Sanctions have been put in place on Russia and Belarus, and the UK’s Foreign Office currently advises against travel to Ukraine, Russia, Belarus, and parts of surrounding countries. These factors in combination will provide auditors with a number of significant challenges.
The tragic circumstances in Ukraine mean that for many, there are much more important issues at hand and the possibility of ‘business as usual’ is not realistic, including carrying out audits. 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. In this article, we give an overview of some 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, whilst 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 and whether there are any new risks, significant or otherwise: disruption that may impact the ability to continue as a going concern; additional disclosures required on the impact of the war, and changes to forecasts, future plans, or even business model or strategy (See ISA (UK) 315 on risk assessment).
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). For example, it will likely affect the obtaining of audit evidence, in particular with respect to group audits with components in countries affected.
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. You are required not to deal with that person and to freeze funds or economic resources that you are in possession or control of, or are otherwise dealing with. Firms should consider consulting their legal counsel or external solicitors.
Checks will need to be extended to whether any debt has been received via a sanctioned bank. The stopping of payments may have going concern implications.
ICAEW’s article Russia sanctions: reputational risk cannot be overstated urges members to look hard at any connections with Russia among their clients and perform careful due diligence, thinking about “not just the letter of the law, but the spirit, too”. Some ICAEW members are re-screening clients, looking at sanction lists beyond the UK’s, and considering clients with ties to the Russian regime even if they do not appear on sanctions lists.
Non-compliance with laws and regulation (NOCLAR)
Whether carrying out the risk assessment as part of planning, audit procedures, or reporting, compliance with laws and regulations is likely to prove a difficult area for management and auditors alike. 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.
Correspondingly, auditors fulfilling their responsibilities under ISAs with respect to laws and regulations, including the requirement to report on the extent to which the audit was able to detect irregularities, including fraud, 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, depending on the period end of the entity and timing of the audit. Auditors will need to be vigilant, and maintain regular communication with management in order to monitor NOCLAR up to the signing of the auditor’s report.
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.
ICAEW’s Financial Reporting Faculty’s article, War in Ukraine: the corporate reporting implications, considers the consequences of sanctions on companies’ financial and non-financial reporting, including post balance sheet events.
Impairment of Russian and Belarusian 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.
Some assets may be based on accounting estimates, where an underlying model relies on assumptions that include macroeconomic factors. These factors have been altered considerably by the war and related sanctions. This might include the higher interest rate set by the Russian Central Bank. Auditors will need to assess whether the assumptions underlying these models are still appropriate, and correspondingly assets (or liabilities) based on these models are not materially misstated. See ISA (UK) 540 Auditing Accounting Estimates and Related Disclosures.
War in Ukraine: the corporate reporting implications provides further considerations.
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
There may be going concern implications if a company, charity or other entity relies on financing, donations or other funding from individuals who have been sanctioned or have had assets frozen or seized. UK entities may be dependent on the support of Ukrainian, Russian or Belarusian companies, and may no longer be able to rely on the continuation of that support. The auditor should challenge how this affects management’s going concern assessment.
Companies that have put a stop on sales to the Russian market
Certain transnational companies have stopped trading with the Russian consumer base. This will affect their sales in the current period, and potentially sales forecasts for the next period at least, and may have a knock-on effect for their suppliers in turn.
The companies may also be voluntarily breaching contracts, and may be subject to litigation or other demands for compensation, contractual or otherwise.
With many countries preventing Russian airlines using their airspace or no longer flying through Russian airspace, certain industries such as tourism may also be adversely affected where tourist numbers are down or longer flight times and hence increased fuel requirements make certain destinations uneconomical.
Business disruption, including supply chain issues
Interruption of supplies of commodities, or rising prices due to reduced supply (including both instances where the Russian government has reduced supplies, and where other countries are refusing supplies) is likely to impact supply chains adversely. This might include oil and gas, as well as the supply of electricity, but also extends to other commodities such as nickel, grain and fertiliser.
Availability of petrol and higher prices will likely affect many companies’ cost base, and cause disruption to transportation. Auditors will need to consider the impact on clients’ business models, cash flows, and ability to continue as a going concern.
Disruption to electronic payment systems, including providers such as Visa and Mastercard, or SWIFT, will also cause operational issues that could affect receipts as well as payments.
Additionally, the elevated threat of cyber attacks may cause further disruption, depending on whether the audited entity is in an industry or sector more prone to being targeted.
Insurance cover of assets
Auditors may also need to consider the effect on going concern of insurance companies refusing to cover damage or loss of a client’s assets. This may be the case when a loss event is considered to be an ‘Act of War’. This may not be restricted to the use of conventional weaponry, but also retaliatory cyber-attacks.
Obtaining trade credit insurance may also be more difficult given the current situation.
The Russian Rouble has already devalued considerably, due to sanctions and other economic factors. Companies revaluing Roubles to another reporting currency may be subject to material exchange rate losses.
Some sanctions have been placed on Belarus for its complicity in the war. Management and auditors should also consider the implications if this causes a devaluation of the Belarusian Rouble.
Investments in Russian entities
Some transnational companies have indicated that they will be divesting investments in Russian entities. They may only be able to do so at unfavourable rates, give up holdings entirely, or be prevented entirely by Russia’s own countermeasures to the sanctions.
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 need to be developed for other areas subject to UK Foreign Office advice, where either conflict or refugee movement make it impossible to function with normality.
If an auditor is unable to obtain sufficient appropriate audit evidence, through lack of physical access, inability to audit or hold meetings by video, or to access working papers electronically, they may have to qualify the auditor’s report due to a limitation on the scope of the audit.
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.
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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