The coronavirus pandemic leaves auditors with the task of issuing opinions on the financial health of companies in increasingly uncertain times. As clients face enormous pressures from the impact of the rapid economic downturn, we discuss some of the key considerations for auditors.  

ISA (UK) 560 – Subsequent events
The auditor is required to perform procedures to obtain evidence on all material events occurring between the date of the financial statements and the date of the auditor’s report. For companies with 2020 year ends, responses to Covid-19 may increase the number of significant adjusting and non-adjusting events.  FRS 102 requires disclosure of non-adjusting events and the auditor must determine whether management’s disclosure is appropriately reflected in the financial statements. 
FRS 102 does not include detailed disclosure requirements, since the information needed depends on the precise nature of the event. Paragraph 32.10 simply requires, for non-adjusting events, disclosure of the nature of the event, and either an estimate of its financial effect or a statement that such an estimation cannot be made. Due to the huge impact that Covid-19 is likely to have on many businesses, shareholders are likely to expect to see significant detail on the current impact to the entity’s operations, profit, financing, dividend policy, and ability to continue trading. Croner-i’s Reported Disclosures provide extracts of IFRS disclosures in recently published annual reports and include Covid-19-related subsequent events.
If the entity is no longer a going concern, this will require a change in the basis of accounting even if the deterioration in performance occurred after the end of the reporting date. The auditor will therefore need to consider if there are any implications for the auditor’s report. 

ISA (UK) 570 – Going Concern
ISA (UK) 570 requires the auditor to evaluate the assessment made by those charged with governance of the entity’s ability to continue as a going concern. In recent months, high-profile companies such as Flybe and Laura Ashley have fallen into administration citing the virus as a contributing factor to their demise.  The government is hopeful that its support schemes will help keep businesses afloat for longer. However, it can only be expected that there will be significant public scrutiny on the auditor’s assessments of a company’s ability to continue trading. Management will need to produce evidence, most likely in the form of revised budgets and cashflow statements, that the entity can weather this crisis. Risks to viability could come from pressures on working capital, problems in the supply chain, perhaps due to the enforced closure of services and amenities, or a general economic downturn. The auditor will need to review management’s assessment, perform sensitivity analysis on key components and ensure that the entity’s borrowing facilities, cash collection rate, contingent liabilities, and ability to adapt to any further events are considered.
There may also be implications for the auditor’s report in relation to going concern. The auditor may conclude:

  1. The use of the going concern basis of accounting is not appropriate in the circumstances: In this case the auditor issues an adverse opinion in their report. If management prepares financial statements on a liquidation basis and the auditor considers this to be acceptable, then the auditor can issue an unqualified opinion and may consider it necessary to include an Emphasis of Matter paragraph to draw this to the users’ attention.
  2. The use of the going concern basis is appropriate and no material uncertainty exists: The auditor in this circumstance includes a separate section in the auditor’s report concluding that the auditor has not identified a material uncertainty and that management’s conclusion that the use of the going concern basis in preparing the accounts is appropriate.  
  3. The use of the going concern basis is appropriate but one or more material uncertainties exist. If the auditor has concluded a material uncertainty exists, they must assess whether management’s disclosure of the uncertainty in the financial statements is adequate.
  • Adequate disclosure – the auditor can give an unmodified opinion but the auditor’s report would include a section on ‘Material Uncertainty Related to Going Concern’ to bring the reader’s attention to the note disclosing the uncertainty. The auditor should explicitly state that the opinion is not modified as a result of the uncertainty.
  • Inadequate disclosure – the auditor either expresses a qualified or an adverse opinion as appropriate. In the basis for qualified (adverse) opinion section of the auditor’s report, the auditor states that a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern and that the financial statements do not adequately disclose this matter.

With talk of a global recession on the horizon, the auditor will need to consider the above very carefully. The FRC, as stated in its Guidance for auditors and matters to consider where engagements are affected by coronavirus (Covid-19 Bulletin), expects more companies and auditors to need to consider reporting on material uncertainties. Going concern assessments may become increasingly difficult and the FRC expects that the auditor’s work on going concern to be more extensive. 
Even for small and micro-entities in the UK, where the applicable accounting framework may not contain the same requirements, the auditor is nevertheless required to consider management’s assessment of the going concern basis and the adequacy of disclosures in relation to any material uncertainties that exist. There may be implications for the auditor’s report where disclosure of such uncertainties is not adequate for the purposes of a true and fair view.

ISA (UK) 720 - The auditor’s responsibilities relating to other information
A qualified or adverse opinion or the existence of a material uncertainty may also have an impact on the auditor’s opinions on statutory and non-statutory other information if the relevant matter is not referred to appropriately in other information, such as the strategic report, or if the other information is not consistent with the information in the financial statements. Auditors must fulfil all their responsibilities under ISA (UK) 720 to ensure that other information presented supports ‘the story’ of the accounts. 

