The complex and shifting challenges tariffs present for many businesses will, by extension, have an impact on their auditor’s risk assessment. 

1) Audit planning, including risk assessment

At the planning stage, auditors need to develop a robust understanding of the entity and its environment. This extends to its business model, and potentially more widely to supply chains and exposure to international trade. US tariffs may affect entities that rely on sales to US customers and if trade partners put ‘retaliatory’ tariffs in place, they may also affect entities that import raw materials or components from the US.

Tariffs can directly affect:

• Profit margins and cost structures: higher import duties could make exports uncompetitive, eroding profit margins and potentially prompting shifts in pricing strategies or sourcing models.
• Operational adjustments: importing companies might react by changing suppliers, re-routing logistics, or modifying their product mix, all of which may alter risk profiles. Exporting companies might switch sales to countries where import tariffs are lower or, recognising the potential impact on profit margins, reduce prices charged on their exports in order to maintain demand for their products.
• Liquidity pressures: increased working capital requirements due to higher costs or inventory build-up can have knock-on effects on liquidity and funding arrangements.

Auditors should consider assessing management’s awareness of tariff exposures and their response strategies.

Auditors should also maintain professional scepticism: do eroded profit margins place more pressure on management to meet targets, risk bank covenants being breached and therefore provide a greater incentive for fraud, including the incentive to misstate reporting?

2) Key financial reporting areas

Tariffs may introduce new or heighten existing financial reporting risks, particularly where management forecasts and estimates are sensitive to cost assumptions. Specific areas to focus on include:

Going concern assessments: the auditor should evaluate whether management has appropriately assessed the entity’s ability to continue as a going concern. 

If tariffs materially impact revenues or cash flows, has this been considered in the entity’s cash-flow forecasts and going concern assessment? Will US tariffs come in as originally communicated or continue to be paused or ultimately be reduced? Will interest rate changes hit lending and make it more difficult for companies to raise finance or mean that covenants are tightened? 

Auditors will wish to ascertain whether management has factored in these uncertainties when reviewing cash-flow forecasts. 

Entities may need to revise budgets and forecasts. Auditors should critically assess management’s assumptions to ensure they are still realistic within current market conditions. Any updated assumptions should also be reflected within impairment assessments, recoverability of deferred tax assets and other estimates.

A deep dive into scenario planning and sensitivity analyses used by management can be particularly helpful, especially for sectors most exposed to US trade policies. Stress testing, by flexing revenue, cost of sales or margins, is one tool. Another is reverse stress testing – understanding the degree to which country or industry tariffs would have to increase for the company to fail.

Revenue recognition: tariff-driven changes in contract terms, such as delivery schedules, pricing clauses, or customer penalties, can influence the timing and pattern of revenue recognition. Auditors should examine whether:

• performance obligations are being reassessed appropriately;
• variable consideration or contract modifications are being accounted for accurately; and
• returns or rebates have increased, and how these have been recognised.

Asset impairments: companies experiencing reduced demand or margins (or demand) due to increased tariffs may be at greater risk of asset impairment. Inventory, goodwill and other non-financial assets may be particularly susceptible. Auditors should:

• reassess indicators of impairment with tariff impacts in mind;
• challenge assumptions in value-in-use calculations; and
• pay particular attention to cash-generating units affected by cross-border activity.

Risk mitigation activities and hedging: some entities may introduce or expand the use of derivative instruments to hedge against price volatility or currency risks resulting from tariffs. Auditors need to:

• confirm that hedge accounting requirements are met;
• evaluate the effectiveness of hedging strategies; and
• review disclosures for clarity and completeness.

Performance-based vesting conditions: for entities with compensation tied to financial metrics, tariffs could materially influence the likelihood of achieving targets. Auditors should:

• understand whether assumptions underlying share-based payment valuations are still reasonable; and
• ensure that any revisions to performance metrics or conditions are properly accounted for and disclosed.

3) Audit evidence and documentation

Given the heightened complexity, auditors may need to obtain additional evidence to support management assertions, particularly in areas involving judgement. This could include:

• external market analysis or industry outlooks;
• legal opinions on tariff exposure; or
• board minutes detailing strategic responses.

Thorough documentation will be critical to demonstrate professional scepticism and compliance with International Standards on Auditing, especially in relation to going concern or impairment assessments.

4) Disclosure and communication

Transparent disclosure is vital in periods of economic uncertainty. Areas of the annual report and financial statements that auditors should focus on, particularly when checking for consistency, include:

• liquidity risks and funding plans;
• exposure to tariffs and trade restrictions;
• management’s assumptions and mitigation plans; and
• uncertainties related to future performance.

The auditor should also consider any impact on the audit opinion, should the impact of tariffs affect going concern, for example considering whether a material uncertainty paragraph may be needed.

The auditor should also consider whether the imposition of tariffs constitutes an adjusting post-balance-sheet event impacting measurements or disclosures.

As escalating tensions and back-and-forth tariffs continue to reshape global trade dynamics, auditors should keep themselves informed and adapt their audit approach accordingly. Professional scepticism remains, as always, crucial.