In many cases, offices of companies and auditors will be closed and obtaining sufficient appropriate evidence will be impossible. There will be different challenges for entities located in Russia and Belarus, where business will be continuing but under sanctions and other restrictions, and accordingly, there will be different impacts on auditing.
This is an overview of the key areas auditors may need to consider.
Overall audit approach
Despite the unusual circumstances, the ISAs (UK) still apply, and auditors must comply with them, while considering how the war impacts their approach.
One such area is the auditor’s risk assessment – taking into account that entities are operating in uncertain conditions. The auditor’s risk assessment will need to reflect changes within the audited entity’s business and operating environment. The situation may also impact on the auditor’s conduct of audit work, when accumulating sufficient appropriate audit evidence (See ISA (UK) 500 Audit Evidence).
Know your client (KYC) and anti-money laundering (AML) checks
Firms, and responsible individuals, are required to gain an understanding of the directors and Ultimate Beneficial Owners (UBO) of entities when taking on a new client. These checks will require further scrutiny, including of checks carried out previously, in case the individuals involved are on the sanction lists – therefore affecting continuance as well as acceptance decisions.
All businesses, organisations, and individuals, including accountants in practice, have an obligation to report information about sanctions breaches to the Office of Financial Sanctions Implementation (OFSI). Reports to the OFSI must be made as soon as practicable if you know or have reasonable cause to suspect that a person is subject to financial sanctions.
Non-compliance with laws and regulation (NOCLAR)
With frequent changes to sanctions and connected restrictions, and steps to reduce reliance on Russian oil and gas supplies, it will often be difficult for management to ensure that they have complied with laws and regulations, let alone articulate how they have complied.
Auditors fulfilling their responsibilities under ISAs with respect to laws and regulations will be auditing and reporting on a fast-changing situation. This may be the case right up to the point of signing the auditor’s report.
See ISA (UK) 250 Section A Consideration of Laws and Regulations in an Audit of Financial Statements and ISA (UK) 700 Forming an Opinion and Reporting on Financial Statements.
Post balance sheet events
For companies with 31 December 2021 year ends, the war in Ukraine would be considered a non-adjusting event, as the conditions did not exist at the end of the reporting period. Auditors will need to ensure that management’s disclosures around any material non-adjusting event, and related estimates of its financial effect, are appropriately disclosed in the notes to the financial statements.
See ISA (UK) 560 Subsequent events.
Impairment of Russian and Belarussian assets
With cash at bank and investment assets frozen by ‘Western’ banks and in some cases tangible assets such as properties and yachts being seized, auditors will need to review management’s assessment of impairment indicators. Other assets that might be impaired include loans or other debtors due from companies in Ukraine, Russia, or Belarus, where there may now be uncertainty over the ability or willingness to repay.
See ISA (UK) 540 Auditing Accounting Estimates and Related Disclosures.
Management of entities affected by the crisis, including those with operations in Ukraine, will need to evaluate the impact on the going concern assessment and revisit this as necessary. The auditor, correspondingly, will need to demonstrate professional scepticism and judgment when auditing going concern, to consider whether management has taken all relevant factors into account. These factors are likely to include:
- financing and funding;
- companies that have put a stop on sales to the Russian market;
- business disruption, including supply chain issues;
- insurance cover of assets;
- currency valuation; and
- investments in Russian entities.
See ISA (UK) 570 Going Concern.
There are likely to be a number of impacts on group audits where one or more components are located in Ukraine, Russia, or Belarus.
Physical access to countries affected, and access to working papers
UK Foreign Office advice will apply here. For component audits planned to take place in Ukraine, Belarus or Russia, there will need to be a rethink. A sensible approach will also be needed for other areas subject to UK Foreign Office advice, where either conflict or refugee movement make it impossible to function with normality.
There will be an impact on consolidating entities in Ukraine, Belarus or Russia if there are severe long-term restrictions over control of either the entity itself, or of significant assets held by the entity.
Member firms in Russia
Some firms have severed ties with member firms in Russia that were part of their network. This may affect planning of a group audit, where a UK engagement team planned to use the member firm for local auditing in Russia.
See ISA (UK) 600 Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors).
Changes to the auditor’s report
In situations where the auditor is required to report on a material uncertainty related to going concern, or is required to modify the audit opinion, such as a limitation on the scope of the audit, the Audit and Assurance Faculty’s guides on auditor’s report wording may be helpful.
Auditors required to report on Key Audit Matters (KAMs) under ISA (UK) 701 may consider that the impact of the war in Ukraine constitutes a KAM, and describe additional audit procedures that were necessary as a result of the war. Additional information may also be required in the ‘Scope of the audit’ section around group audits.
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ICAEW's Library and Information Service produces guides for members who are considering doing business in overseas countries. There are separate guides for Ukraine and its neighbours, all of which include updates on the latest sanctions and restrictions.