In view of the ongoing spurt of the COVID-19 pandemic and in the interest of the Chartered Accountants, I have prepared this article. With this article, I am going to cover some of the areas of the Auditing Procedures which have been impacted by the Outbreak of Corona Virus and how the reporting is required to be done for the F.Y. 2019-20.
In this lockdown scenario, where it is not feasible for the Incoming Auditor to communicate with the Retiring Auditor through the mode(s) of communication permissible in terms of provisions of the Code of Ethics.
The existing Code of Ethics, 2009, provides, under commentary to Clause (8) of Part-I of First Schedule to The Chartered Accountants Act, 1949 as under:-
“Members should therefore communicate with a retiring auditor in such a manner as to retain in their hands positive evidence of the delivery of the communication to the addressee. In the opinion of the Council, communication by a letter sent “Registered Acknowledgement due” or by hand against a written acknowledgement would in the normal course provide such evidence.”
It has been decided that the members may communicate with the Retiring Auditor vide E-mail, provided an acknowledgement of such communication is received from the Retiring Auditor’s E-mail address registered with the Institute or his last known official E-mail address. Such acknowledgement of communication would be deemed as valid evidence of the positive delivery of communication.
Some of us might start online shopping through our credit cards during the lockdown. We have to keep in mind the following:-
There is no prohibition in holding credit cards of banks where a firm is the Auditor of the Bank. Only the condition of indebtedness will apply if there is an outstanding balance of Rs. 10,000/- beyond prescribed credit period limit.
Considering the Outbreak of Corona Virus, the Ministry of Corporate Affairs (MCA) vide its order dated 24th March 2020 deferred the applicability of CARO 2020 by one year. As a result of which it will be applicable for audits on or after 1st April 2020.
Under the current scenario, management is required to carefully evaluate the information that becomes available after the date of the financial statements but before the issuance of the financial statements.
Referring to Ind AS 10 – “Events after the Reporting Period” or AS 4 – “Contingencies and Events Occurring After the Balance Sheet Date” (as applicable on the entity), management has to prepare and present the financial statement.
The auditor shall perform audit procedures designed to obtain sufficient appropriate audit evidence that all events occurring between the date of the financial statements and the date of the auditor’s report that require adjustment of, or disclosure in, the financial statements have been identified.
The auditor shall take into account the auditor’s risk assessment in determining the nature and extent of such audit procedures, which shall include the following:-
SA 560 – “Subsequent Events”, sets out the auditor’s responsibilities with respect to subsequent events. Types of subsequent events and their impact are stated below:-
|Types||Impact on Financial Statement|
|Adjusting Events – Events that provide evidence of conditions that existed at the date of the financial statement||As the name suggests, it requires adjustments to the amounts recognized in its financial statements.|
|Non-adjusting Events – Events that provide evidence of conditions that arose after the date of the financial statements.||As the name suggests, no adjustment required. Only disclosure of nature of the event and an estimate of its financial impact or a statement that estimates cannot be made is required.|
It is important to consider COVID-19 as a factor in an entity’s analysis of estimates required in the financial statements.
Few instances that may be affected by or exist as a result of the COVID-19 (this is not an exclusive list):-
1. Impairment in the value of investment;
2. Increase in inventory obsolescence reserve due to decrease in the value of inventory;
3. Increase in capital or issuance of debt/borrowings/guarantees;
4. Sale of business assets;
5. Application of force majeure clause;
6. New contingent liabilities;
7. Any unusual adjustments / entries;
8. Events that question the validity of going concern assumption;
9. Employees termination
10. Inability to pay creditors
SA 580 – “Written Representations”, managements representations are required to be obtained by the auditor for all the subsequent events before the date of the auditor’s report, but not after that date.
The management of the entity is responsible for the physical verification of inventory.
The objective of the auditor is to design and perform audit procedures that enable the auditor to obtain sufficient appropriate audit evidence and to draw reasonable conclusions for the auditor’s opinion.
CARO 2016 requires auditors to comment on “Whether physical verification of inventory has been conducted at reasonable intervals by the management and whether any material discrepancies were noticed and if so, whether they have been properly dealt with in the books of account”
The COVID-19 outbreak has created challenges for the management of an entity to conduct physical inventory counting and for the auditors to attend these counts. SA – 501 – “Audit Evidence – Specific Considerations for Selected Items“ talks about where an inventory is material to the financial statement (in other words we say above the set materiality level), the auditor shall obtain sufficient appropriate audit evidence regarding the existence and condition of inventory.
The following instances depict the clear picture of hindrances in Inventory Verification and responses to those:-
|Management was unable to conduct physical inventory counting as on the date of financial statements||Management should inform the auditors and those charged with governance the reasons for not conducting the inventory counting.
(i.e. inventory is held in locations which are closed due to Government imposed lockdown)
|Inventory counting conducted by management at a date other than the date of financial statement||Roll-forward (where inventory counting was attended by the auditor at any date before the date of financial statement) or Roll-back (attending inventory counting at a later date from the end of the financial year) procedures.
