Question

discuss how COVID-19 will affect your audit planning, execution and reporting:

c. Going Concern Assessment

d. Audit Opinion

Answer 1

(c) The industry has been expressing difficulty to assess going concern risks considering the severe impact of COVID-19 and the lockdown on liquidity, turnover, profit and profitability for Q4 of FY 2019-20. As per a report, half of the top 500 companies listed on the National Stock Exchange could find themselves strapped for cash to even make routine payments in the aftermath of COVID -19 lockdown.

This is exacerbated by the fact that uncertainty continues on lockdown and control over coronavirus is not yet in sight. The prospects of growth of the global economy in 2020-21 remains negative. The world is faced with the worst economic recession since the 1930 Depression. Virgin Australia is the first big corporation to collapse and go into liquidation due to a pandemic. Considering the gravity of the problem many more companies may collapse even before the pandemic is over.

Given the economic uncertainty created by the novel coronavirus (COVID-19) coupled with significant business disruptions for entities across almost all sectors, there is likely to be an increase in events and circumstances which may cast significant doubt on a company’s ability to continue as a going concern. Therefore, management may need to assess whether going concern assumption is still appropriate as a basis for the preparation of the company’s financial statements.

The auditors may find it difficult to obtain sufficient audit evidence to assess management’s judgement on inherently uncertain future outcomes of events or conditions. The ability of the current balance sheet and the support of the promoters to withstand the crisis is important and not too difficult to assess.

Change in Audit Planning, xecution & reporting :

Planning

The implications of COVID-19 may not automatically result in existence of a material uncertainty. The increased risk of significant doubt on an entity’s ability to continue as a going concern will depend on the nature and circumstances of the entity, including the industry in which it operates.

Some of the important considerations highlighted by the ICAI guidance are as follows:

• Assess what impact the current events and conditions have on an entity’s operations and forecasted cash flows, with a focus on whether the entity will have sufficient liquidity to continue to meet its obligations as they fall due.

• Consider the existing and anticipated effects of the COVID-19 on the assumptions, in particular significant assumptions that are sensitive or susceptible to change or are inconsistent with historical trends.

• Assess specific matters relating to COVID-19. Few examples are highlighted in the table below.

Xecution

Operaiton Environment

General considerations include restructuring of the entity/group (actual or planned) and its business (e.g., store closures, workforce reduction) that may be needed to generate sufficient cash flows.

• Other considerations could include:

– Level of lost revenue and cash flows including the effect of rebates, refunds and allowances.

– Impact of foreign exchange fluctuations including the impact of any hedging arrangements to reduce uncertainty.

- Inability to honour certain terms of contracts leading to penalties by regulators/ counterparties and suitability of invocation of force majeure clauses.

Liquidity

• This could involve operational and funding considerations such as:

– Risk relating to receivables (delays or failures of counterparties, requests for changes in payment terms).

– Impact of trade financing products such as letters of credit, forfaiting, shipping and payment terms, etc.

– The impact on funding due to but not limited to:

o Potential covenant breaches and resultant impact on credit ratings

o Material adverse changes/material adverse event clauses in debt agreements.

o Debt maturity profile and impact of COVID-19 on refinancing risk.

Risk that the parent company will no longer support the business

Disclosure & Reporting

The required disclosures will depend on the facts and circumstances of each entity and their exposure to the current evolving environment. From COVID-19 perspective, following disclosures should be provided:

• In case management has significant doubt about the entity’s ability to continue as a going concern, disclose the uncertainties, even if it concludes that no material uncertainty exists.

• When a material uncertainty exists, disclose the fact that entity’s ability to continue as a going concern is subject to a material uncertainty.

• Additional line items or sub-totals on the face of statement of profit and loss may be included to depict entity’s performance such as impairment adjustment.

• Enhanced disclosures regarding estimation uncertainty might be required, for instance, assumptions may be subject to a material change within the next period.

• Disclose any changes in financial risks such as credit risk, liquidity risk, currency risk and other price risk, and changes in objectives, policies and processes for managing those risks are expected.

• Additional disclosures about liquidity risk might be needed when COVID-19 has affected cash flows from operations or the ability to access cash in other ways such as from government payments, factoring receivables or supplier financing.

• Update management’s analysis of principal risks and uncertainties that could affect the amounts reported in the financial statements or the functioning of the reporting entity.

• Additional disclosures in the board’s report or in an annual report (other than financial statements and auditor’s report) need to be provided.

(d) Audit Opinion

• Use of going concern basis of accounting is inappropriate : If the financial statements have been prepared using the going concern basis of accounting but, in the auditor’s judgement, management’s use of the going concern basis of accounting in the preparation of the financial statements is inappropriate, the auditor would express an adverse opinion.

• Use of going concern basis of accounting is appropriate but a material uncertainty exists which has been adequately disclosed in the financial statements: The auditor would express an unmodified opinion and the auditor’s report would include a separate section under the heading ‘Material Uncertainty Related to Going Concern’.

• Use of going concern basis of accounting is appropriate but a material uncertainty exists which has not been adequately disclosed in the financial statements: The auditor should express a qualified opinion or adverse opinion (depending on the pervasiveness of the matter to the financial statements (i.e., the inadequacy of disclosures)).

• A new Key Audit Matter (KAM) may be reported to describe the identified events or conditions disclosed in the financial statements that were the focus of auditor’s attention.