Auditors are responsible for acting in the public interest and must exercise professional scepticism, maintain objectivity, integrity and independence, and act professionally and ethically throughout an audit. Even during the COVID-19 pandemic, auditors must continue to display these professional behaviours and comply with all required auditing standards.
The current circumstances may necessitate different and enhanced considerations by auditors. For example, travel restrictions present practical challenges to an engagement. Auditors may also need to consider developing alternative procedures to gather sufficient appropriate audit evidence to support their audit opinion, or to modify the audit opinion. To assist, the Hong Kong Institute of CPAs has recently published Auditing and COVID-19: A quick guide as a summary of the key issues and considerations impacting audits of financial statements as a result of the pandemic.
The guide generally follows the flow of the process of an audit, and includes links to resources from global accounting bodies. Note that this summary is not intended to cover all the practical and technical issues in an audit.
Risk identification and assessment procedures
COVID-19 has disrupted business operations and financial reporting processes. There is also an unprecedented level of uncertainty about the economy, future earnings and many other inputs that represent fundamental elements of financial reporting. There may be new or heightened risks of material misstatement compared with prior audits. Increased pressure on management may result in heightened fraud risks and pressure to override controls.
Auditors should discuss with management and those charged with governance (TCWG) how they have assessed the impact of COVID-19 and evaluate whether there are new or changed risks that could be material. If a new significant risk is identified, auditors should obtain an understanding of the relevant controls and control activities. If an auditor is unable to perform walkthroughs on internal controls or undertake tests of controls, they may need to consider if there are additional risks of material misstatement, and to change the audit response and increase substantive testing.
Design and perform audit procedures
Companies may obtain and/or operate controls over the production of financial information in new or different ways. The changing circumstances may impact the selection and application of the method or data used in developing accounting estimates, and obtaining reliable data may be more challenging. The uncertainty about the economic impact adds further complexity and challenges when auditing estimates. Uncertainty may also increase the challenge to obtain sufficient appropriate audit evidence. Experience of prior audits is not likely to be representative of the current and future environment.
If the auditor cannot obtain evidence in the way it was obtained before, consideration should be given to alternative procedures. Auditors should exercise professional scepticism about any digital evidence and may need to design additional procedures to test its reliability. Given the challenges in the current environment, auditors should document their judgements and how they respond to the difficulties and uncertainties encountered.
Evaluate going concern basis of accounting
As a consequence of the pandemic many entities face cash flow difficulties. The deteriorating economic conditions may also affect the reliability of income and cash flow forecasts by management. Finally, aligning the going concern evaluation for group and subsidiary reporting purposes may represent a challenge.
Auditors should evaluate whether an entity has access to sufficient liquidity and can remain solvent through the pandemic and beyond. Auditors should heighten professional judgement in assessing the adequacy of going concern disclosures, and determine if a modification in light of the going concern issues is necessary and make appropriate disclosure in the auditor’s report.
Evaluate the impact and disclosure of events
The pandemic may impact how companies evaluate and disclose events after the reporting date, and require management’s significant judgement to do so. Given the situation continues to evolve, management may need to continually review and update the subsequent event assessments up to the date when the financial statements are issued.
Auditors should work with management and TCWG to ensure subsequent events have been accurately identified and reflected in the financial statements. Auditors may need to design and perform enhanced or additional procedures when auditing subsequent events. Auditors should consider the impact of subsequent events on asset valuations and impairment assessments and management’s disclosures of relevant risks.
The need for a modified opinion may arise because certain audit procedures cannot be performed (for example physical inventory testing) and no other alternative procedures can be undertaken. Management’s key judgements in areas such as asset and liability valuations, going concern basis of accounting and significant accounting estimates may be difficult to support or not agreed by the auditor.
Auditors should determine if a modification is necessary and make appropriate disclosures in the auditor’s report. Auditors may consider including an emphasis of matter paragraph to draw attention to certain disclosures in the financial statements. Where applicable, additional focus may be needed in determining the key audit matters reported in the auditor’s report because of the changing circumstances and difficulties arising from the pandemic.