Covid-19 challenges for audit
The Covid-19 pandemic continues to have a significant impact on entities as well as their auditors. Both entities and their auditors have had to rapidly adjust in response to the restrictions on movement and travel. This has resulted in major changes to how business is and audits are carried out. The changes have happened in a way which meant that entities and their auditors have been unable to plan and put arrangements in place. The situation continues to evolve rapidly and the future impact on businesses is highly uncertain. All of this may impact both on an entity’s ability to prepare their financial statements and on their auditor’s ability to obtain sufficient appropriate audit evidence.
IAASA has created a Covid-19 hub, which shares relevant publications from various regulatory bodies. IAASA continually engages with auditors of public-interest entities and recognised accountancy bodies to understand the difficulties which are arising.
Auditor judgement is critical in this altered working environment. The exercise of professional scepticism is equally critical for the auditor in forming their view on an entity’s financial statements.
The requirements of the auditing standards continue to apply. Auditors are required to obtain sufficient appropriate audit evidence to form an opinion on the financial statements. Auditors will need to assess whether sufficient appropriate evidence can be obtained in the current environment. The nature of audit evidence and mechanism of obtaining it may differ substantially from approaches taken in the past. Some procedures previously performed will no longer be feasible or practical to perform. Situations may arise where it is simply not possible to perform certain audit procedures. In those instances, auditors will be required to assess the impact of this on the opinion in the auditor’s report. This note sets out some examples of challenges that entities and their auditors might face during the audit process.
Examples of challenges faced by entities and their auditors
The following list gives examples of some audit procedures which could be more difficult in this current environment. The list is not intended to be an exhaustive list of matters to be considered by auditors as a result of Covid-19.
Revisions to planned procedures – for many audits that are ongoing or commencing imminently, auditors will have carried out their planning procedures prior to the emergence of the Covid-19 pandemic. The planned procedures may no longer be practicable in the current environment and alternative procedures may need to be planned and performed.
Future uncertainty – there is significant uncertainty around the medium to long term impact of Covid-19. Economic forecasts are continually changing, government supports for businesses are evolving and valuation reports for assets held by entities may have material uncertainties and/or disclaimers regarding the impact of Covid-19. These uncertainties give rise to difficulties in obtaining sufficient appropriate audit evidence in many areas, particularly valuations and going concern and auditors will need to consider the impact of these uncertainties on the opinion in the auditor’s report.
Group audits – travel restrictions may result in auditors being unable to carry out planned visits to component auditors. Auditors will need to consider whether they can adequately review the work of the component auditors.
Subsequent events – auditors need to consider whether events up to the date of the auditor’s report have any impact on the financial statements. The rapidly evolving nature of Covid-19 means that auditors may need to carry out additional procedures to assess the impact of Covid-19 at short notice near the planned reporting date.
Control environments – entities’ control environments may be operating differently than expected or planned as a result of Covid-19 and could result in an increased risk of fraud. Auditors may need to consider whether they can rely on the control environment to the extent planned and may need to perform additional procedures.
Inventory counts – restrictions on movement may impact on plans to attend inventory counts, auditors may need to perform additional procedures or consider the impact of the inability to attend an inventory count on the opinion in the auditor’s report.
Confirmation call back procedures – given that many business premises are closed with employees working from home, call back procedures may not be possible. Auditors will need to consider whether alternative procedures can be performed to verify the confirmation source or to confirm the existence of the asset or liability.
Successor auditor access to work papers – as many auditor premises are closed with employees working from home, the usual practice of providing access to work papers may be impacted. Incoming auditors will need to engage with the outgoing auditors to determine what is possible and consider whether alternative procedures may be required to gather assurance over opening balances.
Audit reporting and communication
Auditors may need ongoing engagement with those charged with governance or management to discuss the impact of Covid-19 on the entity’s business and on the audit.
Auditors will need to consider the impact of Covid-19 on the auditor’s report and the opinion within the auditor’s report. For example, if the auditor judges that a matter is of such importance that it is fundamental to a user’s understanding of the financial statements, they are required to include an emphasis of matter in their audit report. Where an auditor is unable to obtain sufficient appropriate audit evidence or concludes that the financial statements as a whole are not free from material misstatement, then the auditor shall modify the opinion. The modification may take the form of a qualified opinion, adverse opinion or disclaimer of opinion. There may be situations where such modifications are unavoidable due to the challenges emerging as a result of the Covid-19 pandemic. Entities will need to consider whether this impacts on relationships with any other stakeholders and engage with those stakeholders as early as possible.