ISA (UK) 315 – Risk assessment
Auditors planning the audits of companies with 2020 year ends will need to consider the impact of coronavirus on all areas of the financial statements. ISA (UK) 315 requires auditors to perform procedures to gain an understanding of the entity, including its internal control system in order to assess the risks of material misstatement in the financial statements. During this uncertain time where events are changing rapidly, auditors will need to perform planning procedures throughout the audit, not simply at the start. The audit strategy and audit plan may change with additional identified risks resulting in more detailed substantive testing being performed. The FRC, in its Covid-19 Bulletin, also warns that in such difficult times, entities internal controls may not be operating, which may increase the determined risk in the engagement.
ISA (UK) 315 requires auditors to perform risk assessment procedures to obtain an understanding of different aspects of the entity and the environment. Items to pay attention to this year include:

  • Industry conditions – demand, capacity, price competition 
  • Supply chain issues
  • Government grants, reliefs or assistance that may be available
  • The status of any insurance claims
  • Tax relief or deferral
  • Debt structure – including covenants, restrictions, guarantees
  • Foreign exchange exposure
  • Interest rates
  • Value of investments
  • Employment – staff headcounts, sick pay
  • Provisions arising from onerous contracts and legal claims
  • Contingent assets and liabilities

Auditors will need to carefully consider any estimates and judgments. Impairments of financial assets, non-financial assets and inventories as well as provisions and items valued at fair value will all need assessing to ensure the assumptions made are still appropriate and any valuations are reasonable. Entities may now be in contracts for rent or services which are no longer required, and the auditor should review these carefully to conclude if there are any financial implications. Seeing the big picture rather than focusing on the usual significant risks will be crucial to maintain high quality audits. 

ISA (UK) 500 – Audit evidence
Given that many offices have implemented home-working or are operating at reduced capacity, audit firms may need to consider their ability to gain sufficient and appropriate audit evidence as required by ISA(UK) 500 Audit Evidence. That, combined with the possible staffing challenges faced by all businesses at this time, may result in reporting deadlines being pushed back. Audit firms will need to engage with their clients as to how best to proceed to safeguard audit quality and ensure filing deadlines can still be met. The FRC also reminds auditors in its Covid-19 Bulletin to assess both the sufficiency and appropriateness of audit evidence gained through increased reliance on technology and to ensure this assessment is clearly documented.
On 18 March 2020, Companies House announced that companies can make applications for delay if it becomes apparent that they will miss a filing deadline due to coronavirus. Auditors should encourage their clients to act in advance of the deadline where delays are likely due to extreme circumstances.
Where auditors are unable to obtain sufficient and appropriate evidence they will need to consider modifications to the auditor’s opinion.

ISA (UK) 600 - Group audits
On 28 February, the ICAEW released a guide Coronavirus: Considerations for Group Auditors’ aimed at providing practical considerations for group auditors with components in areas affected by the virus. With nearly every country currently fighting or preparing to fight the virus at some point in 2020, group auditors need to consider whether they can meet the requirements of ISA 600 (UK) to evaluate and review the work of a component auditor. If this is not possible, the group auditor must perform additional audit work and inform the relevant competent authority, i.e. the FRC if the entity is a public interest entity. The ICAEW suggests that group auditors identify impacted audits, categorise them by significance to the group and understand the impact on the component. Discussions with management may help to obtain the information required for reporting purposes and delaying reporting deadlines may be necessary. Where site visits were planned, it is suggested that the group auditor considers alternative ways to demonstrate that they have reviewed and evaluated the component audit team. Conference calls, more detailed reporting from the component auditor and/or additional procedures performed by the group audit team may be necessary and will need to be planned for appropriately.
Although the coronavirus has sparked unprecedented government intervention to support businesses, the ultimate impact of this crisis remains to be seen. With great uncertainty looming, it is vital that audit firms maintain high quality audits and continue supportive relationships with their clients while remaining professional and independent, to help ensure the reliability of financial and other information in annual reports. 

Further resources
Further guidance on auditing can be found in Croner-i’s Navigate Audit, which provides everything needed for compliant audit and assurance assignments, from acceptance and engagement through to delivery and reporting. Content is clearly organised by the type of entity being worked on (private company, small company, charity, pension scheme, club and academy) and type of resource needed. Comprehensive commentary, guidance and tools are linked to each other and to the underlying standards and requirements.
For Covid-19 related resources, Croner-i’s Covid-19 Quicklink provides easy access to all relevant resources on the Croner-i platform including tax, audit and accounting.

About the author
Kate Beeston ACA is a technical writer at Croner-i with a wide range of audit and accounting responsibilities, including solicitors’ accounts, charities, ethics and IFRS reporting. Before joining the team, Kate worked as a financial reporting and audit tutor at BPP in London where she prepared students for a range of professional exams including for ICAEW, ICAS and ACCA. She has an in-depth technical and practical understanding of IFRS, ISAs and ethical standards. Kate qualified at KPMG where she gained experience auditing FTSE 100 and other large corporate organisations.