Mar 11, 2019

Navigating COVID-19 Audit Challenges

Social distancing and other pandemic safety measures present challenges. Here's how to navigate around them.

Under the new remote work environment in which many CPA firms and their clients now find themselves, external auditors have had to modify some of their traditional audit procedures.


As part of an annual audit engagement of a manufacturing client, a mid-sized CPA firm in the New York Tri-State area would normally perform an inventory observation — but travel restrictions and other COVID-19 obstacles made an on-site visit risky, if not impossible. The CPA firm contacted Collemi Consulting for advice and we suggested an alternative approach: do a remote physical inventory observation, using either a tablet or a smartphone.


A limited number of the manufacturing firm’s employees were still working on-site, wearing personal protective equipment (PPE) — so, under the audit engagement manager’s video-supervision, the employees could do a count, open boxes for testing, and perform other tasks as needed. Audit documentation requirements could be met through still photos, videos and the engagement team’s detailed notes.


The ongoing COVID-19 pandemic has had a significant economic and financial impact on businesses, and has also presented numerous challenges for auditors as they attempt to comply with their professional responsibilities and regulatory requirements. Consequently, audit engagement teams should also be prepared to address a wide range of issues.


  • Difficulty accessing client records — especially for clients who still maintain their records in hardcopy
  • Disclosure of enhanced risks and uncertainties; especially significant estimates and vulnerabilities due to concentrations in revenues, material, labor, specific markets, geographic and other areas
  • Adjusting procedures to address potential fraud risks
  • Obtaining audit evidence in cases where a client location is either closed or key personnel are not on-site
  • Confirmations may be a viable alternative to obtain audit evidence
  • In addition to video-enabled observation, clients that are unable to perform physical inventory counts at year‐end may decide to perform them on an alternative date, or perform alternative procedures if the client is using a cycle count procedure and a perpetual inventory system


In addition to coping with remote physical audits, particular focus should be on understanding the internal controls of the remote environment, increases in going concern assessments, significant financial reporting and disclosure implications, and the likelihood of not issuing an unmodified opinion.


In order to understand the client’s remote environment internal controls, especially in an unstable period, engagement teams should inquire whether any changes to internal controls occurred after preliminary work commenced. Often, those controls may have changed to accommodate remote work forces, and engagement teams will need to evaluate the degree of reliance that can be placed on those controls — especially since they may have been in effect for only a brief portion of the current year.


Obtaining an understanding of controls may be achieved remotely, but inquiry alone is not sufficient to determine whether they have also been implemented. Auditors will need to consider what evidence can be obtained remotely to determine if effectively designed controls have been placed in operation, and a scope limitation may need to be issued if they are unable to obtain sufficient appropriate audit evidence.


The pandemic is driving more uncertainty, which may cause deterioration in a company's operating results and financial position and lead to a higher incidence of going concern assessments. It could be extremely difficult for auditors to evaluate management’s assessment of conditions, or events that may have an effect on the company’s ability to continue as a going concern.


Significant financial reporting and disclosure implications could include adjustments to fair value measurements, as well as impairments to goodwill, indefinite-lived intangible assets, long-lived assets, and such other intangibles and tangibles as receivables, inventory, contract and deferred tax assets.


Auditor’s report implications could include increased use of Emphasis of a Matter (EOM) paragraph(s) triggered by an auditor determination that the COVID-19 pandemic is a major catastrophe that has had — or continues to have — a significant effect on the client’s financial position, results of operations and cash flows.


COVID-19 has had an unprecedented impact on many businesses, and external auditors are now challenged with having to continue to conduct audits in accordance with Professional Standards and comply with rules and regulations during the upheaval. Trusted technical consultants can provide valuable and insightful guidance to audit engagement teams, enabling them to provide the highest level of service to their clients while protecting the public interest.

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