Audit and disclosure: what is important to remember in quarantine?
Financial statements and consolidated financial statements for 2019, together with the auditor’s report, can be published during the quarantine period or within 90 calendar days following the day of completion of quarantine, but not later than December 31, 2020. This is provided by the Law adopted by the Verkhovna Rada “On Amendments to Certain Legislative Acts to Provide Additional Social and Economic Guarantees in Connection with Spread of Coronavirus Disease (COVID-2019)”.
If the quarantine is not extended after April 24, 2020, the term of publication of the reporting for 2019 together with the auditor’s report is not later than July 24, 2020.
The procedure for reporting companies belonging to the category of securities issuers is also changed due to reference to the date of the general meeting of shareholders.
Issuers must publish reports within 5 working days after the meeting according to paragraph 29 of Draft Law No. 3275. The general meeting of shareholders for 2019, issuing companies have to hold within a period not later than three months from the date of completion of the quarantine according to paragraph 30 of Draft Law No. 3275.
As for the specifics of audit of financial statements of public interest entities in the conditions of the COVID-19 pandemic, the Audit Public Oversight Board recently issued an information message, which stressed the importance of the following aspects:
- assessment of risks associated with the COVID-19 pandemic and the introduction of quarantine and restrictive measures, as well as the need to review previously assessed risks;
- determining the circumstances caused by the influence of the COVID-19 pandemic and the introduction of quarantine and restrictive measures as key audit matters, their notification to those charged with governance and disclosure in the relevant paragraph of the auditor’s report;
- the auditor’s ability to obtain reasonable audit evidence in sufficient extent before submitting an auditor’s report, due to restrictions on movement, actual access to the location of entities, as well as limited opportunities for communication with the client’s personnel due to health status. Auditors should adapt their approach to auditing with maximum use of alternative procedures and modern technologies. If it is impossible to obtain proper evidence, the auditor should consider the modification of the opinion and, depending on the circumstances, express either a qualified opinion or a disclaimer of opinion;
- special attention of the auditor to the significant judgments of management regarding accounting estimates, in particular, the effect of the COVID-19 pandemic and the introduction of quarantine and restrictive measures on estimation uncertainty and disclosure in the financial statements of information related to the relevant accounting estimates. For many business entities, the COVID-19 pandemic and the introduction of quarantine and restrictive measures can lead to direct and indirect financial impact on their activities. Direct influence can be manifested through impairment of non-current assets, a significant change in their fair value, changes in expected credit losses against financial assets, impairment of receivables, etc. Indirect may arise from the impact on buyers and suppliers, which can lead to increased costs or lower incomes, the need to recalculate collateral;
- auditors assess the disclosure of information on the impact of the COVID-19 pandemic and the establishment of quarantine and restrictive measures on its activities, financial position and future economic indicators, whether they are appropriate in accordance with the applicable financial reporting conceptual framework, as well as consideration of the inclusion in the auditor’s report of the relevant explanatory paragraph. If, according to the auditor’s judgment, there are no proper disclosure in the reporting, it will be necessary to consider the modification of the opinion;
- obtain sufficient appropriate audit evidence about the appropriateness of management’s use of the going concern assumption in the preparation of financial statements, taking into account the growing uncertainty associated with the change in the economic situation and pessimistic forecasts of the global and national economy. The auditor should carefully consider the effect of such assessment on the auditor’s report with the adequate going concern disclosures in the paragraph “Basis for Qualified Opinion” or in the paragraph “Material Uncertainty Related to Going Concern”;
- review of other information that is not financial statements (management report, annual information of the issuer of securities, etc.) for the disclosure of the matter of the influence of the COVID-19 pandemic and the introduction of quarantine and restrictive measures on the activities of the business entity and assess whether is such disclosure consistent with the relevant disclosure in the financial statements.
From the practice of Kreston GCG, it should be noted that, given the restrictions on movement and access to the location of entities, we resort to the use of alternative procedures to obtain sufficient appropriate audit evidence. In particular, we practice remote photo and video recording of physical inventory of stocks and property, plant and equipment, the use of cloud solutions, as well as remote communication with the client’s staff through secure communication channels.
The extension of the season of carrying out and publication of financial statements and auditor’s report significantly simplifies the situation, which allows postponing some of the procedures related to the need for physical familiarization with primary documents or assets.
It should be noted that since the introduction of legislation on mandatory audit, and especially after the adoption by the Verkhovna Rada of the bill №1210 in January 2020, the audit community has expressed an opinion on the need to extend the terms of publication of reports and audit from June 1, 2020 at least for 2-3 months.
Unfortunately, the audit season for 2019/2020 was eventually extended due to more serious, independent of the financial market reasons.
As for the auditors’ assessment of the disclosures provided by business entities on the impact of the COVID-19 pandemic and the introduction of quarantine and restrictive measures on their activities, financial position and future economic indicators, much depends on the complex indicators of the entity results of 2019: liquidity indicators, credit load level, etc.
In view of the fact that for the reporting period of 2019, the alarming events of March-April 2020 refer to events after the reporting date, and have not yet been reflected in the reporting period, it is expected that most companies will be able to avoid modifications of audit opinion on matters directly related to the impact of the COVID-19 pandemic.
How significant and long the impact of the pandemic on the activities of public interest entities will be at the end of 2020 depends on how long the pandemic will last and how long macroeconomic indicators will fall in Ukraine and in the world.