COVID 19 Disclosure in Auditors Report

 

While we pass through the second phase of lock down, as an auditor, it only makes our life more difficult. Considering the impact of COVID 19 on client’s businesses, forming an opinion based on testing performed on estimates and forecast, makes us re-visit our conclusions.

In such scenario, non-disclosure of a caveat on COVID 19 in the Auditors Report further tests the auditor’s scepticism. I have been collating my ideas together and have concluded to disclose a paragraph in the Going Concern section of the Auditors report.

I would be adopting it for all my audit clients, who may have significant impact on their business. If you share my views, feel free to adopt it in your Auditors Report.

 

Uncertainty due to COVID 19 Pandemic

COVID 19 Pandemic has created uncertainty not only for the companies in UK but also worldwide. Audit process assesses and challenges the reasonableness of estimates made by the directors, relevant disclosures and adoption of the going concern basis in preparation of the financial statements. Such estimates depend not only on future prospects and performance of the company but also on the economic environment in which the business operates.

At the date of this report, the unprecedented level of uncertainty and outcome arising from COVID 19 Pandemic is unknown. Our audit should neither be expected to predict the uncertainty revolving round the pandemic nor the precise future economic impact on the operations of the company.

Caveat

Opinions expressed are those of Mr. Devendraprasad Kankonkar (Deva) as an individual and are his interpretations of the standards. It has no direct or indirect link with views expressed by regulators, such as ICAI/ICAEW, of which he is a member. This material is for general information and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for yourself as the advice may change based on your circumstances. Resemblance to information on any other site or blog would be just a co-incidence and unintentional.

 

Audit Assertions

Assertions used in Audit Testing

There have been miniscule changes post revision of ISA 315 in 2016 to assertions, however confusion still exists whether the assertions should be continued and categorised in three classes or should there be only two.

 

To make things simple, have given assertions under respective classes that should be used susbsequent to the revision.

 

Transaction Assertions:

Occurrence – To ensure transactions recorded or disclosed actually took place and relate to the entity. Basic test to check if transactions are genuine and not under/over stated.

E.g. – In case of purchases, check if goods were ordered and received. Preferably this test should start from entries in the ledger and should be sourced to the origin. Select a sample of entries from purchase account and trace to the appropriate purchase invoice,  goods received note (GRN) and purchase order.

 

Completeness – To verify if all transactions have been recorded and disclosed, none of them is missing.

E.g. – Always ensure this test starts from the origin. If you are checking sales, you need to start from Order Book right upto goods despatch notes (GDN) and in books of accounts from sales invoice to the posting in Debtors ledger account.

 

Accuracy – To ascertain that there were no errors in posting or documentation. There should not be any misstatement in numbers, its measurement or disclosure.

E.g. – Casting checks, review of reconciliations, verifying monthly totals with summary, invoices checks, etc, are some of the test conducted to verify accuracy.

 

Cut–off – To ensure transactions are recorded in the relevant  accounting period.

E.g. – Verifying GRN or GDN in the begining and end of the accounting year to ensure purchases and sales invoices, though raised in different periods, were received and despatched in the relevant accounting period vis-a-vis its ownership.

 

Presentation – To ascertain if the nomenclature used correctly describes the transaction to readers of the financial statements.

E.g. – Fees paid to the auditing firm for various services is shown under different head as Auditors remuneration and fees for non-audit services. Outstanding to Lenders is segregated into payable in a year, 1-2 years, 3-5 years and above.

 

 

Classification – To verify if the account head used are appropriate for the transactions recorded..

E.g. – Interest income is not shown as sales or labour charges which are direct cost not accounted as salaries under administrative cost.

 

Account balance Assertions:

 

Existence – Physical existences of tangible assets and availability of documentation to confirm monetary value of intangible assets.

E.g. – Physical verification of plant and equipment, motor car, bank letter for confirmation of balances, Debtors circularisation, etc.

 

Accuracy, valuation and allocation – It deals with the values provided to assets, liabilities and equity interests. It also warrants correct and appropriate disclosure including the right allocation of respective heads of account where amounts are agregated.

E.g. – Valuation of Investment Property, verification of depreciation/impairment charge on assets, inclusion of selling cost cost in valuation of inventory, etc.

 

Completeness – To ensure there is no under or over statement of assets and/or liabilities.

E.g. – Verification of Suppliers statements, clearance of reconciliation items post year end, review of expenditure to ensure capital assets are not expensed out, etc.

