FRC issues coronavirus guidance for auditors
The Financial Reporting Council (FRC) has issued guidance (16 March 2020) for auditors in light of the current spread of coronavirus.
The guidance covers the following areas:
1. Logistical issues in preparing accounts and undertaking audits
Some companies and auditors are facing practical difficulties in preparing accounts and carrying out audits. The FRC expects this will affect the way in which audit firms carry out their audit of those companies, given ever increasing restrictions on travel, meetings and access to company sites in some jurisdictions and the need to develop alternative audit procedures to gather sufficient, appropriate audit evidence.
ICAS adds that these logistical issues are likely to also have an impact on audits which are solely being undertaken in the UK. With airlines and trains likely to decrease their level of operations in the coming days and weeks, the ability to travel within the UK is likely to be restricted.
2. Audit quality remains paramount and additional time may be required to complete engagements
The FRC reminds auditors of the continued need for audits to comply fully with applicable standards. It highlights that given the current circumstances, additional time may be required to complete audits and it is important that this is taken, even at the risk of delaying company reporting.
ICAS adds that auditors should be proactive in discussing planed audit timetables with clients whilst accepting that even revised timetables may be subject to sudden change given the fluidity of the situation. These timetables should be regularly revisited to allow for likely interruption to audit fieldwork and potentially the increased time it will take companies to prepare their respective information packs. Additionally, the likelihood of staff resources being depleted at both the audit firm and at the audited entity needs to be considered.
3. The impact of coronavirus on an auditor’s risk assessment of a company.
The FRC highlights that one of the key issues is the auditor’s risk assessment, and whether this needs to be revised. As the current situation is very fluid this is something that will need to be constantly reconsidered during the course of the audit.
ICAS adds that the audit firm will need to consider the likely impact of coronavirus on the entity’s staff and operations. Where has the threat level of existing risks been magnified and indeed is an entity now exposed to new significant risks? Has the audited entity any plans and measures to mitigate any such risks? Liquidity may feature strongly in such considerations.
4. Obtaining Audit Evidence
How the auditor gathers sufficient, appropriate audit evidence, recognising that the planned audit approach may need to change, and alternative procedures developed, particularly in group audit engagements. The FRC reminds auditors they must be able to gather the necessary, sufficient and appropriate evidence to be able to report or consider modifying their audit opinion. This ties in with point 2 above and the potential need for additional time to complete audits.
ICAS envisages that greater use will be required of technology in relation to the sharing of data and in the hosting of virtual meetings. Steps of course will need to be taken to ensure that appropriate security measures are in place when utilising such technological means.
5. Group audit review considerations
The FRC is concerned that the current situation should not undermine the delivery of high-quality audits. Therefore, group auditors need to consider how they plan to review the work of component auditors to meet the requirements in the standards, including considering whether alternative procedures can be used: for example, where travel is restricted. This ties into the increased use of technology noted at 4 above.
6. Implications for the auditor’s assessment of going concern and an audited entity’s future prospects recognising the high level of uncertainty
This will undoubtedly be a key focus of many current and forthcoming audits given that uncertainty about the global economy and the immediate outlook for many companies has increased.
In terms of the applicable ISA this remains the June 2016 version of ISA 570 ‘Going Concern’ although auditors can early adopt the 2019 version of the standard.
ICAS also highlights that consideration has to be given to the difficulties that management may have in preparing future projections given the fluidity of the situation. Indeed, such projections could change significantly in a short space of time. Care therefore has to be exercised to ensure that any projections reflect the situation as and when an audit report is to be signed.
7.The need to consider the adequacy of disclosures made by management about the impact on the company of COVID-19
ICAS adds that auditors need to also consider their responsibilities in relation to other information presented by management with the financial statements. This is covered in ISA (UK) 720 ‘The Auditor’s Responsibilities Relating to Other Information’ and of course very much depends on the nature of the audited entity e.g. is it a premium listed entity.
8. The need for the auditor to reassess key aspects of their audit on an ongoing basis
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. The points at 3 and 6 above very much fall into this category. Where the current circumstances have had a significant impact on the delivery of the audit, the auditor will need to consider how to explain this in their report, for example, by reporting this as a key audit matter.
ICAS adds that, while the vast majority of audit reports do not require the reporting of key audit matters, audit firms are still required to consider the impact of current circumstances on the overall audit and the audit report. For example:
- The impact of potential going concern issues including whether a material uncertainty exists.
- The sufficiency of audit evidence including circumstances where there is a limitation of scope.
- Whether sufficient disclosure is presented in the financial statements and whether the auditor should draw the users’ attention to any specific matters via an emphasis of matter paragraph.
Further information is provided in the full FRC guidance. The Financial Reporting Council (FRC) has previously published guidance for companies on disclosure of risks and other reporting consequences arising from the emergence and spread of COVID-19.
The FRC and ICAS are continuing to consider what additional advice and guidance may be necessary to support the audit profession in delivering audits in the coming months.
ICAS members with queries on any technical matter relating to the current situation are advised to submit these as normal via the online portal at icas.com. If it is then deemed necessary, this might lead to a telephone discussion at a mutually convenient time with an appropriate member of the ICAS team.
ICAS has also taken the decision that all onsite practice and audit monitoring inspection visits are to be postponed until 31 May 2020. The attendance of reviewers at office and home office premises is an unnecessary risk. ICAS will look to explore remote desktop visits as an alternative and believe that some firms will be able to accommodate a desktop review.
