Auditing And Assurance on Accounting Estimates during the Pandemic
- ISA 540 (Revised), Auditing Accounting Estimates and Related Disclosures, requires auditors to obtain sufficient appropriate audit evidence on accounting estimates and the reasonableness of their disclosure, in accordance with the applicable financial reporting framework.
- The uncertainty in light of Covid-19 creates challenges for management, and auditors are reminded that they should remain skeptical when assessing management’s judgements.
- As noted in the IAASB’S Staff Audit Practice Alert ,some examples of the areas with greater focus are;
- Whether assumptions are appropriate in the circumstances and in the context of the applicable financial reporting framework,
- Whether data being used by the entity is relevant and reliable etc.
- Some areas of concern noted by ACCA’s Global Forum Members included:
- Impairment of assets
- Expected credit losses
- Accounting for lease modifications
- Revenue recognition given collection concerns
- Return provisions for merchandise sales
- Onerous contracts
- Accounting for government assistance
- Actuarial estimates for business insurance and for investment performance,
- Held-for-sale assets 12-month assessments
- Recoverability of deferred tax assets
- Weighted average cost of capital and volatility inputs
- Auditing accounting estimates is inherently risky due to both the complexity and judgements involved.
- Auditors must remain alert for any increase in risks of material misstatements due to any further impact on complexity in estimations such as in the case of ECL in light of Covid- 19.
- Auditors should also remain current with the various updates issued by both auditing and accounting standard setters, recognizing that some of the updates may be temporary.
Covid-19 treatment in the books of accounts
- The Covid-19 outbreak was treated as a non-adjusting post balance sheet event by most entities with December 2019 year-ends.
- ACCA’s article on the impact of Covid-19 on corporate reporting states ,there is more doubt about whether for January or February reporting dates the consequences of the COVID19 are adjusting or non-adjusting events.
- The outcome will depend upon the particular circumstances impacting the entity, and when the major impacts occurred in different parts of the world. For reporting dates of March and later then they generally will be adjusting.
