The Covid-19 crisis has presented charities with an incredibly challenging set of circumstances and with it comes the added pressure of planning your next audit. In this article, we look at the potential challenges you may face and how best to prepare for the audit process.
Financial reporting considerations
When it comes to financial reporting considerations, if you are unsure about anything, the first step is to ask us. The earlier in the accounts and audit cycle points are raised, the more advice and support we can offer in determining the impact and provide guidance on financial reporting under SORP 19.
It is the trustees’ responsibility to determine if the charity is a going concern. When assessing whether the going concern basis of accounting is appropriate, trustees must take into account all of the available information about the future which is at least, but not limited to, 12 months from the date of when the accounts are to be signed off.
The impact of Covid-19 must therefore be reflected in the going concern assessment for all accounts not yet authorised for issue. If the charity is not a going concern, adjustments may be necessary to the carrying amounts of assets and liabilities in the financial statements.
The government has introduced a range of initiatives to assist businesses including the Coronavirus Job Retention Scheme, business rates holidays and grants for certain sectors. Government grants may not be recognised until there is reasonable assurance that the entity will both comply with the conditions attaching to them and that the grants will be received.
Many entities may now be reviewing their operations, for example reducing staffing levels, reducing certain operations, or selling some of the company’s assets. A restructuring provision must be recognised only to the extent that there is a constructive obligation at the balance sheet date, alongside the general recognition criteria for provisions. In the case of redundancy, this will be when the staff that are affected have been notified. A decision by the trustees to make changes is not sufficient on its own.
When assets are measured at fair value, for example, property or investments, there may be difficulties in determining fair value measurement (physical inspections might not be possible or there might not be an active market at the balance sheet date).
Tangible and intangible assets
Whereas the assessment of going concern takes account of events and conditions that existed after the end of the reporting period, when assessing the recoverability of tangible and intangible assets (for example, goodwill and/or property, plant and equipment) this assessment must be based on conditions and impairment indicators that existed at the balance sheet date.
Covid-19 means that many entities are not able to operate as normal. This, combined with the negative impact on the economy more generally, are likely to be indicators of impairment to the extent these conditions existed at the balance sheet date. In such circumstances, the entity will need to assess the recoverable amounts of the assets affected. And even when assets are not considered to be impaired, residual values and useful economic lives may still require reassessment.
Stock will need to be written down if there are signs that the items are impaired or the net realisable value is lower than the carrying value. This will be particularly relevant when stocks have a short shelf life or when there is likely to be a long-term reduction in demand for the product.
When there is evidence that debtors are not recoverable as at the balance sheet date they must be written down, for example where there is evidence of significant financial difficulty of the debtor. Adverse market or economic conditions can also be evidence of impairment. If debts have been renegotiated, reclassification or remeasurement may be required to reflect the new agreement.
Bank loans and covenants
Bank and other loans may require reclassification or remeasurement if terms have been breached or renegotiated at the balance sheet date for example, reclassification from non-current to current liabilities or the need to recalculate interest.
HMRC has offered deferral of taxes under some regimes, and so the classification between current or non-current may need to be considered.
Impact on audit
Having explored the financial reporting impact, we will now turn our attention to the impact on the audit process.
Firstly, our risk assessment will change significantly in the light of Covid-19 and will require a detailed update. Our focus on risk assessment will include both financial reporting risk, being centred on our going concern assessment, impact on the organisation’s balance sheet and post balance sheet events, and also inherent risk including the organisation’s systems and controls and the ability to appropriately adapt to “the new way of working”.
Many audit systems can already be accessed remotely, but without being able to attend our clients’ offices we have had to establish new ways of working, designing our audit approach to ensure we maintain audit quality and obtain appropriate audit evidence.
As we have discussed when looking at the financial reporting impacts, many valuations could become difficult either because active markets may no longer exist, or experts are unable to undertake their work or might caveat their findings due to the many uncertainties.
