The global financial authorities are already shaken by the implications of the spread of COVID-19 on a world scale. It is highly unlikely to state when the current situation will pass and the economy will come right back on the tracks. It seems very justified to state that the pandemic which originated far away from the Indian Territory impacted its business on a global level.
To deal with the current situation, the Accounting Advisory has given certain guidelines to perform the auditing of financial statements. Given the physical restrictions on travel and mobility, it is very dicey and interesting to see how the auditors will carry on with their practices. In order to balance this managerial issue, the key Accounting Advisory has taken a step ahead to help the auditors to stimulate the changes while doing the audits of their business prospects. However, the audits should be done after a careful risk assessment and with proper auditing principles.
The stated guidelines are to be exercised extensively while doing the audits as per the Accounting Advisory by the ICAI:-
1) Identifying and evaluating the risk of materialistic misstatements and planning the purpose of planning an audit:
As the consequences of the COVID-19 outbreak prevails, the business associations, especially the ones located within the geographical boundaries received an extreme blow from the scenario. In addition, the other elements who drove their businesses from these entities faced a similar outcome. Viewing on a larger scale, the pandemic will pose a global threat and result in the economic downturn and decline in the activities of the entities in the Indian markets.
Due to the above stated, the auditors will have to assess the additional risks while looking into the following areas:-
– Interruptions in day to day operations resulting from the decline in business demand, customer base, supply chain, employee’s absence, territorial restrictions, etc.
– Non-compliance with contractual breaches, asset valuation, etc.
– Working capital requirement issues that are not enough to replenish the capital requirements arising due to reduced cash flows.
– A decline in asset valuations.
In compliance with SA 315, the auditors should evaluate the risk arising out of the above and stimulate the same in understanding the entity and its environment, and other expected mishappenings.
2) Evaluating Financial Impact and its justified estimation:
As the financial statements have various items included in them, the probable effects of the COVID-19 on them should be considered. In addition to the detailed items of the Advisory key, several other accounting issues can arise in the preparation of the financial statements.
The stated below are some of the issues undertaken:-
– Impairment of Goodwill, Intangible assets, Property, Plant, and Machinery, and Valuation and Impairment of Loans and other Advances.
– Contractual legal penalties.
– Insurance recoveries of business operations.
– Several allowances for compensating credit losses.
As per SA 540, the auditors should make use of Accounting Auditing Estimates and Related Disclosures related to the financial statements.
3) Valuation of inventory on a date other than the date of the financial statements:
As the economy is under a total lockdown for a period of 21 days. It might not be possible for business entities to do a physical valuation of inventory on 31st March 2020. Thus, auditors should find out ways in which the valuation could be done either before or after the stated reporting period.
The auditors should consider SA 501 while complying with the given situation.
4) Component auditors responsible for the audit of consolidated financial statements located at severely affected places:
The Accounting Advisory directs the entities to follow measures according to the reported accounting standard followed by them.
The entities that fall under Ind AS 110, the parent and the subsidiaries, should prepare the consolidated financial statements on the same date. It should be highlighted that the difference between the reporting of financial statements of these companies should not be more than 3 months.
There are companies, the parent and the subsidiaries, that follow AS 21 in the preparation of their consolidated financial statements. They should notice that the difference between the reporting of financial statements of these companies should not exceed 6 months.
5) Events after the reported date or subsequent events:
According to the Accounting Advisory, the auditors of the company should categorize the activities of the entities under two sections i.e Adjusting and Non-Adjusting activities. This is done as per AS 10 for the events which are occurring after the reported period.
In the same way, for entities following AS 4, contingencies and events occurring after the reporting year- the adjustments to the assets and liabilities reported after the financial reporting date needs to be considered. The adjustments related to the above should provide information materially relating to the amounts affecting the situation on the balance sheet date.
Such disclosure needs to be made accordingly by the auditors.
6) Going Concern:
For the going concern assessment, the auditors will need to consider the threat posed to the liquidity status. It takes measures to see the impacts the going concern of an organization might face, up to a period of 12 months.
SA 570 (Revised) also requires the auditors to put the relevant check on the events that may affect the going concern status of an organization beyond the management’s assessments.
