The COVID-19 crisis has significantly altered the way auditors work. With remote work arrangements and the absence of in-person interactions with clients, it has truly been a testing time – especially for those who have joined the audit profession in the last year and a half. Some of the immediate challenges faced by auditors concern access to client facilities, personnel, financial records, and documentation. There is an increased need to understand the client’s risk profile and assess how the pandemic has affected their business.
The pandemic-induced operational disruptions have heightened focus on supply chain management, cash flow and banking arrangements. In addition, certain industries and businesses have been hit more significantly, which has exacerbated concerns around breach of debt covenants and going concern.
The key questions
Here are some of the burning questions auditors have had to deal with in the last few months:
- Are there any changes or limitations in audit scope (e.g. inability to attend inventory counts or access client documentation and/or personnel)?
- Are there changes in management and/or the entity’s governance bodies or ownership structure?
- Are changes to the audit engagement arrangement required (e.g. changes in reporting deadlines)?
- How has the client’s trading been impacted by the pandemic? Any new processes, revenue streams or accounts – or ceasing of significant ones in prior periods?
- Are there any changes in performance indicators that management and others use to measure and review the performance of the business?
- Are any changes required in the measurement basis used to set planning materiality?
- Does the entity have excessive production capabilities and/or excessive inventory held on hand (if the entity has reduced or idle production capacity, overhead costs may not be allocated to inventory as they were in the past)?
- Are there any management incentives or is management under pressure to meet earnings targets that could trigger manipulation of the financial statements?
- Is there an increase in the opportunity for fraud when the entity’s employees are working remotely?
- Is the composition of the audit team appropriate, and are any specialised skills required?
The scale of the challenges presented by the pandemic was unique and unprecedented. Auditors must, therefore, embrace a new approach.
The outbreak of COVID-19 has been as much a challenge as an opportunity for auditors. It has made way for new approaches to auditing – both in terms of dealing with clients and executing the audit procedures. Those who joined the profession in the last year and a half have probably never been to a client site. They may not know how to engage with clients remotely. It is much more difficult than in the past to operate as a team with individuals working on discrete areas and not understanding how that interplays with other audit areas. Learning by osmosis is more difficult in the post-pandemic era.
Overcoming the challenges to remote auditing requires:
- Forward planning
- An understanding of the changing nature of audit risks
- The leveraging of technology and utilisation of a data-driven approach
- An understanding of what is important to the users of the financial statements and increased communication with those charged with governance