Question

Topic background: First reported to the World Health Organisation as an unknown virus in late December 2019, coronavirus/COVID19 developments throughout 2020 are causing great uncertainty for the global economy. This uncertainty is creating risks that entities may not have encountered before, and gives rise to new and rapidly changing conditions that auditors may not have previously encountered. Required: Conduct research on the impact of coronavirus/COVID19 on external financial report audits, then answer the following questions:

5. What are the obligations of the auditor under section 311 of the Corporations Act 2001 in relation to solvency and going concern? (100 words).

Answer 1

The consequences of the pandemic are not yet reflected in the financial statements for the fiscal year 2019, which are currently being issued. Financial statements are strictly based on the balance sheet date and events/information up to the balance sheet date. As of December 31, 2019 (which is the balance sheet date for most companies), there were no major effects of the pandemic. Only the so-called supplementary report briefly discusses effects. The pandemic, therefore, shows the importance of frequent interim reporting, e.g. quarterly financial reports, for the timely reporting of new developments. In these reports, companies have to disclose for the first time reliable and comprehensive figures on the (short-term) effects of Corona on the financial situation. Prior to the pandemic, quarterly financial reports have been heavily debated, because interim disclosure of financial figures may foster myopic management incentives.

The annual financial audit of financial statements by the statutory auditor is more difficult during the current pandemic. For the first time, auditors could not conduct on site reviews and remote audits require external access to the companies’ ERP systems. The Corona crisis will certainly accelerate the current efforts to digitalize the audit process. Here, all accounting records could be examined using intelligent algorithms to detect conspicuous patterns that indicate errors or even fraud. During the pandemic, auditors must take a closer look at whether the company can continue its operations (without insolvency) for at least 12 months. If not, the auditor has to provide a (modified) going concern opinion. A modified opinion is also necessary if there are obstacles to the audit because evidence could not be obtained to a sufficient extent (e.g., due to travel restrictions).

In addition, the auditor is required by section 311 of the Corporations Act 2001, to notify ASIC where they have a reasonable suspicion regarding significant contraventions of the Corporations Act 2001. ASIC has specifically stated in Regulatory Guide 3410 that they consider trading whilst insolvent and non-compliance with Accounting Standards if the auditor does not agree with the basis of preparation, to be considered significant contraventions. Refer to ASIC FAQs for further details on an auditor’s
responsibilities regarding section 311 under the current temporary relief for directors trading whilst
insolvent.
There is also a requirement for auditors of charities under the ACNC Act s65 5(2) to notify ACNC of any
significant contraventions of the ACNC Act.