ICAI Advisory on Accounting & Assurance related issues for Financial Year (FY) 2019-20 in light of Covid-19 disruptions- A Synopsis
The Institute of Chartered Accountants of India (ICAI) is concerned about the impact of Coronavirus disease on the health of people worldwide as well as on the state of economy and commerce of the world in general and on India specifically.
Even in this tumultuous times, professionals in the accounting industry need to ensure that financial reporting continues to be of high quality and reliable based on applicable accounting framework and audit opinions are based on performing the best audit procedures laid down in standards on audit.
Towards this, to guide the preparers and auditors, the Accounting Standards Board (ASB) and Auditing & Assurance Standards Board (AASB) of ICAI, has published an Advisory on “Impact of Coronavirus on Financial Reporting and the Auditors Consideration” highlighting few important areas which require particular attention in respect of financial statements for the year 2019-20.
As the companies in India were heading towards the year-end process when this crisis struck, it gives rise to the urgent need to evaluate the impact of the pandemic on their financial statements and reporting.
The areas from an accounting viewpoint that may be impacted can be broadly categorized into:
- Going concern
- Physical inventory count and inventory valuation
- Impairment
The ICAI’s advisory has been segregated into two topics:
- Impact of Coronavirus on Financial Reporting – from the preparer’s point of view
- Impact of Coronavirus on Audit of Financial Statements certain areas- for auditors
The advisory has been given for entities to whom Ind AS is applicable and to whom AS is applicable, viz, Companies to whom Companies, Accounting Standards Rules, 2006 and Non-corporate entities to whom AS issued by ICAI is applicable. It is meant for specific requirements of a few accounting standards and this is not meant to be exhaustive and may differ based on specific facts, circumstances and business of respective preparers.
The publication talks about the impact on conducting an audit but touching upon increasing restrictions on travel, meetings and access to client locations and how auditors would be facing practical difficulties in carrying out audits.
It goes on to discuss the possible implications for audit report and how to combat the above impacts.
The role of auditors at times like this is under increased scrutiny as the auditors have a public interest obligation to complete the audit work in accordance with professional standards and ethics requirements.
Under the current circumstances, auditors must recognize that the manner in which they conducted the audits in the past may need significant modification to address the challenges and uncertainties arising out of the impact of COVID-19. Auditors should exercise a very high degree of skepticism while performing substantive procedures and be prepared to call out where there is an uncertainty specific to the Company’s operations and explanation by the management, irrespective of the challenges and uncertainties.
Like all other aspects of a company’s operations, financial reporting for the period ended 31 March 2020 will be significantly impacted by the global fallout from the COVID-19 pandemic.
Impact on financial reporting -preparer’s point of view
Key areas of the financial statements that will be impacted and require critical consideration have been listed hereunder:
1) Inventory Measurement
2) Impairment of Non-Financial Assets
3) Financial Instruments
4) Leases
5) Revenue
6) Provisions, Contingent Liabilities and Contingent Assets
7) Modifications or Termination of Contracts or Arrangements
8) Going Concern Assessment
9) Income Taxes
10) Consolidated Financial Statements
11) Property, Plant and Equipment
12) Presentation of Financial Statements
13) Borrowing costs
14) Post Balance Events
15) Interim Financial Reporting
The degree of consideration required, the conclusion reached, and the required level of disclosure will depend on the circumstances in each case, as not all companies will be effected in the same manner and to the same extent. Significant judgment and continual updates to the assessments may be required given the evolving nature of the outbreak.
The impact of COVID-19 reporting is also extended to preparing the annual reports and investor presentations. Companies would need to ensure that their Management Discussion & Analysis, risk management disclosures and investor decks are also suitably updated.
Impact on Audit of Financial Statements
Similarly, auditors have to adjust how they obtain sufficient appropriate audit evidence on which to base the audit opinion, access to people or information, revising the identification and assessment of certain risks of material misstatement, and changing planned audit procedures or performing alternative or additional audit procedures as may be appropriate. At the engagement level, auditors should have heightened awareness of the possibility of fraud or error, including fraudulent financial reporting, with the importance of the exercise of professional skepticism in performing audit procedures.
The following pointers highlight some of the more significant areas that may need to be further considered in designing and performing audit procedures to obtain sufficient appropriate audit evidence, and to report accordingly:
- Reporting of a new Key Audit Matter (KAM) in response to additional audit work necessary as a result of the outbreak,
- Addition of a material uncertainty in relation to going concern paragraph, where relevant,
- An emphasis of matter paragraph relating to a significant uncertainty arising from the outbreak, or
- A qualification or adverse opinion in respect of inadequate disclosures in the financial statements.
The Auditors must also carefully take necessary action such as:
- Maintain close communications with their board of directors, auditors, legal counsellors and other service providers as the circumstances progress.
- Discuss with the board and the audit committee; the potential financial impacts and risk assessment
- Provide adequate disclosure in a year-end financial statement on current and potential impacts
- Assess impact on audit, completion of the last quarter’s results and annual financial reporting process
As we write this, it is important to remember that the situation is constantly evolving. Assessments need to be kept up to date at least a couple of weeks before the financial statements are to be signed. It is important to ensure that all judgements made are current and based on the information available as at the latest date possible.
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