COVID-19: the impact on key areas of audit
14 April 2020: ICAEW’s Audit and Assurance Faculty ran a webinar outlining how auditors should factor the impact of the COVID-19 pandemic into their work. Julia Penny outlines some of the main takeaways.
This webinar, which originally aired on 2 April 2020, sets out some of the key areas that auditors need to consider because of the lockdown policies currently being applied in the UK and globally. You can watch the full webinar and refer to further resources on the ICAEW Coronavirus hub.
The main areas that auditors will need to consider afresh amid this pandemic and the related disruption it is causing are in relation to the following:
- Gathering audit evidence, including attendance at stocktakes
- Accounting for subsequent events
- Valuations
- Risk assessments
- Group audits and how to deal with components
- Company reporting deadlines
Gathering evidence
Many audit systems can already be accessed remotely, but without being able to attend your, or your client’s, offices new ways of working need to be established. The webinar looks at options available and assesses their value.
Stocktake attendance presents a problem and while you should consider whether there are ways to get evidence, such as remote attendance with a video call, you may find this isn’t possible. If you can’t obtain sufficient, appropriate audit evidence, then a modification to the audit report will be needed and this may cause an issue with bank covenants.
Accounting for subsequent events
Companies whose year-end was 31 December 2019 will find that issues relating to Covid19 are usually non-adjusting events. This means disclosures will be needed about any material impact of the pandemic, but the figures as at the year-end are not affected, unless the company is no longer a going concern. For March year-ends adjustments will need to be made, and even in January and February events may be adjusting depending on situation.
Valuations
Many valuations could become difficult either because active markets may no longer exist, or experts are unable to undertake their work or might caveat their findings due to the many uncertainties. Auditors should look carefully at any valuations to consider whether they are reliable enough. There could also be huge difficulties in carrying out impairment reviews which require forecasts, such as for goodwill.
Risk assessments
These will change dramatically from previous years and if prepared even a few weeks ago will need a thorough update to remain applicable.
Group audits
Travel to component auditors to review working papers will generally not be possible, so you will need to consider alternative routes to obtaining the evidence, or modifying the audit report.
Company reporting and filing dates
Companies may ask for an extension to their filing deadlines if they don’t think they can report on time. Private companies request this three-month extension through Companies House. For most listed companies a two-month extension is available. A company could also consider lengthening its year-end to allow more time to judge the impact and prepare accounts.
Stress testing and going concern
One of the prime considerations will be going concern and the auditor may want to see “reverse” stress testing. Here the company looks at how many months it could survive with no income, for instance, to help judge its viability.
Audit reports
In these unprecedented times it is highly likely that, in some situations, auditors may need to issue a disclaimer due to the inability to gather sufficient, appropriate audit evidence. However, this should never be a default and auditors should work to obtain the necessary evidence to form an opinion.
Julia Penny FCA, is principal of JS Penny Consulting. All views expressed in this article are those of the author in a personal capacity