Going concern, audit evidence and accounting estimates are just some of the key issues auditors around the world are responding to during the Covid-19 crisis, ACCA report finds
Based on the practical experiences shared by members of ACCA’s Global Forum on Audit and Assurance, the report shines a light on a number of areas that auditors are required to focus on during these challenging times.
Primarily aimed at those audit firms that are carrying out their work for organisations with March 2020 and June 2020 year ends, the report will also be instructive for those with December 2019 year ends and those that have taken advantage of the additional time granted by regulatory authorities around the world to file audited financial statements.
The report identifies eight major areas that where auditors need to consider, or reconsider, how their work has been or will be affected by the pandemic. These are:
- Identifying and assessing risks of material misstatement
- Auditor’s responses to assessed risks
- Audit evidence
- Auditing accounting estimates
- Subsequent events
- Going concern
- Modifications to the audit report opinion
- Emphasis of matter paragraph in the auditor’s report
The report also acknowledges that the auditing profession was already some way down the road to embracing digitally transformative audit processes ahead of the Covid-19 crisis, so that it has been able to adapt when face-to-face meetings and audit inspections were ruled out due to the spread of the virus.
The report therefore 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 crisis.
Areas highlighted by the report include:
- ISA 315 (Revised), Identifying and Assessing the Risks of Material Misstatement Through Understanding the Business and its Environment: for audits which are underway 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 necessitate auditors to consider if the design and implementation of their responses to the identified risks is still relevant or whether they need 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 to their audit opinion.
- ISA 540 (Revised), Auditing Accounting Estimates and Related Disclosures: uncertainty in light of Covid-19 creates challenges for management, and auditors are reminded that 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 of accounting in the preparation of the financial statements.
- ISA 705 (Revised), Modifications to the Opinion on the Independent Auditor’s Report: the uncertainty caused by Covid-19 and particularly 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 cause many auditors having to include an emphasis of matter or other matter paragraph in their report highlighting on the uncertainty caused by Covid-19.
The report looks in detail at each of these situations, offering guidance and links to helpful resources. 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 that are available to the very largest practices.