Effects on auditing financial statements
Standard on Auditing are required to be complied in full even in the present time of pressure under changed timelines. Auditors should carefully assess the situation and prepare appropriate responses to the challenges that Coronavirus causes for companies and their reporting.
Impact of coronavirus on risk assessment of a company
As per SA 315: “Identifying and assessing the risks of material misstatement”, an auditor is required to assess risk of material misstatement. Post pandemic the auditor is required to look in if the risk assessment is required to be reassessed. As the current situation is very challenging, it poses many new significant risks like company’s liquidity so the auditor is required to constantly reconsider the impact. Further guidance can be found in SA 315.
Obtaining audit evidence
In the present scenario where companies are working from home and physical meetings are not held, the auditor should encourage use of technology, both client and staff for hosting virtual meetings and sharing data. Auditors should consider how to gather sufficient and appropriate audit evidence. For this, auditors may need to shed the traditional approach and develop alternative procedures to obtain audit evidences.
SA 500 “Audit Evidence” provides further guidance.
Impact on Assessing Going Concern
The foremost challenge arises due to coronavirus is the uncertainty about the economy. This poses great threat to the ability of the company to continue as going concern. Hereby now correct assessment of going concern as per “SA 570 Going Concern” is very important.
For example, management’s assessment of going concern may need to include:
- Preparing updated forecasts taking into account the new threats and possible outcomes.
- Changing management’s plans for future actions
- Expanding disclosures
The impact of the company’s future prospects on the auditor’s report:
The auditor should ascertain the problems faced by management in preparing future projections, taking into account the high level of uncertain situations. Because, such projections could change significantly in a short span of time. It isimportant for the auditor to use professional judgement and scepticism. Refer SA 560 “Subsequent events” for further guidance.
- Calculating impairment losses on (plant & machinery, investments, goodwill from acquisitions,intangible assets as the future cash inflow from assets may have changed significantly
- Valuation of inventory as the realisable value of their inventory may have reduced significantly
- Booking of provision of doubtful debts as per expected credit loss.
Consider the adequacy of management’s disclosures about coronavirus’ impact
The auditor is required to ensure that management’s appropriately discloses the company’s future prospects and impact on its stakeholders. Auditors need to also consider their responsibilities in relation to other information presented by management with the financial statements. This is covered in SA 720: “The auditor’s responsibilities related to other information”.
Impact on the auditor’s report
The potential implications for the auditor’s report may include:
- A Key Audit Matter (KAM) para may be required to be reported related to additional audit work needed because of the coronavirus outbreak. For example, to describe the approach for group audit, explain there is no material uncertainty or no going concern uncertainty.
- An ‘emphasis of matter’ paragraph, for example to highlight a significant subsequent event disclosed in the financial statements, or a significant uncertainty arising from the outbreak.
- A material uncertainty in relation to a going concern paragraph.
- A qualification, or adverse opinion, for example in respect of inadequate disclosures, or going concern uncertainties, in the financial statements.
- A qualified opinion, or a disclaimer of opinion, because of scope limitation when unable to obtain sufficient appropriate audit evidence. For instance, when stocktakes could not be attended in person.
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CA Aman Aggarwal
AKGVG & Associates