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COVID 19 pandemic has caused a great deal of uncertainty in the global trade & economy. This has resulted in impact in the financial market as well. The uncertainty arises primarily due to interruption in the production, disruption of supply chain, closure of office facilities, unavailability of personnel and communication between them.

Due to restrictions caused by the COVID 19 pandemic and the related lockdown, several restrictions are faced by the auditors in terms of visiting the client location, meeting with the client, obtaining of audit evidence (through observation and discussion). However, to comply with the quality of audit as prescribed in the Auditing Standards, the auditors must carefully evaluate unique circumstances prevailing in their audit and assess the risk accordingly. Learn more about IFRS and IndAS here 

Areas which requires special attention and documentation are listed below:

Audit documentation requirement under COVID 19

Auditing Standard

Documentation requirement under COVID 19

SA 315 - Identifying and Assessing the Risks of Material Misstatement
through Understanding the Entity and its
Environment

Implication of COVID 19 on the operational disruption resulting in the change in the business model, reduced customer base, disruption in supply chain, contractual non-compliance, liquidity and working capital issue

SA 260 Communication with TCWG

Whether the impact of the COVID-19
has been incorporated into their risk assessment
processes and how they have identified and
assessed the significance of the emerging business
risks.

The auditor will only be able to form a conclusion relating to going concern once management has made its own assessment

Inventory valuation at a date other than the date of financial statement i.e. 31.03.2020. The physical verification of inventory may be conducted at a date other than the date of financial statement.
Whether the changes in the inventory from the inventory count date and the financial statement has been properly accounted.

Alternate audit procedure - Subsequent sale of specific inventory acquired or purchased prior to physical verification

SA 560 - The Responsibilities of the auditor for the subsequent events i.e.
events between the date of financial statements and the date of auditor's report

The auditor shall perform audit procedures designed to obtain sufficient appropriate audit evidence that all events occurring between the date of the financial statements and the date of the auditor's report that require adjustment of, or disclosure in, the financial statements have been identified.

SA 570 (Revised) Going Concern

Operational disruption is critically important for the going concern assessment. Auditors will need to
consider whether the threat to liquidity as a result of supply/demand disruption presents a material uncertainty to the going concern status for the 12 months look forward period

It is the responsibility of management to make the assessment as to whether the entity is a going concern

Management should consider the impact of COVID-19 on customers, suppliers and employees.
For example, could the entity continue to operate if employees are not able to physically present, and how reduced cash flows impact its working capital requirements. Management should also consider whether the insurance policies taken by the entity cover the losses arising from the COVID -19.

The auditor will only be able to form a conclusion relating to going concern once management has made its own assessment

If the entity is disclosing in their subsequent events disclosures that an estimate of impact cannot be made due to the evolving situation, this may result in a
material uncertainty on going concern within the audit report

SA 580 Written Representation

Auditors need to assess whether any specific representations may be required to be obtained
from the Management in relation to Managements' assessment of impact from the ongoing outbreak of COVID-19 on the financial statements for the year
ending March 31, 2020 as well as for the reasonable foreseeable future

Reporting standards
SA 700 (Revised)
SA 705 (Revised)
SA 706 (Revised)

Since in the current scenario there are high probabilities of going concern being
affected, existence of material uncertainties relating to going concern, the principles enunciated in SA 570(Revised) also need to be considered particularly
paragraphs 21 to 24 which prescribe manner of reporting in different situations

SA 701 – Communicating Key Audit Matters in Independent Auditor's Report

The auditor should evaluate whether the impact of the disruption caused because of COVID-19 to the operations of the entity, consequential impact on
the financial statements would be a key audit matter and if determined so, the auditor would need to report the same along with how the matter was dealt in the Auditor's Report

SA 720 (Revised) The Auditor's responsibility relating to other information

Additional disclosure due to COVID 19:
a. Risk assessment - Risk assessment due to COVID 19
b. Management discussion & analysis - Potential impact on their future operation
c. Notes to financial statement - Specific disclosure under subsequent events accounting standard

SA 240 - Fraud Assessment

The impact of COVID-19 on businesses could be very significant and could put pressures on management to meet performance targets or market expectations. This raises the risk of the likelihood of fraud in the financial statements to a higher level which requires the auditor to exercise a much higher degree of skepticism

 
Learn more about IFRS and IndAS here 

Some illustrative situations where the Auditor may need to express modified opinion due to COVID 19

  • The auditor is unable to obtain sufficient appropriate audit evidence relating to the material component audited by the other auditor as per SA 600 due to COVID-19 pandemic.
  • The financial impact arising out of the COVID-19 outbreak are not accounted or reported or disclosed as per the prescribed Accounting Standards, in the financial statements
  • The auditor has communicated misstatements to the management and those charged with governance relating to COVID-19 as per SA 450, Evaluation of Misstatements Identified during the Audit and the management or TCWG refuses to correct such misstatements, that are individually or in aggregate, material to the financial statements. Update your existing knowledge  about IFRS and IndAS here 

Source: Impact of Corona Virus on Financial Reporting and Auditors Consideration issued by ICAI Accounting & Auditing Advisory

 
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