Amid the evolving challenges and looming economic impacts of the COVID-19 pandemic, the PCAOB Staff released a Spotlight document reminding auditors of their responsibilities to identify, assess, and respond to risks of material misstatement and adhere to professional standards. The document primarily discusses the impact that the pandemic might have on an auditor’s risk assessment procedures, the execution of the audit, and potential impacts to client financial statements. Potential impacts to the auditor’s report and firms’ quality control considerations are also briefly discussed.
Risk Assessment
The PCAOB reminded auditors that the risk assessment process is not a discrete phase of an audit but rather a continual process that should be evaluated continuously over the course of the engagement. As new risks related to the pandemic emerge, auditors should consider these risks and design procedures that will adequately address them. Possible risks to consider include:
Changing incentives or increased pressures on management that might lead to new fraud risks
Changes or increased pressures on processes, systems or controls that might give rise to increased risk of error
As a result of these changes, initial responses to previously assessed risks might not be adequate, and revised procedures should be considered. If changes to the planned audit strategy or identified risks are significant, these changes are required to be communicated to the audit committee.
Execution of the Audit
The COVID-19 crisis may cause additional challenges in completing the audit, such as delays by management in responding to auditors’ inquiries or limited access to company personnel or information. These factors, along with a modified risk assessment, should cause the auditor to consider the following when modifying audit procedures or designing additional audit procedures:
Consider obtaining audit evidence of a different form. Reliability of such evidence should be evaluated.
Enhancing direction and supervision of less-experienced team members
Increasing the involvement of more senior or experienced team members in performing procedures related to complex issues
Involving, or increasing the involvement of, specialists
Presentation and Disclosure
Although the economic effects of the COVID-19 crisis on companies might vary widely, depending on industry, geography, or other factors, the auditor should evaluate and challenge management’s presentation of the financial statements, including the disclosures. The PCAOB specifically highlighted the following areas likely to be impacted:
Subsequent events disclosures
Going concern evaluation and disclosure
Asset valuation, including impairment triggers and related assessments
Accounting estimates, particularly those related to fair value measurement
Revenue recognition, particularly with regard to contract modifications
Leases
Hedging
Income taxes
Provisions, allowances, and loss contingencies
Debt modifications or restructuring
Debt covenants, other regulatory ratios, and minimum net capital requirements for broker-dealers
Disclosures related to liquidity, risks or uncertainties
You’ve heard our thoughts… We’d like to hear yours
The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].
Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.
This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.