It is likely that from late 2021, with vaccination rates exceeding 80%, Australian businesses will begin to recover from the financial toll created by COVID-19. However, as government assistance comes to an end, there will be some major issues to consider with business sustainability and profitability.
The Auditing and Assurance Standards Board (AUASB) has already provided feedback and guidelines concerning going concern issues. In a special report published in May 2020, the AAUSB provided an overview of auditor, director and management responsibilities concerning solvency and ongoing concern. These issues are highly relevant as 2021FY financial reports are prepared and the external audit season proceeds.
Key going concern questions that should be considered:
- What is an assessment of solvency and going concern?
- What are the auditor’s responsibilities regarding solvency statements and going concern assessments?
- What are the obligations of the auditor under section 311 in relation to solvency and going concern?
- What are the disclosure requirements outside of the financial statements?
- What should management consider to identify going concern issues?
- What procedures does the auditor have to undertake when evaluating management’s assessment?
- If indicators of going concern issues have been identified, what does management have to do next?
- What if the entity is in hibernation?
- What procedures does an auditor undertake when the entity is in business hibernation?
Click here to view the report ‘The Impact of COVID-19 on Going Concern and Related Assessments.
Asset impairment is also likely to be an enhanced risk.
While preparers often focus on goodwill when considering impairment, it is equally important for companies to evaluate other assets that may be impaired, such as property, plant and equipment, definite and indefinite-lived intangibles, inventory, trade receivables, right of use assets, debt and equity investments. Evaluating these assets and ensuring that the appropriate basis is reflected in a company’s financial statements requires a well-coordinated effort with cross-functional expertise.
Financial analysis and scenario planning are essential.
All businesses should be assessing how they will be affected by COVID-19 in the short and medium-term. Conducting financial analysis will be essential for business recovery in uncertain times when underlying vulnerabilities are exposed. Financial analysis involving realistic and pessimistic cashflow scenarios should provide the data needed to update forecasts and re-examine business strategies and priorities. External auditors should be able to provide their clients with Pro-forma documents to assist with financial assessment.
There is also a great opportunity for accountants and advisors experienced in virtual CFO roles to provide experienced advice and direction in relation to financial and operational decisions. Where appropriate, these services should be provided as the separate scope of work and fee for service.
Where should the process start with auditors and advisors?
Key questions that external auditors and advisors should raise with business clients include:
- Have relevant stakeholders and decision-makers met to discuss the impact of COVID-19 on business performance and profitability? Directors and key managers should already identify key risks and establish a direction for their businesses under the assumption that ‘business as normal is unlikely to eventuate for some time.
- If the business has been running close to insolvency, how much of the financial deterioration was due to COVID-19 and how much was due to underlying structural concerns? What is the likelihood of financial recovery over the next 12 months?
Online auditing is here to stay.
The other aspect of the evolving audit environment focuses on how auditors manage workflow and communicate with clients.
The COVID-19 pandemic has resulted in auditors being forced to work remotely using technology, given the strict social distancing rules imposed by state governments.
In the past, many clients and audit firms have resisted an online audit approach as it can potentially disrupt the working relationship. However, progressive firms understand that online auditing can also lead to significant improvement in workflow. As a result, there is a real opportunity to streamline compliance tasks and create time and capacity to add value in other areas, including risk management and profit generation.
It is important that in going online, there is an even stronger focus on the personal touch through identifying and maximising client touchpoints and by using videoconferencing to engage with clients more directly. Some firms already experienced with online communication portals have seen an improvement in communication. The relationship between firm and client becomes more collaborative and consultative.
COVID-19 gives rise to new and rapidly changing conditions that auditors may not have previously encountered. As a result, auditors should be alert, exercise professional scepticism and apply professional judgement about the potential for these conditions to give rise to possible material misstatements or other auditor reporting issues. On the positive side, changes to technology and processes required to take auditing online have already led to stronger and more efficient workflow, enhanced client relationships and a renewed focus on value-added services.
The National Audits Group is well prepared to manage audit clients in the current environment. If you would like to discuss the implications of COVID-19 on your audit clients or how NAG can help, give us a call.
Steven Watson, Managing Director, National Audits Group