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The challenge of obtaining sufficient, appropriate audit evidence

Audit evidence

Written by: Jonathan Millar, Product Manager (Audit)

At the time of writing, the UK has just entered its second period of three weeks of movement restrictions for all but essential purposes, and working from home has become the norm, where that is possible.

Regardless of when the ‘lockdown’ is lifted, it is likely that many of the measures of ‘social distancing’ will need to continue for some time yet. So how is that going to affect the auditor, who very often (sometimes literally as well as figuratively) has to get their hands mucky, out in the field?

During this crisis, various outlets such as the FRC and ICAEW1 have been publishing guidance to auditors regarding issues that will arise out of the restrictions that have been imposed, particularly that crucial one of obtaining sufficient, appropriate audit evidence.

Modifications of Audit Reports

On 16th March the FRC issued guidance to auditors on ‘Audit Issues Arising from the Consequences of the Covid-19 (Coronavirus) Pandemic’ 2 and then followed that up on the 21st April with guidance on ‘Modified Audit Opinions during-Covid 19 crisis’ 3.

Amongst other things, the FRC advised that during this time auditors will need to consider the impact of Covid-19 on:-

  • How the auditor gathers sufficient, appropriate audit evidence to support their audit opinion
  • How the group auditor proposes to review the work of component auditors, including whether alternative procedures can be used
  • The need for the auditor to reassess key aspects of their audit as a result of the fast-changing situation, recognising that this assessment will take place right up to the point of signing the auditor’s report, and may need the provision of further evidence and information by management.

These circumstances may require auditors to consider modifying their audit opinion.

The guidance released gives examples of the types of modification that may be required as well as a diagram setting out the decision-making process an auditor follows when considering a modified opinion, and the circumstances that apply in each case.

This occurs where, either an auditor is unable to obtain sufficient, appropriate audit evidence (because it is no longer possible to perform relevant audit procedures or because of the inherent uncertainty about the impact on a company of the pandemic); or because they disagreed with management; and the extent to which this undermines the reliability of part, or all, of a set of financial statements.

Alternative auditing procedures

Many firms have already been using remote working techniques by utilising advancing technology. This is only likely to accelerate in the immediate future in order to for the auditor to be able to obtain the sufficient, appropriate audit evidence they require.

Such techniques can include:-

  • Video conferencing
  • Use of secure web portals
  • Data analytics

Video conferencing

This has become the norm for many of us over the past few weeks with an exponential use of platforms such as Microsoft Teams and Zoom getting the headlines (other platforms are available).

What this facility provides is a means to maintain that vital element of auditing – the human contact. Obviously, judgement and verification of any representations given will still be required, and full documentation of such communication will need to be evidenced on the audit file.

There are also one or two extra benefits available in that screens and files can be shared (subject to firms’ own security requirements) and (with permission) recordings of conversations can easily be made.

Secure web portals

Many firms have their own secure portals through which confidential information from clients can be received. This can include general ledger files as well as other documentation required during the course of an audit.

Our own ‘prepared by client’ Cloud based tool Xtend can be used to this end as well, so that queries to clients can be followed through with secure data transmission into the audit file itself.

Data Analytics

Already a growing area in the enhancement of audit quality, data interrogation techniques are likely to come even more into their own, where physical restrictions to client premises remain in place.

The ICAEW has produced a report on recent developments and fundamental questions about the opportunities data analytics provides which can be downloaded from their website4. Previously the preserve of larger and mid-tier firms, these techniques are becoming more available with the potential to transform smaller audits in due course.

Facing the future

None of us can know the final impact the difficulties we are all going through will have in the longer term. But the firms that innovate and keep an eye on where technological developments are going to undoubtedly be the ones that come out of these challenges stronger, and in a better place to assist their clients as providing crucial advice and assurance services becomes even more valuable.

*These are the opinions of CaseWare Product Managers to provide information and insight to our products and should not be considered as a replacement to statutory guidance.