 

Rights and obligations – To verify if the entity has an obligation to pay a liability or legal title to an asset.

E.g. – Reviewing title deeds for ownership of property, Loans to be verified with Lender agreements, confirmation from Legal/Counsel on pending court cases, etc.

 

Presentation – To ascertain if the nomenclature used correctly describes the nature of the asset and/or liability to the reader of financial statements.

E.g. – Purchase or disposal of assets, current or non-current asset/liability, secured debts disclosure, etc.

 

Classification – To ensure Assets and liabilities are disclosed under correct heads.

E.g. – Balances owed to related parties are not clubbed with Trade Debtors or Creditors, loans having maturity of <1year are not classified under Creditors outstanding > 1 year, Cumulative preference shares with fixed terms of redemption are classified as Debt capital and not Equity capital.

Caveat

Opinions expressed are those of Mr. Devendraprasad Kankonkar (Deva) as an individual and are his interpretations of the standards. It has no direct or indirect link with views expressed by regulators, such as ICAI/ICAEW, of which he is a member. This material is for general information and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for yourself as the advice may change based on your circumstances. Resemblance to information on any other site or blog would be just a co-incidence and unintentional.

Audit Working Paper

What can be considered as an Audit Working Paper and what cannot has been widely debated. ISA 230 on Audit Documentation has clarified this for the profession and made life simple for judgments. Audit file reviewers usually use it as a Bible while conducting cold file reviews.

As far as possible, audit working papers should be in a standard format and the format should be retained throughout the audit file.

Contents of a good working paper:
1. Name of the client
2. Period
3. Name of the Creator of the working paper
4. Date on which it was prepared
5. Name of the client staff if provided by the client
6. Date of receipt if provided by the client
5. Name of the Reviewer
6. Date on which it was reviewed
7. Audit objective for the test done in the working paper
8. Samples selected & method of sampling (In absence of separate documentation for sampling)
9. Key for any colours or jargons used on the working paper
10. Reference to the working paper for resolution for any audit findings
11. Conclusion of the Test.

Have given below extracts from the ISA for better understanding of the reader on what is expected from an audit working paper.

 

The auditor should prepare, on a timely basis, audit documentation that provides:

1. A sufficient appropriate record of the basis for the auditor’s report, and

2. Evidence that the audit was performed in accordance with ISAs and applicable legal and regulatory requirements

3. The nature, timing, and extent of the audit procedures performed to comply with ISAs and applicable legal and regulatory requirements

4. The results of the audit procedures and the audit evidence obtained, and

5. Significant matters arising during the audit and the conclusions reached.

 

The auditor should prepare the audit documentation so as to enable an experienced auditor, having no previous connection with the audit, to understand:

1. The nature, timing, and extent of the audit procedures performed to comply with ISAs and applicable legal and regulatory requirements

2. The results of the audit procedures and the audit evidence obtained, and

3. Significant matters arising during the audit and the conclusions reached.

 

In documenting the nature, timing, and extent of audit procedures performed, the auditor should record:

1. Who performed the audit work and the date such work was completed, and

2. Who reviewed the audit work and the date and extent of such review (3).

 

In documenting the nature, timing, and extent of audit procedures performed, the auditor should record the identifying characteristics of the specific items or matters being tested.

Caveat

Opinions expressed are those of Mr. Devendraprasad Kankonkar (Deva) as an individual and are his interpretations of the standards. It has no direct or indirect link with views expressed by regulators, such as ICAI/ICAEW, of which he is a member. This material is for general information and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for yourself as the advice may change based on your circumstances. Resemblance to information on any other site or blog would be just a co-incidence and unintentional.

Triennial Review 2017 changes/amendments w.e.f 01.01.2019

FRS 102 - Triennial Review 2017

Effective for periods starting from 01.01.2019. Early adoption permissible, if adopted, all amendments should be applied. Cannot pick and choose only relevant sections. There is an exception, amendments on Directors Loans, can be adopted without adopting all other amendments.

There are quite a few Amendments to FRS 102, but I have given snapshot of 7 Main amendments which would be used by most small and mid-sized practising firms. Also given is a list of Other notable amendments, accountants who are interested in having further information on them can read the link provided under the same.

 

Directors’ Loan Exemption

Section 11 has introduced new exemption to measure loans at transaction price instead of Fair Value. Loans which qualify for such exemptions are:

1.       Loan from Directors

2.       Loan from group of close family members of Directors, which consist at least one shareholder

 

Investment property & Investments in Associate & Joint Ventures

Undue Cost or effort exemption removed.

