COVID-19 has taken the world by storm, so much so that plunges in global stock markets are making history in terms of the low levels being hit, as well as the speed at which the collapses are occurring.
For the first time in history, the US oil prices fell below zero. From travel bans and cancelled sporting events to national lockdowns, COVID-19 has influenced global and personal realities.
The auditing profession has not been immune to this influence either. The entire auditing profession, from the performance of day-to-day audits to international standard setting activities, has been impacted by this pandemic.
Auditors started to see the impact that COVID-19 had and would continue to have on the global markets during the early stages of the pandemic.
Firstly, with the lockdowns and travel restrictions, auditors are struggling to perform the usual audit procedures to enable them to obtain sufficient appropriate audit evidence to support the audit opinion.
With the inability to perform physical site visits, auditors need to be innovative in designing alternate procedures to gather sufficient appropriate audit evidence to support the audit opinion. This situation is further aggravated by laws that prohibit the transfer of information across borders.
Travel restrictions and the inability of the auditor to access information remotely are creating particular issues in the audit of multinationals.
The auditor may either not be able to comply with the requirements relating to using the work of component auditors in the audit of group financial statements or is faced with the situation where the group auditor is unable to carry out audit procedures to gather sufficient appropriate audit evidence to support the group audit opinion. The result is often either delays in reporting, or modifications to the auditor’s report.
The inability to provide the markets with relevant information on a timely basis has the knock-on effect of limiting or even preventing issuers of publicly traded instruments from raising the necessary capital. This has resulted in an increase in the levels of anxiety among issuers.
Those responsible for the preparation of financial statements and auditors are under immense pressure in ensuring that reporting deadlines are met; a situation that is further aggravated by the difficulties experienced by preparers in gathering and collating the necessary information and the auditor’s ability to then obtain the necessary audit evidence.
In South Africa, this pressure has been relieved to some degree by the extended reporting deadlines that have been announced by, among others, the JSE Limited.
Prior to the announcement of the national lockdown in South Africa, local entities saw a decline in sales as a result of inventory not being available to sell as production in China and imports from China came to a halt.
This situation is further aggravated by uncertainty around whether the sales will recover after the global pandemic due to a general recession in the market, even after the lockdown restrictions are eased.
The South African Rand has devalued considerably of late and companies dealing with foreign currency are feeling the pinch.
To illustrate, if a company placed an order at the beginning of the year that is payable in US Dollars in 90 days from date of order and did not take out forward cover, this will cost the company approximately 14% more. Where the company is not able to pass this increase on to its customers, this will have a significant impact on the profit margins.
These factors are resulting in the alarm bells ringing in terms of going concern considerations.
Typical questions being raised include whether sufficient inventory will become available to enable the company to continue trading and if so, will this happen in time for the company to recover from the losses already experienced? What impact is the increase in cost and hence lower profit margins having on loan covenants? If these are breached, what is the likelihood of the finance housing recalling the debt immediately?
Other considerations that are at the forefront of the minds of the preparers and auditors relate to whether adjustments are required to be made to the amounts reflected in the financial statements or whether mere disclosure of this is sufficient.
We have issued Educational Material 1: Application of IFRS Standards in Light of the Coronavirus Disease (COVID-19) Uncertainty: Events after the Reporting Period to provide guidance to both preparers and users, which is summarised as follows:
- For reporting periods ending on 31 December 2019, any effects of events related to the COVID-19 outbreak on the financial statements of a reporting entity are the result of conditions that arose after the reporting date, which is therefore a non-adjusting event after the reporting period.
- For January 2020 and February 2020 year ends, the SAICA Educational Material is less definitive in concluding whether COVID-19 is an adjusting or non-adjusting event and states that entities will need to consider all relevant facts and circumstances in making their assessment whether conditions existed at 31 January 2020 or 29 February 2020.
- For financial reporting periods ending on or after 31 March 2020, events after 31 March related to COVID-19 would generally be adjusting events after the reporting period and would require the assets and liabilities to be adjusted to take into effect any accounting implications associated with or caused by events related to COVID-19.
Auditors also need to pay close attention to the impact that COVID-19 has on the internal control environment of the entity relating to financial reporting and the related impact on the identification and assessment of risks; a process that is foundational to an audit.
Even prior to the implementation of national lockdowns across the globe, multinational entities grounded staff by placing a travel ban on all employees due to the global spread of COVID-19.
Where employees had already travelled, certain multinationals and even governments required these individuals to enter a period of self-isolation.
One example is that the March 2020 meeting of the International Auditing and Assurance Standards Board (IAASB) was changed from a physical to a virtual meeting, with a condensed agenda and no public observers being allowed to attend.
In terms of other international developments relating to COVID-19, the American Institute of Certified Public Accountants’ (AICPA) Auditing Standards Board (ASB) recently announced their decision to defer the implementation of seven recently issued Standards on Auditing due to the COVID-19 pandemic.
It is unlikely that the IAASB will follow suit because many countries have already commenced adopting recently issued new and revised international standards on auditing.
The COVID-19 global pandemic has not only impacted all facets of life but also has a significant impact on financial reporting and the manner in which audits are performed.
This includes aspects such as the ability to obtain audit evidence, going concern assessments and subsequent events considerations, to name a few.
Despite the challenges that auditors face, there is no exception from complying with the prescribed standards and other pronouncements, although certain requirements will be heightened and require enhanced consideration.
Auditors have indicated that they remain resolute in performing their audits to the highest standards, and maintaining and enhancing audit quality.
 Exchange rates as quoted on Oanda.com and using an approximate rate of ZAR14 to the USD at the beginning of 2020 to ZAR16 to the USD mid-March 2020.