As auditors, we will look carefully at any valuations to consider whether they are reliable enough to accept as audit evidence or whether alternative procedures may need to be adopted in order to obtain the level of assurance required.
There could also be huge difficulties in carrying out impairment reviews which require forecasts, such as for goodwill.
In these unprecedented times it is highly likely that, in some situations, auditors may need to issue a material uncertainty paragraph in relation to going concern or an emphasis of matter paragraph explaining inherent uncertainties arising from the pandemic. It is important to highlight that such modifications are not qualifications to the audit report. This would never be a default position and we will work with our clients to obtain the necessary evidence to form the appropriate opinion.
Linked to this is the key milestones to meet internal reporting cycles. It is imperative that we maintain open communication and set out key deliverable dates from the outset.
Whilst we endeavour to maintain reporting deadlines, in some cases where there is a potential material uncertainty in relation to going concern, or if there are other significant implications for the organisation, we are encouraging sign off dates to be delayed so far as possible to ensure all evidence can be obtained to reach the appropriate audit conclusion.
How to prepare for the remote audit process
It is unlikely that the audit process can be carried out wholly on-site that would have previously been the case. Mitchell Charlesworth have brought together the use of various technologies that have enabled us to continue to provide an effective audit service remotely. In some cases it will be necessary to visit the charity’s premises for a short time and it is necessary for all parties to ensure that it is safe both from the charity’s and the individual’s perspective.
For a remote audit to be successful, planning is key, and it requires the support and collaboration of all parties.
Pre-audit planning meetings should be held on an agreed platform to ensure the audit process is communicated and understood, including the expectations of when and what information is required. Preparing for the audit and collating deliverables should be completed before the audit fieldwork is scheduled to start.
Use virtual meeting platforms
Microsoft Teams and Zoom appear to be the most widely available and offer the potential for voice, video and document sharing on screen. Test and agree the communication platform to be used. Testing is paramount; no one wants to spend the first fifteen minutes of the opening meeting trying to resolve connection issues; and it must work for everyone regardless of location.
Use of these platforms has also given us the ability to conduct appropriately planned audit procedures, such as walkthrough of systems, stock counts and access to data via screen share.
Use cloud-based software
Where we see the real added value for adapting to remote auditing, is in our cloud-based information request portal, Inflo. This software allows us to give transparency to the audit team and our clients, whether that be in relation to information requests, status of these requests, and workflow. This system also allows us to access to 100% of accounting entries through the data exchange upload meaning we can plan our samples and instigate requests remotely and efficiently.
As such, we are working more collaboratively with clients on any device, with any accounting software, and from anywhere.
The use of Inflo to centralise the deliverable and give visibility will of course greatly assist, but it is vital that there is continuous communication throughout the process. Concerns rightly exist for the sharing and control of documents; be those concerns centred around data protection requirements, or security and control.
Make time for the audit process
Allocate time to spend with us during the audit process, pre-diarising daily calls and systems walkthroughs and control review via screenshares. Understand that it is vital that we have sufficient time and support to carry out our work to an appropriate standard, including reassessing work done to reflect changed circumstances.
Make financial forecasts
Prepare detailed forecasts with assumptions and sensitivity analysis to assist with our going concern evaluation. The impact of Covid-19 on operations, what government assistance has been utilised and recovery plans will all be integral to establishing our conclusion in this area. You will want to create various best and worst case scenarios.
Seek expert advice early
Speak to experts early, whether they be property valuers, actuaries, and include us in these discussions so we can ensure our audit requirements can be integrated into their work, and we can pre-empt issues that may arise with logistics and ability to measure fair value within the uncertain climate.
Most importantly, ask us questions, maintain the communication channels, and involve us in financial reporting decision making.
To watch our webinar on the impact of Covid-19 on audit process, please visit: https://www.mitchellcharlesworth.co.uk/resources/recordings/watch-our-impact-of-covid-19-on-audit-processes-webinar/
If you would like to know more about remote auditing, please get in touch with our charities team.