1.       All investment properties now must be valued on the date of the Financial Statements. Except for properties rented to another group entity, which have been given a choice of Accounting policy

2.       Investment properties rented to other group entities have option of following any 1 policy mentioned below:

a.       They can be measured at Cost less depreciation and impairment. On transition to this new accounting policy, entity is permitted to use the Fair Value of such property on date of transition as its deemed cost going forward.

b.       They should be valued and stated at Fair Value on the date of the statement of financial position (Balance Sheet).

Valuation need not be undertaken by an independent valuer, however the fair value should be assessed based on the guidance set out in the appendix to Section 2 (Concepts and Pervasive Principles).

3.       For Investments in Associates and Joint Ventures, entities have the option to choose between fair value and cost. Entities which continue to use the fair value basis, cannot use the undue cost/effort exemption, now have to value such investments on the date of the statement of financial position (Balance Sheet).

 

Investments in Group entity – Which are NOT subsidiaries, associates or joint ventures

Accounting policy choice:

1.       Cost less impairment

2.       At fair value with changes through P&L

3.       At fair value with changes through Other Comprehensive Income.

 

Consolidated & Separate Financial Statements

Parents which prepare separate financial statements have got a choice of Investment categories and also additional disclosure.

1.       Option to break-up investments into 2 categories

a.       Investment in Companies which can be consolidated

b.       Investment in Companies which are part of Investment portfolio and not consolidated.

2.       New requirement of disclosure – Need to disclose entities which are not used in consolidation. Have to elaborate on their nature and extent of interest along with risks associated thereon.

 

Definition of Basic Financial Instrument widened

In addition to the Debt instruments which were considered as Basic Financial Instruments as per Section 11, now the below instruments would also be covered in this category with addition of new paragraph 11.9A.

A Debt instrument would be classified as Basic Financial Instrument, if it gives rise to cash flown on specified dates that constitute repayment of the principal advanced, together with reasonable compensation for the time value of money, credit risk and other basic lending risks and costs.

 

Choice of recognising Intangible Assets in business combination widened

Entities are allowed to capitalise Intangible Assets Other than Goodwill if:

1.       Criteria to capitalise, should meet All 3 below:

a.       Meet the recognition criteria

b.       Are separable

c.       Arise from contractual or legal obligation

 

2.       Additional intangible assets can be capitalised if 2 conditions are satisfied. Condition A is mandatory and Any 1 condition from B & C should be met:

a.       Meet the recognition criteria

b.       Separable

c.       Arise from contractual or legal rights.

Both the classes stated above should be stated separately under intangible asset category and should be applied consistently to all business combinations. One can see the criteria in both classes stated above is similar but the condition to meet the requirement are different hence should be maintained as separate classes.

 

New exemption on Related Party Disclosures

Companies which must mandatorily disclose Directors remuneration, need not disclose key management personnel compensation if the Key Management personnel and Directors are same personnel.

 

Other notable amendments

Section 1A – EU Accounting Directive implemented for Republic of Ireland

Section 2 – Fair Value guidance moved to this Section

Section 3 – Any small entity can take exemption from providing Cash Flow, not restricted to entities adopting Section 1A unless required by any other law. Comparatives are mandatory for disclosures required by SORP’s.

Section 5 – Clarification on items to be included and excluded from operating profit

Section 7 - Additional Net Debt reconciliation to be disclosed. Identical to the requirements of FRS1 Cash Flow Statements

Section 11 – Various amendments.

Section 19 – Definition of Group reconstruction expanded

Section 22 – New guidance on Debt for Equity Swaps

Section 23 – Additional guidance on Revenue for Agents and Principals based on IAS 18

Section 26 – Minor improvements to align some definitions to IFRS2

Section 29 – Exemption introduced in relation to tax effect of gift aid payments

Section 34 – Definition of Financial Institution revised.

Below link is ready reference for those who are interested in reading further on above notable amendments.

https://www.frc.org.uk/getattachment/9be202ba-351d-4e38-9d09-1982cb20d666/Amendments-to-FRS-102-Triennial-Review-2017-(Dec-2017).pdf

Caveat

Opinions expressed are those of Mr. Devendraprasad Kankonkar (Deva) as an individual and are his interpretations of the standards. It has no direct or indirect link with views expressed by regulators, such as ICAI/ICAEW, of which he is a member. This material is for general information and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for yourself as the advice may change based on your circumstances. Resemblance to information on any other site or blog would be just a co-incidence and unintentional.