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The impact of COVID-19 on financial reports subject to audit

As the effects of the Coronavirus (COVID-19) start to influence businesses and the global economy, we need to consider the impact that COVID-19 may have on financial reports that are subject to audit.

The key considerations

  1. Are the impacts of COVID-19 likely to be material to the entity?
  2. Is there a need to adjust financial statements to reflect the effects of COVID-19?
  3. What disclosures are required of the entity?
  4. How does COVID-19 impact the business’s ability to continue as a going concern?

1.  How Do You Assess The Materiality Of COVID-19 On The Entity?

COVID-19 may have a material impact on the financial report where information relating to the effect of COVID-19 on the business is omitted or misstated, and this information would have the potential to adversely impact decisions made based on the report.

Direct financial impacts may include:

2.  Understanding if there is a need to adjust financial statements

If an event after the reporting period confirms conditions that existed before the reporting date, then this may require an adjustment to the financial statements of the entity. Each entity needs to consider its situation on a case by case basis.

Where the effects of COVID-19 are material to the financial report, consideration should be given to an adjustment. If the event reporting date is indicative of conditions that arose after the reporting date then the financial statement balances should not be adjusted, however the event should be disclosed in the notes to the financial statements.

Given the unpredictability of COVID-19 however, we recommend that even if the event is a non-adjusting event, disclosures should be made in the notes, addressing entity-specific information such as the nature of the event after the reporting period and estimates of financial effects.

3.  What disclosures are required?

The first step is to determine if there is a financial impact on your entity. This may involve assumptions made in valuations or sensitivity analyses. Where there are indications of financial impact on the entity, entities should disclose information relating to assumptions made regarding the future, and other major sources of estimation uncertainty.

Where there is no financial impact in the current reporting period, entities should disclose their key assumptions as to why it has not had an impact, if COVID-19 is material.

4. How does COVID-19 effect going concern?

Given the uncertainty surrounding the impact of COVID-19, management needs to assess material uncertainties that may cast significant doubt on an entity’s ability to continue as a going concern.

Consideration should be made to all relevant forecast information for at least 12 months after the reporting date, as directors must attest to an entity’s ability to continue as a going concern for this period.

Where management determines that the facts and assumptions indicate trading will cease, or there is an intention to liquidate before or after the reporting period ends, the financial statements should no longer be prepared on a going concern basis.

Navigating the financial reporting considerations

 The flowchart below summarises the financial reporting considerations for businesses as a result of COVID-19.

 

Impact on the audit process

Your auditor may require further information to evaluate the potential impact of COVID-19 on your financial report. This is needed to ensure that the financial statements are appropriately adjusted for the impact and that any disclosures relating to COVID-19 are included.

You may need to revise your budgets and forecasts to include various scenarios resulting from the impact of COVID-19.

If a business is under financial stress, then your auditor may include an Emphasis of Matter paragraph in your audit report. This highlights uncertainty in relation to the entity’s ability to continue as a going concern. Where the adverse impact of COVID-19 on the business is significant, and it is not adequately disclosed in the financial report, then your auditor may issue a modified audit opinion.

 Summary

The consequences of COVID-19 need to be considered by all entities in preparing financial reports that are subject to audit. Materiality plays a key role in determining whether the impact of COVID-19 is applicable to financial reports. However, management within the entity are required to make assumptions and judgments regarding how COVID-19 will influence operations and ability of the entity to continue as a going concern. If in doubt, the Ashfords Audit and Assurance team can provide guidance and direction.

Please contact us on (03) 9551 2822 if you wish to discuss your audit needs.

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