The auditors cited issues such as physical verifications of inventories, fixed assets, balance confirmations, fair-value measurements, and going-concern assessments, which are difficult to carry out under the present circumstances.
An audit report, even if submitted at a later date, may not present a reliable picture if the auditors try to ascertain the key data for the March figures in June. Companies, too, are struggling with ascertaining their inventories due to supply-chain disruptions.
“We will have to roll back inventory figures to derive year-end numbers. This is different from physical verification done at year end. Control testing done later, which is rolled back to year end, also has its challenges. If the financial year
is extended, it may help companies channelise their efforts to other priority areas at this point of time and auditors will also be able to obtain appropriate audit evidence,” said Sanjeev Singhal, partner, SR Batliboi & Co.
The government and the regulators in the last few days have taken steps to ease the compliance burden for companies, extending deadlines for filing and waiving late fees till June this year.
The Securities and Exchange Board of India last week allowed listed companies to file their fourth-quarter and annual financial results by June 30 and also extended the date for filing quarterly corporate governance reports by one month.
However, audit companies might not be able to place adequate checks and balances in place in a lockdown while compiling their report.
Deloitte India is planning to issue guidelines for companies so that they can provide minimum basic information that can help in financial reporting.
Many company experts said they were finding difficulty preparing their financial statements primarily related to areas that required management. These could relate to forward-looking cash-flow estimates, recoverability and impairment of assets, contract modifications, etc.
“The regulators may consider providing one-time accounting-related relaxations. From an audit perspective, the rigour will definitely increase since due to these uncertainties, auditing management estimates and judgements will pose newer challenges,” said Khazat Kotwal, partner, Deloitte India.
The auditors’ physical presence is usually required not just for verifying inventories but also for closing balance in banks, minutes of board meetings, etc.
Companies are now providing electronic evidence, the reliability of which may be weaker. The auditors have to give their assessment of the internal control of financial reporting. Many companies have deployed disaster-recovery plans, triggering alternative processes such as increasing the decision-making powers of an individual or a group of persons in the concern.
“Companies and auditors have to address the changes in a company’s internal control environment and ensure appropriate risk assessments and controls to address additional risks in the current scenario,” Kotwal said.
Another worry is assessing whether the company is a going concern. The board is required to state the impact of coronavirus
in its report.
“The auditor’s responsibility is to consider appropriate audit evidence in this regard. However, the auditor cannot predict future events and therefore his report cannot be taken as assurance in the absence of evidence of material uncertainty in the ability of the company to continue as a going concern,” said Ashok Haldia, former secretary, Institute of Chartered Accountants of India (ICAI).
Since many audit procedures began by the end of February, conducting a limited audit review for 11 months ended February 2020 has been suggested.
Earlier this week, the government pushed back the implementation of the Companies Audit Report Order 2020 by a year to 2020-21, reducing the workload of auditors.
The ICAI is planning to issue guidelines for auditors to take into account the disruption caused to companies because of the pandemic.
Challenges auditors face
* Physical verification of inventory
* Confirming bank balances
* Fair value measurements
* Assessing nature of going concerns
* Impairment of assets