Neil Maniscalco, Director of Audit and Assurance at DFK Malta, discusses the impact of the coronavirus pandemic on the accounting and audit profession, and the new terminology, new processes and new way of working it has brought about:
No one would have ever imagined a couple of months ago that we would ever be in the situation we find ourselves today.
The interruption of normal life routines on a world-wide basis has led to some drawing parallels of the COVID-19 pandemic to World War II.
Even though this analogy can prove to be a bit misleading, what the current pandemic and World War II undeniably have in common is that they are both situations of crisis, and thus ask for a radical change in the way we live.
This new way of life came about in the accountancy and audit profession as well. Even though, thanks to advances in technology, remote working practices were already being widely used by many in our profession in the past couple of years, regular face-to-face communication with clients and colleagues, together with a physical office presence were still deemed to be important for carrying out our job effectively and in an efficient manner.
Thereby, the sudden change, back in March, to 100 per cent remote working with only virtual communication, brought about its own challenges and inefficiencies, particularly with those clients who were not accustomed to the virtual world.
This pandemic has basically impacted every business, in one way or another. Those in the tourism, non-essential retail and entertainment sectors were mostly impacted as they were forced to close down, resulting in zero revenue and outflow of fixed expenses.
Other sectors which continued to operate were still adversely impacted by other factors such as cash flow problems due to exposure to companies which COVID-19 and its implication on the audit profession stopped operating, reduced level of work due to less demand and higher costs due to inefficiencies.
The demand in the auditing sector remained relatively unchanged so far, particularly because most of our work relates to statutory audits and is carried out in arrears (i.e. after the reporting period ends).
On the contrary, due to the various challenges brought about by COVID-19, the level of work for auditors increased, resulting in increased costs to carry out audits. One of the main reasons for the increase in the level and complexity of work is due to the obligation to report on the going concern of companies.
As a result of the circumstances explained above, coupled with the uncertainties this pandemic has brought both on the economy and the companies, it is more difficult and time-consuming to assess the going concern.
Gathering of audit evidence has also proven to be more challenging, given that both the auditor and the client are working remotely, hence the exchange of documentation is taking longer.
Another impact of COVID-19 on the execution of audits is the risk assessment process, which has become more complex due to increased inherent risks as well to changes in internal controls in some instances.
Since most of the audits being carried out relate to 31st December 2019 year ends, there is no impact on the financial performance of the year being audited due to coronavirus, given that the outbreak and declaration by the World Health Organisation as a global pandemic occurred in early 2020.
Thereby, according to accounting standards, COVID-19 is considered as a non-adjusting post balance sheet event. In this case, due to the scale and impact of the event, companies should disclose a post balance sheet event note in the financial statements describing the impact COVID-19 is having on the company after year end, up till the approval of the financial statements and, if possible, quantify its effect.
The scenario would change for those audits being carried out with a 2020-year end as it is more likely that COVID-19 is an adjusting event (depending on the month of the year end), meaning that on the balance sheet side there is the possibility that certain assets may be worth less than the carrying amount in the books and hence would have to be impaired.
Furthermore, it may be the case that part of the decline in operations due to the pandemic is factored in the income statement. Thereby, in this instance, there would be an impact on the financial results being audited. New terminology, new processes and new way of working – it seems that the only constant is change.
2020 has shaken us all to an extent that no one had ever imagined. There have been announcements, advisories and guidance by all standard setters and regulators on how to deal with the accounting and auditing aspects in the COVID-19 situation. Unfortunately, this pandemic which has come upon us is not a sprint but a marathon, hence people need to adapt to endure these conditions and the same applies to our profession and to the execution of audits.
This first appeared in the June/July edition of the Commercial Courier
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