Challenges for Auditors During the Pandemic – Part 2

This is Part 2 of our series of three blogs about the impact that the Coronavirus (COVID-19) is having on evidencing of audit work.

In Part 1 last week, we looked at issues like stock attendance (ISA 501), fraud (ISA 240) and accounting systems and controls (ISA 315). Here are some other problem areas seen during recent audit monitoring inspections.

Going concern (ISA 570)

Going concern has always been a key audit area and remains so, particularly at the moment.  Monitoring inspectors often see excellent examples of audit work on going concern including consideration of worst case scenarios when assessing forecasts, and good documentation of the thought processes supporting the auditor’s conclusions on this topic. This will include evidence of scepticism and challenge of management’s assumptions.

In other cases with less than ideal inspection outcomes, audit work on going concern may have been carried out but inadequately documented, or in some cases insufficient audit work on going concern is performed.  Areas giving rise to findings on monitoring visits include lack of, or insufficient challenge and assessment of management assumptions or the lack of alternative audit procedures on the audit file, where for example formal future cash flow forecasts are not prepared, particularly on smaller clients. These need to be on file for a period of at least 12 months from the date of sign-off of the financial statements.

Please remember ISA 570 (Revised) (effective for audits of financial statements for periods commencing on or after 15 December 2019) contains increased requirements in relation to audit work on going concern.

Subsequent events (ISA 560)

Inspectors also see cases where there has been a delay in signing some financial statements due to the Pandemic.  Don’t forget to ensure that appropriate subsequent events procedures are performed up to the date of the auditor’s report in such circumstances. This should include details of the date/time/place and names of those attending the final close off meeting, even if this s a brief 5-minute phone call. The notes should also contain details of action points agreed and matters forward to the next audit.

Financial Statement disclosures – COVID

There are often comprehensive disclosure in financial statements regarding the impact of COVID.  Unfortunately in other cases, there are only brief or no disclosures.

Even where the directors consider COVID has had no impact on the entity, it may still be appropriate to include disclosure in the financial statements to that effect.  Disclosure should be sufficient to enable the reader of the financial statements to understand why the directors believe this to be the case.  Information disclosed in the directors’ report must be consistent with the information disclosed in the financial statements.

See the final Part 3 of this blog next week.