COVID 19: interim reporting and the auditor’s role
Interim reporting by listed companies will be of particular interest in 2020 to a range of stakeholders, including investors and other users of company accounts who want to understand the impact of COVID-19 on business performance and prospects. This guide developed by ICAEW’s Audit and Assurance Faculty is designed to help users to better understand the role of auditors in relation to such interim reports.
An interim financial report comprises a company’s complete or condensed set of financial statements for a period shorter than a full financial year (usually a half year).
The intention of the interim financial report is to provide an update from the company’s last complete set of annual accounts, focusing on new activities, events, and circumstances rather than duplicating information reported previously. It is likely that we will therefore see increased reporting by companies, given that as a result of COVID-19 circumstances may have changed quite significantly since the year-end – and this includes enhanced narrative information, covering the impact of COVID-19 on the business.
What are the requirements for publishing interim financial reports?
Governments, securities regulators, stock exchanges, or accountancy bodies may require certain entities, for example, companies whose debt or equity securities are publicly traded, to prepare and publish interim financial information.
The requirements for publishing interim information vary across jurisdictions, as do the financial reporting and assurance frameworks that are applied in preparing and reporting on it. Interim financial reports do not, therefore, all look the same, and users should exercise caution when seeking to make global comparisons.
In the UK, interim financial reports generally include condensed financial information prepared for the first six months of the financial year. With a few exceptions, companies that are listed on the London Stock Exchange must prepare, and make publicly available, half-yearly financial reports. These must be published within three months of the end of the period (temporarily extended to four months in light of the coronavirus pandemic).
Companies listed on the UK’s AIM market are also required to prepare half-yearly financial reports.
What reporting framework is used?
If a UK company listed on the London Stock Exchange is required to prepare consolidated statutory annual accounts using International Financial Reporting Standards (IFRS), the applicable financial reporting framework will be IAS 34 Interim Financial Reporting.
For other UK companies (including AIM companies), the applicable financial reporting framework will either be IAS 34 (if applying IFRS in the statutory annual accounts) or the UK standard FRS 104 Interim Financial Reporting (if applying FRS 102 or FRS 101 in the statutory annual accounts).
It’s worth noting that neither IAS 34 or FRS 104 require companies to publish interim financial reports or prescribe how frequently, or how soon after the end of an interim period, they should be published.
Interim financial reports and assurance
Auditor involvement with interim financial reports varies across and within jurisdictions – in terms of the extent of involvement and assurance provided and whether the reports are publicly available or not. Some jurisdictions do not require any auditor involvement.
For UK companies, there is no statutory or regulatory requirement for auditors to report on interim financial information. UK companies may, however, engage their independent auditor to perform a review of the interim financial report. This review should be performed in accordance with the UK version of an international standard, the International Standard on Review Engagements 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity (ISRE 2410), issued by the International Auditing and Assurance Standards Board (IAASB).
ISRE 2410 establishes requirements and provides guidance on auditors’ responsibilities when undertaking these engagements, and on the form and content of the auditors’ review report.
The standard is applicable to a review performed by the independent auditor of a company, but not where a company engages someone else to perform a review (in these circumstances practitioners might have regard to ISRE 2400). It is also not applicable where companies engage someone to perform specified procedures in relation to interim reports (referred to as agreed-upon procedures engagements). This type of engagement is very different to a review engagement because the report contains factual findings only, and no assurance conclusion is provided.
What is a review of interim financial information?
Auditors are required to perform certain procedures and, on the basis of these procedures, they conclude whether or not anything has come to their attention to indicate that the interim financial information has not been prepared, in all material respects, in accordance with the financial reporting framework. The conclusion is expressed in the review report in a negative way (ie, nothing has come to the auditors’ attention that causes them to believe that the interim financial information (for the period ended …) is not prepared in all material respects in accordance with the applicable financial reporting framework). The level of assurance it conveys is limited.
What work is performed by auditors in a review?
The work performed in a review consists mainly of making enquiries of management – those with accounting and financial responsibility - and performing analytical and other review procedures, then evaluating the evidence that has been obtained. The work is based on the auditors’ understanding of the company and its environment, which the auditors will have already obtained from the audit of the statutory accounts – and will have updated for the purposes of their review, including considering any significant risks.
