Question

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

a. Risk Assessment

b. Audit Planning and Audit Strategy

Answer 1

Answer.

COVID-19 issues will depend on each audit’s facts and circumstances. However, every auditor shall have to be proactive for these wholly unprecedented challenges in number of areas while carrying out their respective audits.

The COVID –19 outbreak is a human tragedy and has a growing impact on global economy which has resulted in “severe demand shock” and global supply chain disruptions. However, the actual severity and duration of the outbreak is still unknown.

COVID-19 issues will depend on each audit’s facts and circumstances. However, every auditor shall have to be proactive for these wholly unprecedented challenges in number of areas while carrying out their respective audits.

AUDIT PLANNING AND RISK ASSESSMENT:

Auditor shall be required to assess risk as per the respective facts and circumstances arising during the audit and whether the risk assessment needs to be revised. There shall be wide and strong impact in the next 1 or 2 quarters and the auditors shall have to take a strong understanding of the following:

• Cancellation of contracts or contracts becoming onerous
• Operational constraints and disruptions resulting in change in demand increase in working capital requirements and considerable increase in operating cycle.
• Liquidity crunches and working capital issues
• Asset impairment

The auditor shall be required to understand whether any change in the nature and level of risk require alternative audit responses to these risks.

For e.g.: If an auditor is unable to be at client locations to carry out test of controls, the fundamental basis or data used for certain analytical procedures is no longer apt, increased levels of risk requiring increased sample sizes when carrying out tests of details.

AUDIT RISK FACTORS:

Auditors need to maintain professional skepticism and be cautious about the fact that fraud risks may be higher as a result of COVID-19. There may be instances where there is a higher risk of fraud and the control environment may be working differently as compared to usual, for instance: Impact on segregation of duties and relaxation of security controls at an entity based on changes to working conditions e.g. work from homes caused by the COVID-19 restrictions.

GOING CONCERN CONSIDERATIONS

The Financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. In assessing whether the going concern assumption is appropriate, management considers all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period.

Proofs regarding going concern are often provided in the form of cash flow models and/or budget forecast models, as well as attributes of future sales pipeline projections. Auditors will have to make certain that they obtain ample, appropriate audit evidence when testing management’s assumptions and forecasts. The repercussions of going concern shall differ according to business models, supply chain legal and contractual issues. The auditor shall have to examine the following:

• How has business model been impacted?
• How has been supply chain impacted?
• Are there any legal or contractual issues?
• How have cash flows been impacted by lower disposable income of Consumers during COVID-19
• Have the business customers been impacted?
• Does the entity have promoter funds or ability to raise funds?

Also, the auditor shall examine how management & TCWG have tested their projections in assessing the going concern.

AUDIT EVIDENCE

During the ongoing pandemic, examining client books and records may present obstacles for some auditors especially in cases where clients still maintain paper records. Auditors may be able to examine the copies prepared by client or scans of key records, but auditors need to check the legitimacy of those records and perhaps carry out additional audit procedures to be content that those records are complete, accurate and legitimate.

Auditors are directed to inspect alternative means, including technology to all possible extent. The accomplishment of high-quality audits under the present situation may require additional time, which may affect reporting deadlines. As a result, auditors may need to defer the issuance of their audit report, and where this is not possible or not likely to resolve the issue, auditors may have to alter their audit report to mirror that they have not been able to obtain the requisite audit evidence.

PHYSICAL INVENTORY COUNT

Accounting Standards requires auditors to attend inventory counts where inventory is material, unless impractical, to provide audit evidence relating to existence and condition. Alternative procedures are otherwise needed and where a count is conducted at a date other than the year end, additional procedures are needed to cover the intervening period. Auditors may experience cases where retail locations and warehouses are shut, or are open with very limited staff or auditors are unable to travel to the inventory observations due to travel restrictions. In those cases, evident challenges emerge in carrying out physical inventory observations. Following are the solutions to the mentioned challenges:

• Leveraging technology shall help with inventory counts as the Standards does not prohibit the use of Technology. E.g. CCTV cameras being used to review the location of inventory and ensure that the warehouses were locked down.
• If the management chooses to perform a count after the year end, and you are able, willing and authorized to attend, you may be able to execute testing procedures after the end of the year and audit the interceding management reconciliation of the inventory counted with the year-end inventory (i.e. a roll-back).
• The auditor can also use the work of other auditors located at client’s location to notice the physical inventory count taking into account the easy movement of the auditor and health regulations issued by government.

At the time of testing and concluding, the outcome of many scenarios, such as the possibility of a second wave of infections, may not be known or predicted with accuracy. Auditors will have to apply judgment and Professional Skepticism and consider the specifics of the business and its operations. Given the heightened uncertainty, it is very likely that more businesses and auditors will need to consider reporting material uncertainties and modify reports as per Standards and give proper and sufficient disclosures.