Hello everyone, I hope you all are doing well and staying safe at your places.
We all are having multiple views over the impact of COVID-19 in Accounting and auditing.
At present, many of us are doing Audits remotely on the basis of the availability of data. However, while doing audits remotely the effectiveness of the work can’t be such as we do after visiting the client place physically. The client may provide us data for analysis on email and testing also can be done on a sample basis, however, there are multiple risk assessment activities that can’t be done effectively through remote auditing.
Since now we are expecting that complete lockdown will be lifted soon and again we have to resume our practices as we did before Lockdown however while doing the audit post lockdown Auditor have to be very vigilant while looking to the various aspects such as inventory, business continuity plan, going concern, etc.
Following are the key points which has to be taken care while doing audit post Lockdown:
1) Review of Business Continuity Plan:
The auditor should review exiting BCP and provide Inputs on BCP and validation of assumptions used /dry runs on impossible and unanticipated situations.
BCP should be sufficiently flexible and reflect the firm’s size, complexity, and business activities.
2) Review of management’s assumption of Going Concern
Since many sectors hit hard by COVID-19 hence they may face financial distress such as a decline in demand, failing in margins, shortage of cash flows.
Considering the viability risk related to COVID-19 and in compliance with SA 570, Auditor would evaluate and conclude on the appropriateness of management’s use of the going concern basis of accounting in the preparation of financial statements and would need to conclude whether a material uncertainty related to the entity’s ability to continue as a going concern exists.
Disclosures shall also be made such as material uncertainties that might cast significant doubt upon an entity’s ability to continue as a going concern.
3) Important aspects to be captured in MIS
MIS should contain multiple ratios such as liquidity ratio, Current ratio including the cash flow status. Further, it should also contain expected outflows and expected inflows.
Also, Budgets of sales and production will be appropriate considering the guidelines issued as a precaution of COVID for example as per the guidelines only 50%/33% staff will work for some time.
4) Review of Compliances
What are the additional compliances required from SEBI, MCA, and other statutory bodies? Whether these all are incorporated in regular compliance calendar or not.
All the Modifications in compliance calendar including the dashboard of escalations/prioritizations of compliances as per the timelines have to be checked.
5) Payment controls during Remote Working
Since employees are working from home, all of the entities opted online payment mode to make payments during the lockdown however there are many controls that need to be in-placed so that no additional payment and fraud will be made. Hence have to check the additional controls in-placed by the entity. All the payments have to be checked which were made during Lockdown.
6) Controls over IT System & Backup
An auditor ensures the adequacy of IT infrastructures, Cyberthreat mitigation procedures, guidelines, backup procedures, the importance of testing, online banking, etc.
Further, since most of the organizations working remotely additional whether guidance was provided to all the staff including the Do’s and Don’ts and using the personal networks, blockage of Pen drive access, etc.
7) Inventory Verification during COVID
There is a high risk of misappropriation of Inventory. Auditor has to ensure whether verification of the inventory has been done at the near the end of the financial year. Whether they have complied provisions of SA 501, also ensure whether it was done on a sample basis or 100% verification. Further, if the verification has been done by another auditor then the auditor has to rely on the work done by another auditor subject to the provisions of SA 600.
8) Inventory Valuation
During the lockdown, the company may have to incur any cost which was earlier added in production cost such as direct fixed cost however if should not be exceeded due to short production or no production. Allocation expenses should not increase as the consequences of low production. Unallocated overheads are recognized as expenses in the period of its occurrence.
Further, Inventory may be written down to NRV if the movement of inventory reduces or the decline in selling prices, or maybe due to obsolesce.
9) Review of Overall Expenses
Every expense recorded in cost ledger during the lockdown period and all the exceptional expenses has to be checked with due care. For example staff welfare expenses, staff salary including casual staff salary.
10) Impairment of Assets non-financial assets
It has to be assessed whether there is any indication that non-financial assets may be impaired. The impairment test has to be carried out only if there is any indicator. Further, the entity has to estimate the recoverable amount.
For example, Future cash flow expectations may be affected by COVID-19 if its disruptive effects are sustained this is a so-called triggered event or can be considered as an indicator.
11) Risk arises from Process Outsourced
Many of the organizations have outsourced multiple processes to third parties such as payroll processing, IT control, Data Backups, etc. Auditor has to review the additional controls in-placed during remote workings and BCP plans of these third parties.
12) Existing Contracts
Auditor has to review whether they are having a force majeure clause and the doctrine of frustration in all the key contracts.
“Force majeure clause is generally available in all the contracts that essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as a war, strike, riot, crime, epidemic.”
13) Check of Liquidity Damages
Before the lockdown, entities may have multiple orders in hand and at different stages such as RM orders placed, Material procured, under production process, or in finished goods. Vendor may invoke the force majeure clause and due to this potential liquidity damage claims may arise.
14) Insurance Claims-Contingent Assets
Nowadays every organization has taken insurance to cover up various losses arising from various aspects such as cash, inventory, building, and others including loss of profit due to business disruptions. Auditor has to check if any claim is recorded as receivable there must be virtually certain i.e. the insurance entities have accepted the claims and the insurance entities will meet its obligations. Hence it can’t be recorded on the basis of conditions fulfilled as insurance companies also affected the pandemic.
For example, loss arises due to material obsolete lying with the transporter and not received due to pandemic and now become obsolete for which insurance claim is filed by the organization. In this case, the claim has to be recorded only when it’s virtually certain.
15) Disruption of Supply Chain Management
There are many industries working during the Lockdown related to Essential commodities such as Pharma, Grocery, etc. Auditor has to ensure whether they have taken proper licenses or clearance certificates etc. Further, how they mitigate the challenges faced in the SCM process during the lockdown. Apart from above, Additional costs incurred to arrange the Raw Material, Manpower, and consumables, etc. has to be reviewed with due care.
16) Risk from Vendors
Auditor has to identify the Risk that will emerge on account issues with vendors and non-availability of materials. Further, to reduce the risk of dependency, whether an entity having alternate vendors and what will be the additional cost that will hit the statement of profit & loss account when procurement made from alternate sources. Also, it has to check whether, in case of procurement, Share of Business has been defined or not by the entity however this will not apply in case of OEM procurements.
17) Risk from Customers
Possible contract cancellations/renegotiation/deferment, due to disruptions at key customers.
If material already procured then recovery or diversification of the material. Further, if the material is not supplied on time it may also result in losses from the imposition of penalties due to delay in supply.
18) CAPEX related to Project
It has to check that Material already procured can be deployed to other projects or wither return to the vendor. If the operations related to projects were shut off then whether cost ledger was blocked during that lockdown period or not, also ensure whether the project area sealed during this period.
19) Working capital management
Auditor has to ensure whether the entity is having sufficient cash flow for managing day to day operations. Further, it has to be checked whether any loan/advances which categorized as long term earlier but due to breach of covenants in compliances may become current and have not recorded as a current liability.
20) Borrowing Cost
Capitalization of interest is suspended when the development of an asset is suspended.
The management may consider this aspect while evaluating the impact of COVID-19. The interest expenses related to the suspended period has to be recognized as an expense in profit & loss account.
Author may be reached at garg.nishank@gmail.com for any further inquiries or +91-9718005226.
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