This includes the evaluation of the appropriate support for the assumptions underlying the management’s assessment. At the same time, it analyzes the consistency of these assumptions on the overall business activities.
7) Evaluating the work of Management experts:
As a lot of evaluation is involved in realizing the impact of COVID-19 on financial statements and assessment of an entity’s going concern, the management may rely upon certain experts to carry on with the task.
As per SA 500 to facilitate audit evidence, the auditor shall do the following:
– Evaluate the competitive ability and objectivity of the expert;
– Obtain an understanding of the expert’s work;
– Analyze the accuracy of the expert’s work to serve audit evidence and proceed further for the relevant assertion.
8) Written presentations:
In accordance with SA 580, the auditors shall take the written presentations on various assessments and estimates made by the management to perform audits. These presentations can be tiresome, including the method of measurement, the occurrence of transactions, etc and the disclosure of financial impacts on the financial statements.
The possible impact of COVID-19 should be taken into consideration while forming such presentations.
9) Auditor’s opinion:
As per SA 200, the overall objectives of the liberal auditors in the conduction of audits should be taken. These audits should be performed as per the standard auditing principles.
The objectives are as follows:
– Obtaining the assurance that the financial statements are free from materialistic misstatements, fraud, and error. This enables the auditor to express an opinion on the grounds that financial statements are prepared with all the financial reporting aspects.
– To report any communication on the financial statements as required by the SAs.
10) Reporting on Key audit matters:
As per SA 701, the auditors are required to communicate any key audit matters that come out of the auditor’s report. Key audit matters are those matters that in the auditor’s opinion affect the auditing of the financial statements of the current period.
The auditors should evaluate whether the consequences of COVID-19 should be taken as a key audit matter while performing the audit of the financial statements or not.
11) Auditor’s responsibility relating to other information as per SA 701 (Revised):
As per SA 701 (Revised):
– The auditors are required to read and screen the other information pertaining to the financial statements. This other information may be materially inconsistent with the financial statements.
– After the auditor’s evaluation, the other information may also indicate that the information has misstatements or other credible activities that may undermine the authenticity of the financial statements.
12) Internal control considerations:
This is for companies that have to report the internal financial control to the management. Due to COVID-19, the companies may include other considerations such as:-
– Implementation of a new internal control method or changes in the existing one.
– Evaluation of the applied method to know whether it is functioning properly or not. There might be an absence of the individuals due to illness/isolation/working from home. Therefore, a check should always be done.
– Identify alternate controls, etc.
13) External confirmations:
As per SA 330, the Auditor’s response to Risks requires more persuasive audit evidence. The higher the level of audit evidence, the higher the auditor’s assessment of risks.
SA 240 requires that the auditors may design confirmation requests to obtain more corroborative information to address the misstatements in the financial statements due to fraud or error or any other inconsistencies.
As per SA 505, the external confirmations provide guidelines regarding the process of seeking external confirmation and evaluating the results from it.
14) Risk of fraud:
As per SA 240, the auditors will perform their duties to take out any inconsistencies in the preparation of the financial statements. However, there are unavoidable risks or misstatements that may not be detected even though the auditing is properly planned and designed.
For this, the auditors should have an open outlook to report the minute details whenever any mishappening seems to be there.
As the skies are not clear and there is no light as of now for the world to look forward to. It is said by the financial experts that the impacts of the situation are likely to increase in the times to come. In times like these, the auditors are tested to their core as they have a public obligation in accordance with their professional ethics.
It should be clearly indicated by the Auditors to the company’s officials to get a hold on all the relevant information while doing the audits. If there is any scope for skepticism, the auditors can clearly highlight the same and present in the data.
This article is written to give a brief overview of the current financial alterations exercised by the ICAI to release some tension of the entities while dealing with the global recession as announced by the IMF.
However, it does not mean to lend any burden on the prepares of the financial statements while incorporating the pointers of the Accounting Advisory.
The information contained herein is of a general nature and is not intended to address the circumstances of any person or entity. Although we endeavor to provide accurate and timely information, there is no guarantee that such information is accurate as of the date it received or that it will continue to be accurate in the future. No one should act on such information appropriate professional advice after a thorough examination of the situation.