Anupinder Singh
The existence of COVID-19 situation has given birth to a lot of material questions in the auditors' mind which they need to consider while conducting the audit of any financial statement. Finding answers of some of these questions may be difficult depending upon the facts of the case.
In addition to the procedures adopted by the auditor while evaluating the internal control system and auditing the financial statement of any entity which he keeps in mind every year, this year he also needs to evaluate the assessment made by management and those charge with governance on current and future overall working of the entity due to this COVID-19 situation.
Here I have picked some points which needs special attention of the auditor while conducting the audit of financial statements. This is not an exhaustive list.
I have tried to make this article more informative while keeping it simple and as precise as possible.
These points are common irrespective of the which standards (Eg: IFRS, Ind. AS or Traditional Accounting Standards) are being followed by the entity for the preparation of financial statements:
Going Concern:
Impact of COVID-19 situation on some industries like Airline, Hospitality and Tourism etc is so drastic that the management will have to reconsider this fundamental accounting assumption. Financial statements of these industries include substantial amount of Interest & Borrowing cost because of the huge investment required to commence these businesses. If going concern assumption is not applicable then the Financial statements have to be prepared on liquidation basis.
Impairment of Assets:
Some fixed assets are valued in financial statements at Present value of future cashflows from those assets. Here future cashflows will have to be computed again with good possibility of new computation being less than the previously computed, hence impairment loss will have to be recognized in books.
Inventory valuation:
We value inventory at cost or NRV whichever is low. Some entities don't know even they will be able to make sale of their stocks as demand has gone drastically down. Here NRV may be less than the cost of stock on 31st March 2020, hence NRV has to be taken as value of the inventory and balance to be written off in the Statement financial results.
Liquidity:
Current and Liquidity ratios of some entities may fall below ideal. This will contribute towards increase in headache of the banks and financial institutions who have funded them. Compliance of NPA norms of RBI needs to be checked closely while auditing the financial statements of banks and financial institutions.
Provision for doubtful debts:
Recoveries from customers will be difficult as all will be facing liquidity problem. Hence appropriate provision needs to be created in financial statements.
Contingent Liabilities:
A lot of entities will not be able to complete their contracts on time and some may require escalation clause to be invoked. This may result into litigation among the parties of the contract. Their impact has to be evaluated in financial statements or its footnotes.
Deferred Tax:
We have to carefully check which adjustments will result in timing difference ultimately resulting in impact on deferred tax.
All the above mentioned points, either singly or in combination with each other, contribute in cutting down the profits and increase in losses of the businesses. Though there are some industries which are benefitted by this situation (Eg: Pharmaceutical) and some remained constant (Eg: Essential goods)
Covid-19 situation has increased the risk of material misstatement in the financial statements which may be due to fraud or error (intentional or unintentional). Hence following measures are suggested:
More of professional skepticism attitude needs to be followed.
Remember: Management representations do not on their own provide sufficient appropriate audit evidence.
Basis on which management has made estimates and judgements have to be reconsidered by the auditor.
If unable to perform any audit procedure, try to find the best alternative audit procedure.
The existence of COVID-19 situation has given birth to a lot of material questions in the auditors' mind which they need to consider while conducting the audit of any financial statement. Finding answers of some of these questions may be difficult depending upon the facts of the case.
In addition to the procedures adopted by the auditor while evaluating the internal control system and auditing the financial statement of any entity which he keeps in mind every year, this year he also needs to evaluate the assessment made by management and those charge with governance on current and future overall working of the entity due to this COVID-19 situation.
Here I have picked some points which needs special attention of the auditor while conducting the audit of financial statements. This is not an exhaustive list.
I have tried to make this article more informative while keeping it as precise as possible.
These points are common irrespective of the which standards (Eg: IFRS, Ind. AS or Traditional Accounting Standards) are being followed by the entity for the preparation of financial statements:
Going Concern:
Impact of COVID-19 situation on some industries like Airline, Hospitality and Tourism etc is so drastic that the management will have to reconsider this fundamental accounting assumption. Financial statements of these industries include substantial amount of Interest & Borrowing cost because of the huge investment required to commence these businesses. If going concern assumption is not applicable then the Financial statements have to be prepared on liquidation basis.
Impairment of Assets:
Some fixed assets are valued in financial statements at Present value of future cashflows from those assets. Here future cashflows will have to be computed again with good possibility of new computation being less than the previously computed, hence impairment loss will have to be recognized in books.
Inventory valuation:
We value inventory at cost or NRV whichever is low. Some entities don't know even they will be able to make sale of their stocks as demand has gone drastically down. Here NRV may be less than the cost of stock on 31st March 2020, hence NRV has to be taken as value of the inventory and balance to be written off in the Statement financial results.
Liquidity:
Current and Liquidity ratios of some entities may fall below ideal. This will contribute towards increase in headache of the banks and financial institutions who have funded them. Compliance of NPA norms of RBI needs to be checked closely while auditing the financial statements of banks and financial institutions.
Provision for doubtful debts:
Recoveries from customers will be difficult as all will be facing liquidity problem. Hence appropriate provision needs to be created in financial statements.
Contingent Liabilities:
A lot of entities will not be able to complete their contracts on time and some may require escalation clause to be invoked. This may result into litigation among the parties of the contract. Their impact has to be evaluated in financial statements or its footnotes.
Deferred Tax:
We have to carefully check which adjustments will result in timing difference ultimately resulting in impact on deferred tax.
All the above mentioned points, either singly or in combination with each other, contribute in cuting down the profits and increase in losses of the businesses. Though there are some industries which are benefitted by this situation (Eg: Pharmaceutical) and some remained constant (Eg: Essential goods)
Covid-19 situation has increased the risk of material misstatement in the financial statements which may be due to fraud or error (intentional or unintentional). Hence following measures are suggested:
- More of professional skepticism attitude needs to be followed.
- Remember: Management representations do not on their own provide sufficient appropriate audit evidence.
- Basis on which management has made estimates and judgements have to be reconsidered by the auditor.
- If unable to perform any audit procedure, try to find the best alternative audit procedure.
Disclaimer: All the above mentioned may or may not be applicable to some entities depending upon their nature of businesses.
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