SA 701 & SA 570: Auditor special considerations with respect to covid-19 pandemic
In light of the corona virus pandemic various tragedies and sufferings are currently faced by the community and there is also economic slowdown having significant impact on the economy resulting in halt down the GDP of the country, the users of the financial statements are now concerned with financial results of the entities for their financial and operating decisions, in order to maintain the credibility and confidence among the stakeholders, the entities may tend to engage in window dressing practices, thus as per SA 200 “ Overall objectives of the independent auditor and the conduct of auditor in accordance with standard of auditing” , it cast primary responsibility on the auditor to obtain sufficient and appropriate evidence to obtain reasonable assurance weather the financial statements are free from material misstatement and presents a true and fair view as per applicable financial reporting framework.
Financial Statements are prepared on the basis of three fundamental principles of accounting:
With respect to going concern principle it states that the operations of the entity will continue for a foreseeable future, assets and liabilities are recorded on the premise that entity will be able to realize its assets and discharge its liabilities in the normal course of business, unless otherwise states that entity is not to intend to liquidate and shut down its operations.
This principle has gain weightage in the current financial and economic conditions, in light of the corona pandemic, temporary business shutdowns, suspension in the manufacturing unit, sudden hike in unemployment and various other parameters, Auditor in the course of preparing risk assessment procedures and related activities for the purpose of designing responses according to SA-315 and SA-330, for the purpose of collecting sufficient and appropriate evidence in order to determine and evaluate on the appropriateness of the going concern basis of accounting, The Institute of Chartered Accountant of India have notified SA-570: Going Concern, which laid the scope and duties of the auditor as laid down there under:
Auditor’s need to identify weather events or conditions that may cast significant doubt on the entity ability to continue as going concern, if the auditor encounters some indicators that may cast material uncertainty in the preparation of financial statement on the going concern basis of accounting, auditor shall inquire whether management has performed assessment, if performed, management has identified any events or conditions weather individually or collectively, that may cast significant doubt on the entity ability to continue as going concern, the indicators are broadly classified into three categories:
1. Financial Indicators: Negative Net worth/working capital, Arrears/discontinuance of Dividends, Adverse financial ratio, substantial operating losses, short term borrowing for long term asset financing, No payment to creditors on due date, Negative cash flow from operations.
2. Operating Indicators: Loss of key management and no replacement available, Loss of major market or supplier, Labour unrest, strikes.
3. Other Indicators: Pending legal proceedings, Change in Government policy, affecting the entity adversely, Non-compliance with Statutory requirements.
Auditor may perform additional audit procedures that are appropriate to identify any events or conditions that may cast significant doubt in the entity ability to continue as going concern and material uncertainty exist in the preparation of financial statements, the auditor may perform following procedures
If based on the audit procedures and additional audit procedures, sufficient and appropriate evidenced have been identified that cast material uncertainty relating to going concern, the auditor shall take into considerations the following pre-requisites:
(a) Where management has not yet performed an assessment of the entity’s ability to continue as a going concern, requesting management to make its assessment.
(b) Evaluating management’s plan for future actions in relation to going concern assessment, whether the outcome of these plans is likely to improve the situation and whether management’s plans are feasible.
(c) Where the entity has prepared a cash flow forecast:
(i) Evaluating the reliability of the underlying data generated to prepare the forecast; and
(ii) Determine whether adequate support for the assumptions underlying the forecast.
(d) Consider whether any additional facts or information have become available since the data on which management made its assessment.
(e) Requesting written representations from management and TCWG, regarding their pland for future actions and feasibility of these plans.
The auditor shall evaluate whether sufficient appropriate audit evidence has been obtained regarding, and shall conclude on, the appropriateness of management’s use of the going concern basis of accounting in the preparation of the financial statements.
Based on the audit evidence obtained, the auditor shall conclude whether a material uncertainity exists that may cast significant doubt on the entity ability to continue as going concern.
