Remote audits: disclose, disclose, disclose
28 July: Alison Kitchen, Chairman of KPMG Australia, says that audit teams are managing the challenges of remote audit admirably. However, key to good audit outcomes will be driving companies for more disclosure of the information used to support their conclusions.
In the end, conducting a successful audit under COVID conditions will largely boil down to achieving good continuity of communication, acquiring meaningful information and encouraging clients to be fulsome in telling readers of their accounts about the judgments they made. This sounds simple, but in recent months achieving these aims has been a tough ask. Auditors’ skills have been stretched every which way in terms of professional judgment, tech-savviness, communication skills, empathy, adherence to processes, regulatory knowledge, and patience. It has not been easy being the trusted advisor of companies feeling the strain of a pandemic.
“Most companies in Australia have a June year end so we are at the pointy end of these issues,” Kitchen comments, who was elected National Chairman in 2017 after a career in audit spanning more than 25 years. “It is not uncommon for some of our clients to have their processing in offshore centres such as the Philippines, Vietnam and India. Typically, we would fly our audit teams to those sites to do controls testing, walk-throughs, have meetings and watch management in their own environments.”
“In this reporting period it wasn’t safe to travel,” she continues. “In fact, it wasn’t possible to travel. We were all working remotely so we weren’t able to do the work in the normal way.”
There has been a raft of new issues to consider: is security being compromised, what are the limits of technology as a communication tool, how much more extensive and detailed do meeting agendas need to be? The list goes on.
“What we found was that if you have teams on both sides of the relationship that enjoyed good continuity and had established a rapport, then it worked OK. There were obviously challenges where there were new teams or change-teams in place,” Kitchen points out.
“Some companies – especially in developing economies – were not able to transfer seamlessly to remote working,” she continues, pointing to connectivity and security issues as well as some cultures not being open to video calls. “But most clients were able to get through it. They reflected that the work was more time-consuming, and they were slightly less confident of the evidence they received. Lack of personal familiarity was, again, an issue.” Nevertheless, she says, despite the odd drawback, video has proved to be a key tool for successful remote auditing.
Perhaps the repercussions of working across different time zones have not been a significant issue until we were all locked in our own environments. Remote working has meant early starts and late endings for many, with all the impacts on people’s personal lives that this implies.
To compensate for the lack of physical presence and all those visual clues that engender trust in a relationship, Kitchen stresses how important it has been to get as interactive as possible, and that has meant video conferencing, possibly doubling the number of calls and multiple corroborations when testing evidence.
“If you think about what good auditors do, they participate in team meetings and watch the interaction between the people in the room, seeing who really knows what they are doing and who is looking to whom for leadership. You lose all of that when you can’t physically go to sites. This will get more challenging as time goes on.”
Many more disclosures
Kitchen points out that when we look back at this COVID reporting period, there will be many more disclosures in annual reports because of the level of uncertainty. “We are in the thick of this and we know that a judgment we made today may be harder to justify in three weeks’ time, let alone when we look back in the following year, so the more you explain in writing the better,” she says. It is, after all, inevitable that some judgments made now will be shown to be inaccurate over time; explanations in the accounts will be intrinsic to understanding in the future the context in which judgments were made in the past.
Focusing on the balance sheet, Kitchen agrees that property valuations are a challenge and unpredictable. “But most long-term non-current assets will continue to be difficult. If you look at goodwill or any other indefinite life intangible assets, you value them based on your expectation of future cashflow,” she says, “and that is so hard to define under prevailing conditions.”
She continues: “None of the base sources of external truth that auditors typically use to test management’s thinking can be relied on at present. Forecasts, even from the most reliable of economic commentators on GDP, unemployment, future commodity prices and other data which are key drivers of valuation models are being regularly updated and fluctuating wildly as the health crisis evolves.”
Companies with seasonal inventory – such as fashion retail – will be a minefield to audit, she says. Even trade debtors, a key component of working capital on the balance sheet, are being monitored, controlled and managed in very different ways by companies making it much harder for auditors to assess the reliability of collection expectations.
The financial services sector is especially hard to audit with IFRS9 coming into play. “Moving to a forward-looking model was done for sound reasons,” says Kitchen. “But this is an extraordinary time full of huge uncertainty. Overlays and adjustments are inevitable – quite the reverse of what the regulators were looking for when they introduced the standard.”
Moreover, everyone is having to update their materiality assessment as profits have shrunk.
On the liability side of the balance sheet, there are yet more challenges. Accounting for the different subsidies and tax holidays is a challenge as the rules are new, evolving and governments are not all clear on how they are going to monitor and enforce compliance. Factoring in your own credit risk is not going to be easy.
When you add up all the challenges outlined above, questions about going concern will be a very common result and again, the answer will be testing management assumptions using those very uncertain sources of data. “Our favourite mantra is disclose, disclose, disclose,” she says.
So will audit inevitably be regarded as an inadequate measure of corporate robustness given the stress audit processes are currently under? Kitchen responds: “There is even more point than usual in having someone independent challenging management, testing their thinking and looking at alternative points of view. Then, when that work is complete, challenging again, on whether how much of that process management has chosen to disclose is balanced. We will have less certain conclusions but the processes we go through to hold management to account are even more important.”
If anything, she says, management is more open to ideas and welcoming of other perspectives in this environment. It is not all bad, and we have learned during this period that constructive relationships are the key to successful remote audits.
Learning from the experiences working remotely, ICAEW’s Audit and Assurance Faculty have drafted a guide to frequently asked questions about remote auditing.