From banks to Main Street investors, financial statement users place their trust in auditors to assure the accuracy of the financial information they use to make decisions. As we navigate the impacts of COVID-19, the auditor's role as protector of the capital markets has never been more important.
But just as clients are scrambling to secure needed funding and managing remote workforces, auditors are also facing challenges that many have never experienced. Where do we begin? As many audits with Dec. 31 year ends are already underway, here are six areas to focus on as you perform your calendar year 2019 audits.
PERFORMING AUDIT PROCEDURES REMOTELY
For many auditors, conducting "field work" from a home office is a novel concept. Some have even questioned whether professional standards permit conducting audit work away from the client site.
While the standards address what evidence an auditor needs to obtain, they don't generally dictate how to meet those requirements. When auditing remotely, make sure you have the right technological infrastructure in place and that your staff members have been adequately trained. If your client has paper books or records, ensure that they have access to relevant files, then develop a plan to address the authenticity of documents that have to be scanned or copied (e.g., by confirming directly with a third party).
The COVID-19 pandemic has caused the financial position of many organizations to deteriorate. For clients in certain industries (e.g., restaurants, hospitality) and in certain geographical areas, the entity's ability to continue as a going concern may be called into question.
Start by assessing whether there are events or conditions (e.g., the pandemic) that raise substantial doubt that the entity can continue as a going concern. Management is also required to evaluate the entity's ability to continue as a going concern. Next, ask for that evaluation and consider whether it is complete and accurate. The look-forward period is one year from the date the financial statements are issued or available to be issued, unless otherwise specified in the financial reporting framework.
"Substantial doubt" means, in management's judgment, it is probable that the client will not continue as a going concern. When substantial doubt exists, disclosure in the financial statement notes is required, regardless of whether the doubt is alleviated by management's plans.
After determining whether there is substantial doubt, consider management's plans to alleviate that doubt. Then, assess the impact on the auditor's report as follows:
- If management's plan alleviates substantial doubt, an unmodified opinion may be issued.
- If the going concern basis of accounting is appropriate but substantial doubt remains, an emphasis-of-matter paragraph is required.
- If the going concern basis of accounting is not appropriate, an adverse opinion should be issued.
EMPHASIS OF MATTER
Even if there is not substantial doubt about any entity's ability to continue as a going concern, an auditor may still conclude that an emphasis-of-matter paragraph is necessary. This would be the case if an unusually important subsequent event or major catastrophe is disclosed in the financial statements and, in the auditor's opinion, it is necessary to draw the user's attention to the matter. In determining whether COVID-19 meets this definition for a given client, auditors should consider the circumstances of that particular client and exercise their professional judgment.
As auditors work with clients throughout the pandemic, there is a real possibility that scope limitations will occur. For example, confirmations that are a key source of evidence may not be returned and alternative procedures may not be considered sufficient, or it may not be possible to evaluate the design and implementation of relevant controls at the client.
When assessing the impact of a scope limitation, auditors should focus on whether they are material and pervasive. "Pervasive" effects are those that, in the auditor's judgment, meet one or more of the following criteria:
- Are not confined to specific elements, accounts, or items of the financial statements.
- If they are confined, represent or could represent a substantial proportion of the financial statements.
- With regard to disclosures, are fundamental to the users' understanding of the financial statements.
Scope limitations that are material but are not pervasive to the financial statements result in a qualified opinion, while scope limitations that are both material and pervasive result in a disclaimer of opinion.
For audits of calendar-year-end 2019 financial statements, COVID-19-related subsequent events are likely to be Type II events (i.e., events that provide evidence of conditions that arose after the date of the financial statements). This includes declines in the fair value of investments.
While these events would not require recognition in the financial statements, disclosure may be required. Auditors should assess the appropriateness of the subsequent-event disclosures in the financial statements, and if an appropriate disclosure is not made, a modified auditor's opinion may be appropriate.
For audits of clients with year ends that fall in 2020, pandemic-related events may require adjustments to the financial statements or additional disclosures as Type I events (i.e., events that provide evidence of conditions that existed at the date of the financial statements).
RISKS AND UNCERTAINTIES
Management is required to disclose risks and uncertainties that could significantly affect (1) amounts reported in the financial statements in the near term or (2) the near-term functioning of the entity. Risks and uncertainties can stem from the nature of the entity's operations, significant estimates, or current vulnerabilities due to certain concentrations.
Many entities will be required to disclose risks and uncertainties associated with COVID-19, as the pandemic may meaningfully impact significant estimates and exacerbate concentrations. Examples include market and geographical concentrations in an area severely affected by COVID-19, and concentrations in the volume of business with one customer, supplier, etc. As such, auditors should assess whether the robustness of disclosures appears appropriate.
Free, in-depth audit and accounting resources
The AICPA has launched a free Coronavirus (COVID-19) Audit and Accounting Resources page at aicpa.org/eaq/covid19. Visitors can access reports that take deep dives into the topics covered in this article while learning more about key risks to consider in 2020 year-end audits. For information about how COVID-19 may impact other areas, from personal financial planning and tax to forensic accounting, visit the AICPA's Coronavirus (COVID-19) Resource Center at aicpa.org/coronavirus.
About the authors
Bob Dohrer, CPA, CGMA, is the AICPA's chief auditor. Carl Mayes, CPA, is an associate director with the Association of International Certified Professional Accountants.
To comment on this article or to suggest an idea for another article, contact Ken Tysiac, the JofA's editorial director, at Kenneth.Tysiac@aicpa-cima.com.
- "How Auditors Can Test Inventory Without a Site Visit," JofA, April 24, 2020
- "Tips for Auditing With Changed Controls During the Pandemic," JofA, April 13, 2020
- "Going Concern Tips for Auditors During the Pandemic," JofA, April 3, 2020
- "Pandemic-Specific Guidance for Auditors and Preparers," JofA, April 7, 2020
- Consequences of COVID-19: Potential Auditing Challenges, Center for Plain English Accounting
- "COVID-19 Audit Implications," June 2 (#WC2305874) and July 21 (#WC2305882)
- National Advanced Accounting and Auditing Technical Symposium (July 20—21) at ENGAGE Digital (July 20—24), aicpaengage.com
For more information or to make a purchase or register, go to aicpastore.com or call the Institute at 888-777-7077.