Strategies for managing audit risks associated with a pandemic

As specialists in almost every industry on the planet, because of the coronavirus pandemic, auditors have experienced a tremendous interruption to their daily activities.

But the severity of the fallout of the pandemic will only begin to become apparent as communication teams prepare plans for future consumer feedback and audits for 2020 and conduct simple practises such as audit sampling.

At the AICPA ENGAGE 2020 online conference in July, Lynford Graham, CPA, Ph.D., a consultant in Short Hills, N.J., is expected to lead the ‘Audit Methods for Greater Performance’ and ‘Audit Sampling-Not It’s Rocket Science’ workshops. He clarified that the lessons that auditors have learned over the years from dealing with consumers would mean very little in 2020.

“You may have to rip up this year’s usual strategy and start fresh,” said Graham. “You have to look at this business as it is in 2020.”

Many public sector audits and certain private company audits use a control-based methodology, which Graham said depends strongly on the willingness of a customer to retain adequate financial management controls over the year. It also has the advantage of saving the inspector from having to perform a large amount of substantive research at the end of the year.

But in 2020, such a control-based approach could not be feasible.

Were those checks really in effect throughout 2020? ‘Asked Graham. Perhaps they were in January; perhaps they were in December. But what about the time in the middle? Did any of those safeguards slip by the wayside when the key entities were not there and company procedures changed? ”

The possibility that the safeguards of a client will be less reliable than in previous years will also determine how the interaction team approaches its sampling of customer accounts.

“If you don’t get your leverage from your controls or if fraud risks are identified, the sample size that you used for your substantive revenue test and cost tests last year may have to be raised quite significantly,” Graham said.

“If the operations were continuous, you could take a random sample of the entire population, as in many previous periods, and it would give you a reply with regard to the financial statements,” he said. “But you could have had very different activities this year.” Certain industry lines could have begun to operate as they had during 2019 in the first couple of months of 2020, but the pandemic and lockout started a disruption with an end date that is still unknown.

“What you may want to do is stratify your sample so that the period that was abnormal is more intensively sampled,” Graham said. When company gets back to normal late in the year, he said, auditors will want to more intensively sample the middle phase and look together at the start and end of the year.

The severe disruption to the economy from the pandemic threatens plunging many businesses into ruin, and private companies may pose higher risks than public companies.

Graham reported that, traditionally, auditors face the possibility of lawsuits in about 80 percent of bankruptcies because the creditors of the client may accuse them of failure to recognise the degree to which the financial condition of the client declined prior to the bankruptcy. When a customer is purchased, the purchasing company may sue the auditor if the buyer discovers any failure after the sale is closed or considers mistakes in reporting in the newly acquired company that it decides it is significantly overpaid. Since it is all but inevitable that for the rest of 2020 and maybe until 2021, an exceptionally high increase in bankruptcies will mar the corporate climate, Graham predicts that litigation targeting auditors will also rise.

“That’s going to be a dramatic environmental change,” he added. The unusually extreme litigation threats facing the profession, in his opinion, put an increased urgency on carefully mapping the plan for each interaction and being exceptionally diligent in collecting the records and recording the facts reviewed while carrying out simple procedures such as sampling.

“You have a very interesting year, where the traditional auditing approach and the usual risk assessment approach may not be the same,” Graham said.

Graham said that the implementation of the FASB Accounting Standards Update No. 2014-09 guidelines, Income From Arrangements With Consumers (Topic 606), offers a clear indication of the complexities of auditing sampling procedures after the pandemic.

“You should not issue an opinion that you can not defend from litigation exposure and professional standards perspectives,” he said. “This kind of atmosphere is going to place the auditor at risk to know where you really don’t have enough evidence, with certainty of saying,’ Sure. This sector is as presented at this point in the financial statements.”

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