Navigating an audit in 2021
Audit environment and changes
Whilst audit may have been in the press for all the wrong reasons of late, it is vital that confidence in the audit process is restored, and it is now far more evident that our clients and prospects are looking for something extra from their annual audit.
Audit on the whole has remained fairly unchanged for some time, with changes in financial reporting standards being in the spotlight in recent years. However, revisions in auditing standards impacting from 2020 onwards, along with Covid-19 and Brexit, have given auditors greater challenges than we have seen for a long time.
Working collaboratively with our clients has never been more essential.
So what are these changes?
The “once in a generation” audit reform which is on the horizon, follows a number of steps that have been brought in over the last 18 months, both in the auditing standards and enhanced audit reporting requirements.
Whilst most of the significant changes relate to large entities, and focus on governance and enhanced reporting ( SECR, S172, Corporate Governance) following corporate failures, the changes that have had the most impact on the audit process have been the modifications brought in aiming to enhance audit quality and delivery, through the introduction of Revised International auditing standards and a revised ethical standard. The concept of who is auditing the auditor has been at the forefront of bringing back faith in the audit profession.
For our clients, these changes highlight two key points, firstly the differences they see in the audit process, and secondly, the increased reliance on our clients to be taking a more proactive approach in measuring success, concluding on going concern, and responding to the enhanced narrative requirements where applicable.
The changes in the standards have set out a more focused approach on risk, and estimation and judgement in the financial statements, and have enhanced the requirement to gather and substantiate audit evidence in the areas.
This may lead to new requests, further corroboration of management representations or rationale behind judgements exercised in establishing provisions or estimations.
With the new ethical standard, we as auditors have to follow guidelines to ensure we remain objective and independent in the audit process, and ensure we mitigate any risk that may arise from long association with our clients, service delivery in non-audit or other ethical considerations. We believe that this is a positive change and the rotation of audit teams and applying additional quality reviews will give added assurance of the quality of our audit processes, and the potential opportunity to provide alternative insight.
Of course no one had suspected at the time of drafting these new measures what was around the corner, with Covid-19 further impacting the audit process significantly, and Brexit adding extra considerations and potential disclosure requirements to a period when these revisions were to be brought into effect.
Impact of Covid-19
For our clients and us as a business, Covid-19 has brought with it relentless challenges, be it operationally, financially or in health and wellbeing.
We took on the challenge having already taken strides in moving innovatively in how we work but nothing could have prepared us for the last 18 months, as I am sure so many have experienced.
Covid-19 had audit and financial reporting implications, which we embraced collaboratively with our clients to ensure we maintained open dialogue throughout the audit process.
Our Risk assessment changed significantly in light of Covid-19 and will require a detailed update for some time to come. Our focus on risk assessment includes both financial reporting risk, which is centred on our going concern assessment, and the impact on the organisation’s balance sheet, and also inherent risk including the organisation’s systems and controls.
Gathering evidence was a challenge for which we had to think outside of the box. Suddenly we were unable to obtain direct physical verification evidence, discuss matters across departments and undertake work to detect understatement of balances, i.e. what isn’t there.
The physical verification of assets, stocktake attendance and systems work evidence is imperative to our audit conclusion, and where we could not obtain sufficient, appropriate audit evidence, then a modification to the audit report would be needed.
To overcome these challenges, we have been working closely with clients to devise alternative verification methods, for example, video calls and screen shares.
Valuations have 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 need to look carefully at any valuations to consider whether they are reliable enough to accept as audit evidence or may need to design alternative procedures in order to obtain that level of assurance.
There could also be difficulties in carrying out impairment reviews which require forecasts, such as for goodwill. These will change dramatically from previous years and when prepared may need further updates to remain applicable.
We also need to carry out an assessment of judgement and estimations, particularly in relation to Covid-19 related financial assumptions. This is a difficult audit area at the best of times. Under Covid-19, the level of uncertainty and therefore impact on management judgements has been even more difficult, especially during the ever-changing landscape.
Stress testing and going concern was and continues to be a prime consideration and our risk assessment in this area elevated, with enhanced procedures undertaken to help judge an entities’ viability.
Reporting deadlines and the ability to meet internal audit and meeting cycles has encouraged communication throughout the process, and it has become imperative to maintain open communication and set out key deliverable dates from the outset.
These considerations have come hand in hand with our internal vision of enhancing audit quality whilst adding value in the audit process. We believe that this added value comes with improving the audit experience, facilitating business decision making, and ensuring the audit process is a positive process that evolves over the year rather than being a year-end process.
Adding value and easing the burden of auditing
Clients are now expecting auditors to be innovative in their audit approach, whilst still maintaining competitive fees, and giving them an efficient and effective audit that adds value to their business.
But what constitutes a positive audit? Obviously, quality is at the forefront, ensuring the appropriateness of the audit approach and the level of testing. However, isn’t this to be expected when you appoint a qualified audit firm, who are members of the applicable Institutes and governed by set auditing standards and financial reporting standards? We have been looking at ways to ease the burden of the audit process for our clients, streamlining dataflow, and reducing resources at clients who are dedicated to the audit process.
Technology has a vital role to play in bringing these attributes to life. The step change is one that is easily adopted, but there is sometimes a resistance to change what has been done in the past, so it is important that auditors communicate early in the audit process.
Many audit firms of a similar size to us started with adopting paperless auditing. That now seems like a distant memory with the newer audit tools that are on the market today. Automation of processes from requesting bank confirmations to electronic signatures are the new norm, and the introduction of data analytic tools and client collaboration is a crucial step we have taken to enhance both audit offering and quality, with a view of achieving this added value in the audit process.
The data analytic tools have wide ranging capabilities, and with the advancement of client accounting software and ERP packages, the integration we have experienced has proven successful in achieving full data set reviews rather than a manual sample based approach, imparting an element of the risk detection and sample detection to artificial intelligence. This whole data set review strengthens the audit process from both a risk and advisory perspective.
The use of data analytics can also bring out meaningful discussion and reporting on findings, ideal for board discussions, audit committee scrutiny, and for making useful recommendations in relation to the processes and control environment, which for many companies is high on the agenda in light of audit reforms and current government consultation in relation to the role of both directors, boards and the auditor and their individual and joint responsibility to stakeholders.
With all the step changes we have embraced and implemented, technology has enabled us to adapt and deliver our audit service, but will technology replace the auditor? We don’t believe so. The level of judgement and subjectivity that will remain within audit, and the scepticism that comes from years of audit experience, and direct client dealings, in our opinion, cannot be replaced. For us, the higher level understanding a human can obtain from getting to know their clients, how their systems work, and how they are exposed to risk is a significant aspect to a quality audit, but AI can certainly support and complement this, taking potential bias out of sampling or targeting of heightened risk transactions.
As we slowly come out of the other side of Covid-19, and the remote audit challenges it has brought, we have developed and built the core foundations, but for us, nothing is more important than personal interaction, whatever technology and the future may hold.
If you would like further information, please contact Louise Casey below:
Written August 2021.