Written by Jonathan Millar, Product Manager (Audit)
To say that the past 12 months have been challenging would be beyond an understatement. On top of the general disruption to working practices and their own business, auditors are faced with the difficulties in assessing the risks within their clients’ businesses associated with the pandemic and Britain exiting the EU. One of those would be challenging enough but the implications for audits of the combination of these factors are likely to be felt for some time going forward.
Supplementary documentation for assessing risks
CaseWare’s content providers have produced supplementary forms for consideration of these issues, which are available from the Download area of our KnowledgeBase. If you haven’t accessed those yet, please speak to one of our Support Team who will be able to help you with getting hold of them.
These consist of checklists to make an impact assessment and risk analysis of the issues involved.
The impact of Covid-19
When analysing the risks surrounding Covid-19 the auditor needs to be aware of the impact of the pandemic in different areas of the audit, such as:-
Accepting the appointment/ re-appointment
– there may be extra ethical considerations and safeguards to take into consideration if the usual rotation of the RI is delayed, or overdue fees arise due to the client’s circumstance
Entity and environment
– consideration is needed of the financial implications of the pandemic on the client, exposure to areas with severe consequences (key suppliers, production facilities), response and restructuring plans, reassessment of corporate objectives etc.
Materiality and misstatements
– possible reassessment of basis of materiality and performance materiality if there have been changes to the underlying business model or whether previously used benchmarks are still appropriate
Financial reporting issues (accounting estimates and fair values)
– perhaps there are new areas that require the development of accounting policies, such as recognition of grant income and other forms of government support, assets may have become impaired due to the economic environment
Availability of evidence
– where access to the client’s property has been prevented alternative procedures will need to be implemented to confirm the existence of the client’s assets, alternative means sought to access the entity’s accounting records
Going concern
– enquiry as to whether or not management has included the impact and uncertainty of the pandemic in their assessment of the entity’s ability to continue as a going concern, or whether the going concern basis of accounting is even appropriate
Subsequent events
– consideration of whether any significant subsequent events arising as a result of the pandemic have an effect on the planned audit approach
The impact of Brexit
In a similar manner, the auditor will need to consider the impact of Brexit in largely the same areas:
Scope of the engagement and accepting the appointment/ re-appointment
– as well as the ethical issues described above, there may be other changes in respect of audit exemption or consolidation exemptions in the Companies Act, or definitions of ineligible groups
Entity and environment
– consideration is needed of the financial implications of Brexit on the client, access to markets and demand for the client’s products and services, changes in laws and regulations affecting the client, adaptation of systems to address new processes
Materiality and misstatements
– possible reassessment of basis of materiality and performance materiality if there have been changes to the underlying business model or whether previously used benchmarks are still appropriate and the extent to which the reporting period has been affected by Brexit
Financial reporting issues (accounting estimates and fair values)
– assets may have become impaired due to the changing economic environment, contracts may now have become onerous or modifications to them may require a reassessment of how they are accounted for
Availability of evidence
– consider whether service organisations used by the client been impacted by Brexit, informing the client where additional audit evidence is to be provided, reviewing the reliability and comparability of data for use in substantive analytical review and using alternative procedures where necessary
Going concern
– enquiry as to whether or not management has included the impact and uncertainty of Brexit in their assessment of the entity’s ability to continue as a going concern, or whether the going concern basis of accounting is even appropriate, consider whether Brexit introduces any material uncertainties in the assessment of going concern
Other resources available
The ICAEW has brought together a broad range of resources to assist with various aspects of audit and financial reporting for the 2020-21 season at www.tinyurl.com/AB-2020-21Season.
It has also created hubs to help members and provide advice to those whose businesses are impacted themselves by these issues and these can be found at www.icaew.com/brexit.
Adding into this mix, the new considerations around ISAs (UK) 540, 570 and 700, we recognise that our customers are having to face some unprecedented challenges in the months and years ahead.