2020: will audit ever be the same again?

17 July: Widespread changes in audit practices driven by COVID-19 have accelerated trends already underway in the market. This means that 2020 audits – and many audits in future years – will be different to those performed in the past, writes ICAEW Audit & Assurance Faculty’s Nigel Sleigh-Johnson.

When people think about who has been busy during lockdown, accountants are not likely to be the first to come to mind. But the onset of the pandemic meant that accountancy firms of all sizes were very busy. They faced a tsunami of calls from businesses and other organisations needing advice on furlough, the job retention scheme and so on, while at the same time managing the migration of their own staff to home working and completing December 2019 audits. 

Since then, they have turned their hands to 31 March and 30 June period ends, with advice and guidance on reporting and auditing in the wake of coronavirus coming thick and fast. Armed with what they have learned, larger audit firms are now starting to gear up for the audit of major companies with December 2020 year ends. 

Audit, in particular, is unlikely to be the same again. While much of the technology that has facilitated remote auditing is not new, what is new is the extent of its use. And importantly, COVID-19 has resulted in wider changes to auditing that are significant to plans for audit reform. 

Among ICAEW's five goals for audit reform is a more reliable core audit, with a renewed focus on internal controls, going concern/viability and fraudulent financial reporting. Going concern and viability will continue to be key focus areas, not just for audits of 2019 and 2020 year-ends, but for all audits. New FRC guidance requires more of auditors, and many of this year's corporate reports and audit reports will make specific references to going concern issues that have not been made before. 

As we move forward with audit reform, more light will inevitably be shed on these issues in both corporate reports and audit reports. As with remote auditing, much of this would have happened anyway. COVID-19 will just accelerate change, and that may be a good thing. 

COVID-19 could be an opportunity for some reporting entities to bury bad news. 'Big bath' or 'kitchen sink' provisions will be a temptation for some companies this year, and audit firms will be aware, now more than ever, of the need not only to exercise professional scepticism but to demonstrate that they have done so.

The risk assessment undertaken for 2020 audits is going to be different. For many audits, COVID-19 may mean that there are two, possibly three periods to be considered, marked by changes to systems and controls which the risk assessment will need to accommodate. To some degree at least, the business and financial reporting risks faced by companies will be of a different nature and order, and the audit itself is subject to new risks arising from the move to remote working by auditors. 

One aspect of this that deserves wider appreciation is the work on internal controls required of auditors under auditing standards. Internal controls, including the control environment and the tone at the top, are important. They stand between financial statements that give a true and fair view and those that don't. They are the first line of defence against fraudulent financial reporting and, arguably, corporate failure. They are not foolproof, but it is questionable whether true and fair financial statements can be prepared without them. 

This year, auditors will be looking hard at these controls, from tone at the top to the most detailed IT control procedures. Firstly, they will be looking at what happened to controls as companies went into lockdown. Auditors will need to consider how companies assessed, evaluated and managed the risks associated with staff working at home and doing many other things differently. They will then look at the same process in reverse, as we come out of lockdown. This work is governed by ISA 315 on risk assessment, which has recently been revised. When it comes into force, it will have a much sharper focus on internal controls than the extant standard, and I think it will stand us in good stead as we move forward with the audit reform agenda. 

ICAEW has a dedicated hub on audit-related COVID-19 issues. A new FAQ guide on remote auditing and COVID-19 prepared by the Audit and Assurance Faculty has just been added to the hub. The Audit and Assurance Faculty has also prepared a more comprehensive guide on remote auditing in practice which is available to faculty members and is also available for purchase.