Audit tests positive for COVID-19

Bryan Borg  -  14/October/2020

Well not literally! But directly or not, who can say that he/she has not been affected by this global pandemic that brought the world to its knees?

The audit profession is no stranger and audit and accountancy firms had to adapt to this new norm and its effects. Needless to say, the adverse economic conditions had a domino effect on all industries including audit firms, as their clients struggled to keep up with their financial requirements, experienced huge drop in revenues and consequently suffered losses. 

Beyond this, the companies’ directors, management and auditors had to undertake additional procedures in line with guidelines provided by Authorities and the profession itself. These entailed further analysis and appropriate disclosures that needed to be considered when a company prepares its annual financial statements. 

In turn, auditors had to take the necessary steps to obtain reasonable assurance that such disclosures are transparent and relevant to the users of the financial statements and stakeholders of the respective company.

Management must make sure that an appropriate assessment is conducted to analyse the financial effects that COVID-19 has on their company, both for the period covered by the financial statements and also for the near future. Such assessment should consider the financial health and the ability of the company to continue in operation. Ideally and when possible, the inclusion of estimates of expected revenues, losses and financial position are to be disclosed as this would provide comfort or otherwise to stakeholders.  As a minimum it is recommended that when reliable estimates cannot be computed, a disclosure must be included in the financial statements stating this fact and whether there are any uncertainties in relation to the company’s going concern. 

Consequently, an audit engagement would now entail a review of such judgements, estimates and inherent disclosures in the financial statements. The auditor will then assess how this affects the audit report.

This does not necessarily mean that the audit report will be qualified. Some players in the industry and the public in general unfortunately have the perception that an audit report can merely be clean or qualified, good or bad! This is not always the case and an unmodified opinion can still be issued with additional commentary such as the following:

Emphasis of Matter paragraph 

This is not a modification but is included so that users can immediately note that the directors have included additional disclosures in the financial statements which are of relative importance and thus need to be underlined.

Material Uncertainty due to Going Concern

Similarly to an Emphasis of Matter paragraph, this does not necessarily modify the audit opinion. However, due to the significance of the scenario it merits a separate paragraph. The inclusion of this paragraph was common for financial statements having their accounting year ending 31 December 2019, and for which directors were unable to reliably estimate the ability of the company to continue as a going concern due to the subsequent crisis brought about by COVID-19. Even though disclosures reflecting such matters would have been included in the financial statements, and the auditor would have obtained sufficient appropriate audit evidence, still this could not go unnoticed in the auditor’s report.

It goes without saying that limitations in obtaining audit evidence (for instance the auditor could not physically attend a stock-take or lack of assessment by management on the impact brought about by COVID-19), could still lead to qualifications of audit opinions.

At KSi Malta we strongly believe that communication with clients is key in explaining the impact of our audit work due to COVID-19 and the considerations mentioned in this article.


This article was also published on The Sunday Times

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