Audit in Covid Environment

Audit considerations in Covid-19 Environment

An article by our Partner @Jabir Contractor

We are again in a situation almost as previous year grappling with the Covid pandemic related restrictions where the movement and momentum of audit both has been adversely affected due to lock down in major states of the country. The fear of pandemic is preventing us from undertaking traditional face to face audit.

Having said that we as an auditors are required to issue Audit report, provide opinion and also ensure the safety and security of our audit staff. It’s a balancing act which calls for a lot of professional judgements and experience to discharge our function.

From the shareholders, investors and other stakeholder’s perspective it becomes very important that they are provided with a true and fair view on the financials in these difficult times. They do not want unpleasant surprises in future and hence very keen to get utmost information on the impact of pandemic on their company’s financial statements. Timely and adequate information becomes imperative. The information could be as a part of Board report, notes to Accounts, Management Discussions and Analysis or reporting to stock exchange etc.

In nut-shell there is a dual responsibility of the Management and auditor to deliver on the expectation of the society by doing their part of the job with utmost care and diligence. Further elaborating on the responsibilities of management and auditor, few areas highlighted hereunder need disclosure or attention while preparing and auditing the financial statements. 

MANAGEMENT RESPONSIBILITY:

1) A note on the impact of Covid is required from the management giving a true perspective about the financial loss and effect on business continuity. A transparent disclosure would go a long way in proving the corporate governance standards followed by the management.

2) The impact should further be analyzed into Qualitative and Quantitative terms in the financial statements. Figures would speak louder than words and hence analytics would be helpful for the investors/shareholders.

3) The impact should be quantified on the financial statements in terms of fall in the revenue, profitability, sales volumes, Gross margin, loss of customers etc.

4) A qualitative disclosure should supplement the quantitative disclosure must form a part of the financial statements.

5) It would advisable to present an elaborated disclosure on the impact on Revenue due to the pandemic by a detail disclosure in terms of fall in volumes, reduced realizations or shrinkage in margins etc. Revenue being the first and a major line item in the statement of profit and loss account, it deserves a detailed impact analysis due to the pandemic.

6) A note on impairment of assets would also be required based on Fair value of the assets.

Apart from the disclosure from management perspective as highlighted above, the audit procedure adopted by the auditor the following areas would deserve utmost attention of the auditors:

AUDITORS RESPONSIBILITY:

1) Going Concern Assumption:

Assessment of going concern assumption at the year-end becomes an important judgement to be exercised based on facts and disclosures made by the Management. Any projections/ forecasts need a through due diligence before its acceptance.

2) Impairment of Intangible assets:

Intangible assets like goodwill, patent, copyrights, software would be required to be reviewed for impairment if any.

3) Revenue recognition:

Revenue recognition policy of the management need a through audit from the perspective of cut-off applied for recognizing the revenue.

4) Lease accounting:

In case of asset light business if major assets are leased, the impact of lease rental concessions, waiver etc. invites attention of the auditor. This is more from the angle of proper documentations for the waiver/concessions from landlord and the consequence provisions in the accounts. 

5) Inventory Valuation:

Valuation of inventory at Net realizable value is required to be done with an emphasis on determining the correct NRV. Good amount of business understanding would be required to be garnered in order to arrive at the judgement of arriving at NRV. 

6) Subsequent event:

Post year end events in terms of adjusting/non-adjusting would be required amendments to the accounts accordingly.

7) Disclosures: 

It becomes necessary to provide a detailed disclosure of changes in financial position as compared to reported in the previous year. The usual examples would be following:

• Any change in the judgement or assumptions.
• Any loans disclosed as good in the previous year has gone bad during the current financial year.
• Any change in the classification of assets as compared to previous year.
• Reversal of any provisions.
• Any change in business or economic circumstances of business.

Apart from the audit procedures on certain areas as mentioned above, there needs to be a disclosure in the financial statement and audit report with regards to constraints in carrying out the normal routine audit procedures due to pandemic. However, it is imperative that auditors carry our alternative audit procedures in order to mitigate the risk of mis-statement in the financial statement. As a handy example if the inventory verification is not carried out physically then a roll forward procedure is undertaken to determine the adequacy of stock figure. Lastly in these trying times the quality and integrity of data needs to be seriously looked into.

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