As well as procedures performed to update the auditors’ understanding of the entity and its environment, and inquiries of management, auditors also apply analytical procedures to the interim financial information to help identify relationships and individual items that appear to be unusual and that may reflect a material error in the interim financial information. Auditors might compare the interim financial information to the most recent audited accounts or to comparative interim financial information. In light of COVID-19, this may be more challenging for auditors, given that there might be very significant changes to business operations reflected in interim information.
Auditors will assess the validity of evidence obtained with a questioning mind and be alert to evidence that contradicts or brings into question the reliability of documents or representations by management of the entity.
Auditors will also read the interim financial information, and consider whether anything has come to their attention that suggests that the interim information is not prepared, in all material respects, in accordance with the financial reporting framework.
Auditors are not required to perform tests of the accounting records or to corroborate information obtained as part of the review. However, the review may bring significant matters affecting the interim financial information to the auditor’s attention. If the auditors become aware of an issue that makes them question whether a material adjustment should be made, they need to make additional inquiries or perform other procedures to enable them to express a conclusion in the review report.
It seems likely that COVID-19 will impact the extent of auditors’ review work, and companies should be prepared for more rigorous reviews, for example, on estimates and management’s going concern assessment. The nature and extent of the review work required may also be dependent on period end timings, and the extent to which the previous year end audited accounts have taken account of COVID-19.
What inquiries are made of management?
Areas of focus, in light of COVID-19, might include inquiries of management about:
- the effect of changes in the entity’s business activities (for example, in relation to contracts, customers, changes in supply chain and payment terms);
- whether there have been significant changes in internal controls or commitments and contractual obligations;
- the significant assumptions relevant to fair value measurements and other estimates (which is particularly relevant for assessing impairment and understanding their impact on the accounts);
- government support schemes accessed; and
- whether the company has complied with debt covenants.
What work will auditors perform in a review in relation to going concern?
For listed companies, the UK Corporate Governance Code states that directors should report in half-yearly financial statements whether they consider it appropriate to adopt the going concern basis of accounting, and identify any material uncertainties to the company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements.
ISRE 2410 requires the auditor to inquire whether management has changed its assessment of the company’s ability to continue as a going concern. If the auditors identify events or conditions that indicate that the going concern basis of preparation might not be appropriate, they must make inquiries of management as to plans for future actions, their feasibility and whether management believes they will improve the situation. Auditors also consider the adequacy of disclosures and will modify their report if they believe adequate disclosure of information has not been included in the interim financial information.
The standard makes it clear that for reviews of interim financial information auditors would not generally be expected to corroborate the feasibility of these plans or whether the outcome of these plans would improve the situation. However, given the potential impact of COVID-19 on businesses, the going concern assessment is likely to be an area of greater focus for auditors in their reviews of 2020 interim reports.
How does a review conclusion differ to an audit opinion?
Because of the limited work performed, the review does not provide a basis for auditors to express an opinion on whether the interim financial information gives a true and fair view, or is fairly presented and the review cannot be relied on to disclose whether fraud or errors or illegal acts exist. As a result, a lower level of assurance is provided than for an audit.
Why is the term auditor used when it isn’t an audit?
The term auditor is used because the scope of ISRE 2410 is limited to a review of interim financial information performed by the independent auditor of the financial statements of the company.
What is the relationship between ‘emphasis of matter’ paragraphs in review reports and paragraphs in audit reports on ‘key audit matters’ and ‘material uncertainty related to going concern’?
An ‘emphasis of matter’ paragraph may be added to a review report. It does not affect the auditor’s conclusion but highlights a matter that is included in a note to the interim financial information that more extensively discusses the matter, for instance, a material uncertainty relating to an event or condition that may cast significant doubt on the entity’s ability to continue as a going concern.
Where, however, there is a material uncertainty related to going concern in the audited annual accounts, the auditing standard on going concern (ISA 570) requires the audit report to include a separate paragraph headed up ‘material uncertainty related to going concern’.
It is also worth noting that auditing standards (ISA 706) do not permit an emphasis of matter paragraph in the audit report on the annual accounts for an issue that is already included as a ‘key audit matter’. ISRE 2410 has not been updated for this recent amendment to ISA 706 and this inconsistency may mean that an emphasis of matter included in an interim review report might instead be included as a key audit matter in the audit report on the subsequent annual statutory accounts.