence and conclude on the appropriateness of management’s use of the going concern basis.
- ISA 705 (Revised), Modifications to the Opinion on the Independent Auditor’s Report. The uncertainty caused by Covid-19 and the challenges that auditors are currently facing in obtaining sufficient appropriate audit evidence could result in modifications to the auditor’s opinion.
- ISA 706 (Revised), Emphasis of Matter Paragraph and Other Matter Paragraphs in the Independent Auditor’s Report. The uncertainty caused by Covid-19 is likely to result in many auditors having to include an emphasis of matter or other matter paragraph in their report highlighting the uncertainty caused by Covid-19.
The ACCA report looks in detail at each of these situations, offering guidance and links to helpful resources.
The auditor’s opinion report will be an area of particular scrutiny. While auditors will not want to give qualified opinions ‘just to be on the safe side’, there will be some issues, such as opinions on going concern or the impracticability of observing stock counts, that will create difficulties for auditors. Diolas expects to see more emphasis of matter statements in the auditor’s opinion, in much the same way as during the financial crisis in the last decade.
While the report will be of use to all auditors, it will be of particular interest to small and medium-sized practices that may not have the depth of resources available to the very largest practices. But, as Diolas points out, they will need to carry out the audit work all the same.
Philip Smith, journalist