Adequacy of disclosures when events or conditions have been identified and material uncertainty exists
If the auditor concludes that management’s use of the going concern basis of accounting is appropriate in the circumstances but a material uncertainty exists, the auditor shall determine whether the financial statements;
(a) Disclose the events or conditions that may cast significant doubt on the entity’s ability to continue as going concern and management’s plan to deal with them; and
(b) Disclose clearly that there is material uncertainty and, therefore, that it may unable to realize its assets and discharge its liabilities in the normal course of business.
Adequacy of disclosures when events or conditions have been identified but No material uncertainty exists
If the events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as going concern but, the auditor concludes that no material uncertainty exists, the auditor shall evaluate whether, in view of the requirements of the applicable FRF, the financial statements provide adequate disclosures about these events or conditions.
Implications for the Auditor’s Report
Use of going concern basis of accounting is inappropriate
Use of going concern basis of accounting is appropriate but a material uncertainty exists
(A) Adequate disclosures of a material uncertainty is made in the financial statements
(a) Draw attention to the note in the financial statement that discloses the matter; and
(b) State these events or conditions indicate that a material uncertainty that may cast significant doubt on the entity ability to continue as a going concern and that the auditor’s opinion is not modified in respect of that matter.
(B) Adequate disclosures of a material uncertainty is not made in the financial statements
(a) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705; and
(b) In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a material uncertainty exist that may cast significant doubt on the entity ability to continue as a going concern
(C) Management Unwilling to make or Extend its assessment
Some practical illustration of auditor report with context to going concern
Gati Kausar India Ltd 2018 Annual Report
Material uncertainty related to going concern
“ we draw attention to note 35 in the financial statements, which indicate that a company has incurred a net loss of Rs.222.83 million during the year ended 31st March, 2018 and as of the date has a negative net worth of Rs.244.74 million. The company current assets exceeds its current liabilities as at 31st March, 2018 but only without considering the liability towards the commitment fee discussed in ‘Basis of qualified opinion’ section above. These conditions along with other matters set forth in such note, indicate the material uncertainty that may cast significant doubt about the entity ability to continue as going concern. However, in view of the mitigating factors as fully described in the aforesaid note including the revised business plan, the management is of the view that going concern basis of accounting is appropriate. Our opinion is not modified in respect of that matter.”
Audit report of f Enedo Plc FY2019-2020,
Material uncertainty related to going concern basis
We would like to draw attention to the accounting principles for the consolidated financial statements “going concern” section stating amongst other that:
TRS INVESTMENTS LTD FY 2019-20 Audit Report
Material Uncertainty Related to Going Concern We draw attention to Note 16 to the financial statements, which indicates that TRS’s current liabilities exceeded its current assets by $459,000 (2019: current liabilities exceeded current assets by $594,000) and that if it does not secure a transaction for a takeover of the Company then the Company is dependent on the support of its shareholders to discharge its obligations to third parties. As stated in Note 16, these events or conditions, along with other matters as set forth in Note 16, indicate that a material uncertainty exists that may cast significant doubt on TRS’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.
In light of the corona pandemic another standard that got emphasis and gain prominence is SA-701 “Communicating Key Audit Matters in the Independent Auditor’s Report” at the common and general parlance its meaning is those matters in the auditor professional judgment were of most significance in the audit of the financial statement of the current period, these are selected from the matters communicated with TCWG.
Scope: Auditor’s judgment as to what to communicate in the auditor’s report and the form and content of such communication
Objectives: Auditor professional judgment to determine key audit matters and, having formed an opinion on the financial statements, communicate those matters by describing them in the auditor’s report.
Determining KAM: The auditor shall determine, from the matters communicated with TCWG, those matters that required significant auditor attention in performing the audit.