Auditors should exercise professional skepticism in regard to the quality of the entity’s inventory record and internal control over inventory movements.
|Impracticable for auditors to attend inventory counting
The matter of general inconvenience to the auditor cannot be sufficient to support a decision by the auditor that attendance is impracticable.
The time involved, difficulty, the cost involved cannot be considered as valid for auditors to omit an audit procedure for which there is no alternative or to be satisfied with audit evidence that is less than persuasive – SA 200.
|Perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory.
a) Inspection of documentation of the subsequent sale of specific inventory items acquired or purchased prior to the physical inventory counting.
b) Virtual inventory counting with the use of video call facilities/use of drones.
c) Inventory cut-off procedures
d) Reliance on confirmations received from the third parties without the interference of the management.
e) Using the work of Internal Auditor (Refer SA 610 for detailed procedures)
Impact on Audit Report: Where it is not possible to perform alternative audit procedures to obtain sufficient appropriate audit evidence in relation to material inventory balances, the auditor should modify the opinion in the auditor’s report in accordance with SA 705 – “Modifications to the Opinion in the Independent Auditor’s Report”. This will be considered as a limitation on the scope of the audit. Whereas qualification would depend on whether the matter is pervasive to the financial statements.
Management should consider the effects of the COVID-19 pandemic while assessing the entity’s ability to continue as a going concern.
While assessing the going concern, management should consider the following but not limited to these factors:-
1. Forecast of cash flows
2. Entity’s ability to meet obligation / honoring dues to the creditor
3. Sensitive assumptions which are inconsistent with historical trends
4. The impact of measures taken by the government in respect of imports and exports
5. Repayment of borrowings
6. Unable to recover significant payment from debtors
7. Impact on valuation of investments
8. Loss of potential buyers from the market
9. temporary shutdown scenario and their tenure due to unavailability of skilled labors i.e. issue of migrant labors.
Management may utilize industry reports, data from government departments, and other reports issued by the third party while making assumptions in going concern assessment.
The auditor is responsible for evaluating the management’s assessment of the entity’s ability to continue as a going concern. The Auditor may extend the period of assessment beyond 12 months from the end of the financial year, where known or certain expected events that will occur after the 12 months from the end of the financial year. Where the management considers a period of less than 12 months from the end of the financial year for the assessment of the entity’s ability to continue as a going concern, the auditor shall request management to extend its assessment period to at least 12 months.
The auditor should evaluate the reliability of the underlying data to prepare the forecast and determine whether there is adequate support for the assumptions.
Scenario – 1
Where the management itself concludes that the going concern assumptions are not valid and prepares the financial statements on NRV of assets along with disclosures, the auditor may be able to express an unmodified opinion on financial statements, provided there is adequate disclosure therein about the basis of accounting on which the financial statements are prepared, but may consider it appropriate or necessary to include an Emphasis of Matter paragraph in accordance with SA 706 in the auditor’s report to draw the user’s attention to that alternative basis of accounting (i.e. NRV basis) and the reasons for its use.
Scenario – 2
Material uncertainty in the auditor’s report is required to be made under the separate paragraph “Material Uncertainty Related to Going Concern” in accordance with SA 570 and should not be included under Emphasis of Matter paragraph. This alerts users of the financial statements to the circumstances that existed.
Where the auditor concludes that the use of the going concern basis of accounting is appropriate in the circumstances, but a material uncertainty exists, the auditor should also determine whether the financial statements adequately disclose the matter and management’s plan to deal with the event or condition giving rise to the material uncertainty. When the disclosures are adequate, an unmodified opinion should be issued, and the below-mentioned portion should be included in the auditor’s report.
Material Uncertainty Related to Going Concern
We draw attention to Note X in the financial statements, which [describe material uncertainty]. As stated in Note X, these events or conditions, along with other matters as set forth in Note X, indicate that a material uncertainty exists that may cast significant doubt on the company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.”
Scenario – 3
Where adequate disclosure about the material uncertainty is not made in the financial statements, the auditor should express a qualified opinion or adverse opinion. In the Basis for Opinion section of the auditor’s report, the auditor should state that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern and that the financial statements do not adequately address this matter.
Scenario – 4
Where there are substantive COVID-19 related disclosures in the financial statements made by the management of the entity and the auditor is satisfied that these disclosures are appropriate and adequate, then based on the professional judgment of the auditor, an Emphasis of Matter (EOM) paragraph may be included in the auditor’s report.
Emphasis of matter – Effects of COVID-19
We draw attention to Note X in the financial statements, which describes the economic and social [consequences/disruption] the entity is facing as a result of COVID-19 which is impacting [supply chains / consumer demand/ financial markets/commodity prices/ personnel available for work and or being able to access offices]. Our opinion is not modified in respect of this matter.
