2020/21 Reporting Season: Brexit - where are the risks for auditors?
17 December 2020: Understanding Brexit risk factors is now particularly important given the additional risk of COVID. Entities and auditors will need to analyse and understand the combined impact of these two events.
Guidance based on ISA 315 ‘Understanding the entity and its environment’ has now been published by the Audit and Assurance Faculty. ISA 315 requires auditors to undertake a risk assessment. This process will be key to understanding the risks posed by Brexit and COVID in particular.
Audit teams need to consider the potential areas of risk from Brexit, how significant the threat of material misstatement associated with these risks is, whether there any risks exacerbated by the dual impact of Brexit and COVID, and what audit procedures therefore should be performed.
Potential risk factors could relate to the industry in which an entity operates, risks associated with the entity itself, uncertainties related to estimates and forecasts, as well as many other practical areas of risk.
Industry risk could relate to supply chains, labour issues or delays – although some entities will benefit from their changed circumstances. Entity specific risk factors arise from the changes in the economic and business environment given Brexit and COVID. Among many other things, auditors will need to consider the potential impact on the financial statements of potential risk factors.
Of course, estimates and forecasts are inherently uncertain at the best of times. Combined with the impact of Brexit and COVID, there is likely to be increased risk in estimates and forecast accuracy, especially in relation to: asset impairments; going concern; fair value calculations; loss provisions in contract accounting; and the recovery of deferred tax assets.
Brexit may also result in more practical audit risks. While the FRC noted in its letter to auditors that it does not anticipate significant issues for group audits involving a UK parent company and EEA subsidiaries, it encourages auditors to take steps to ensure access to files and working papers is maintained. Finally, be aware that auditors working in the EU may be impacted by registration requirements following the end of the transition period.
Wellbeing in the 2020/21 reporting season
With the 2020/21 reporting season likely to be difficult for many, ICAEW reminds members of the resources available to them and their families from CABA.
The Audit and Assurance Faculty are sharing their webinar on maintaining wellbeing during audit busy season broadcast on 11 January 2021. Watch the recording.