In making this determination, the auditor shall take into the following:
Communicating KAM: The auditor shall describe each key audit, using an appropriate subheading, in a separate section of the auditor’s report under the heading ‘Key Audit Matters’
The introductory language in the section of the auditor’s report shall state that:
Auditor’s special considerations in reporting KAM in auditor’s report:
(a) Why the matters was considered to be one of the most significance in the audit and therefore determined to be a KAM; and
(b) How the matter was addressed in the audit.
(a) Law or regulation preclude public disclosures about the matter, or
(b) In extremely rare circumstances, the auditor determines that the adverse consequences of communicating the matter would reasonably be expected to outweigh the public interests benefits. This shall not apply if the entity has publicly disclosed information about the matter.
In light of the current economic scenario, the responsibilities of the auditor with respect to key audit matters have increased, in response to the matters that are communicated with management and TCWG, the auditors need to identify the most significant matters that have a material effect on the entity as the users of the financial statement tends to focused on the events or conditions for making financial and operating decisions, thus auditor needs to establish an overall audit strategy in performing more nature, timing and extent of audit procedures in relation to significant events or conditions that are material and fundamental for the primary users of financial statements. Auditor needs to report appropriately based on his professional judgment in the auditor report.
Practical Illustration of KAM
GODFREY PHILLIPS INDIA LTD. (GODFRYPHLP) – AUDITORS REPORT Fy 2019-20: Key audit matters extract
|KEY AUDIT MATTERS||HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER|
|RECOVERABILITY OF CARRYING VALUE OF NET ASSETS RELATING TO RETAIL AND CHEWING BUSINESS (AS DESCRIBED IN NOTES 5 (D) (I) AND 5 (D) (II) OF THE STANDALONE IND AS FINANCIAL STATEMENTS)|
|AS AT MARCH 31 2020 THE CARRYING VALUE OF NET ASSETS RELATING TO RETAIL AND CHEWING BUSINESS WAS RS. 8603.17 LAKHS AND RS. 6386.99 LAKHS RESPECTIVELY.||OUR PROCEDURES AMONGST OTHERS INCLUDED THE FOLLOWING:|
|RECOVERABILITY OF CARRYING VALUE OF ASSETS RELATING TO RETAIL AND CHEWING BUSINESS HAVE BEEN IDENTIFIED AS A KEY AUDIT MATTER DUE TO:||
IDENTIFICATION OF AND ESTIMATES CENTRED INDICATORS OF IMPAIRMENT AND FUTURE PROJECTIONS RELATING TO THE AFORESAID BUSINESS.
Reliance Industries limited- Audit report Fy2019-20-Key Audit matter extract
A. Capitalisation of property, plant and equipment During the year ended March 31, 2020, the Company has incurred significant capital expenditure. Further, out of the total additions to property, plant and equipment of ` 1,13,300 crore in the current year, significant part of the capitalisation pertains to the Gasification project, including modification of power plant equipments i.e. Gas Turbines, Auxiliary Boilers, HRSGs, Process Furnaces, etc. to make them compatible to multiple feedstock, including those received from petcoke gasifier. All units of the gasification complex and related integrated projects have been successfully commissioned and capitalised during the year. Significant level of judgement is involved to ensure that the aforesaid capital expenditure/additions meet the recognition criteria of Ind AS 16 – Property, Plant and Equipment, specifically in relation to determination of trial run period and costs associated with trial runs for it to be ready for intended use. As a result, the aforesaid matter was determined to be a key audit matter.
In nutshell, Auditor’s need to demarcate that the events or conditions that have material effect on going concern basis of the business needs to be reported as per SA-570, other than those, matters having higher assessed risk of material misstatement and events or conditions, like transition from Accounting standard to Indian Accounting standard or transition from Indian Accounting standard 17 leases to revised Indian accounting standard 116 leases needs to be reported as per SA-701, the primary consideration of both the standard is auditor cannot express opinion on these matters, it is relevant for the users understanding of the entity and its applicable environment for making rational decisions.
GDP:- Gross domestic product
SA:- Standards on Auditing
TCWG:- Those charged with governance