SA-701 -“Communicating Key Audit Matters in the Independent Auditor’s Report”
SA 701 is applicable for audits of financial statements for periods beginning on or after April 01,2018 for audits of complete sets of general purpose financial statements of listed entities. It casts a new reporting requirement on auditors of listed entities to communicate the key audit matters in their audit reports. This Standard is also applicable in audit of unlisted entities in situations where law or regulation requires communication of key audit matters in the audit report.
Key audit matters are those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. Key audit matters are selected from matters communicated with those charged with governance.
The auditor is required to report in his report a further description of each of key audit matter by stating that:
-Why the matter was considered to be one of the most significance in the audit
-How the matter was addressed in the audit
-Reference to the related disclosures
Clause vii(a) : Reporting on deposit of undisputed Statutory Dues
It requires auditors to report whether the company is regular in depositing the statutory dues or if not regular, statutory dues were in arrear as at year-end for a period of more than 6 months from the date became payable.
The Government of India and Other Authorities have extended the due dates of payment of taxes and where statutory dues have been paid within such extended due dates, it does not constitute a noncompliance. However, if there is no extension of the due date and an option has been given to make payments at a later date upon payment of interest and penalty, it should be reported as default.
Clause viii: Reporting on default in repayment of loans/borrowings
It requires auditors to report whether the company has defaulted in repayment of loans to any financial institution, bank, Government, or debenture holders and the amount & period of default is to be reported.
Considering the Outbreak of Corona Virus, the Reserve Bank of India has issued a circular dated 27th March 2020 to mitigate the burden of debt / provide relief to borrowers by way of moratorium period for repayment of term loans and working capital facilities. Whereas interest would continue to be charged for this period.
Case-1: Where the company has not opted for the moratorium period and repayment of borrowings were honored at the scheduled time. —->>> No adverse reporting required.
Case-2: Where the company has opted for moratorium period and made the payment within such extended due dates. —–>>> It does not constitute a non-compliance. The auditor should make a factual statement in his report and no adverse reporting required.
As per Sec 143(3)(i) of Companies Act 2013, the report of the auditor should state as to whether the company has adequate Internal Financial Control System in place and the operating effectiveness of such controls.
Further, Rule 10A of Companies (Audit & Auditors) Rules 2014 states that for the financial years commencing on or after 1st April 2015, the report of the auditor should state about the existence of adequate Internal Financial Controls and its Operating Effectiveness.
As per Notification No. GSR 464 (E) dated 5th June 2015 as amended by Notification No. GSR 583(E) dated 13th June 2016, this requirement shall not apply to a Private company-
a) which is one person company or a small company, or
b) which has turnover less than Rs. 50 crores as per the latest audited financial statements and which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than Rs. 25 crores.
1. The level of substantive procedure (High / Medium / Low) to be carried out by the auditor based on internal control testing.
To make inquiries in respect of modus operandi during this COVID-19 pandemic (i.e. work from home and individuals roles and responsibilities).
3. Rewriting the audit plan to address the changes in the internal control framework.
4. Testing the design and operating effectiveness of the updated controls framework including the segregation of duties.
5. Communicate with those charged with governance.
6. To obtain MRL for matters relating to the audit of internal financial controls over financial reporting
Case-1: Auditor unable to obtain sufficient appropriate audit evidence to form an opinion on the design and operating effectiveness of internal financial controls —>>> Issue Disclaimer of opinion
Case-2: Where the main audit opinion is modified, the auditor should evaluate the factors and determine whether the modification also leads to a modification of the report on internal financial controls.
Case-3: Where material weakness is identified in the design or operation of internal controls, the auditor should modify his opinion on the IFC and consider the impact of such modification on the main audit report.
Case-4: Where no material weakness is identified in the design or operation of internal controls, the auditor should include a cross-reference in the opinion on the IFC to the Emphasis of Matter Paragraph of the main audit report with regard to COVID-19 assessment.
Contributions to COVID-19 Relief Funds made after the year-end but within three months after year-end cannot be provided for as CSR Expenses of the current accounting period.
The rationale for not providing as an expense of the CY:
A provision is recognized when the Company has a present obligation as a result of past events and it is probable that an outflow of resources will be required to settle the obligation in respect of which a reliable estimate can be made. If these conditions are not met as of reporting date, no provision shall be recognized for that financial year.
The GOI issued the notification on 31st March 2020 considering the Contribution towards COVID-19 relief fund under CSR and hence, it is unlikely for any entity to have a present obligation on 31st March 2020, for such a commitment.
The management is required to disclose the amount spend subsequent to March 2020 in the notes to the accounts as the same will be considered in the measurement of deferred tax liability if the entity claims a deduction in the Income Tax Return for the F.Y. 2019-20.
Members/readers can refer the same at https://resource.cdn.icai.org/59470asb48382.pdf
The information contained in the above article are solely for informational purpose after exercising due care and is based on the author’s interpretation of the relevant provisions. The same should not be considered as professional advice. The author accepts no responsibility whatsoever and will not be liable for any losses, claims, or damages which may arise because of the contents of this write-up.
You may contact the author for further information at 9836405353 or [email protected]