Jesswani, Jasper S. - 11826002 ACYASR 2 and 3 Reasonable Assurance Amidst COVID 19 The first major economic impact of COVID 19 was first felt with the declaration of a lockdown which began on March 15, 2020, as a result of a rapid increase of cases from 6 all the way to 111 within one week (Talabong, 2020). What was initially expected to be a quick and temporary lockdown has long extended even until today. With this in mind, the economy had suffered an extreme recession contracting its GDP by 9.6%, which was the largest decline since 1946 (Biswas, 2021). Countless businesses were forced to close and those who could adapt to an online setting would struggle to meet the same income. This drastic change raises the question to both internal and external auditors regarding whether or not the same reasonable assurance can be granted, be it in the procedure or quality, with the new normal. According to the Public Company Accounting Oversight Board (2005), reasonable assurance is described as the auditor’s responsibility in the preparation and performance of the audit to obtain a reasonable, but not absolute, assurance that the financial statements have no material misstatements brought about by error or fraud. The key highlight of this concept is the lack of absolution which takes into account the limitations of the auditor and the lack of control they may have when obtaining evidence about the companies they are auditing. This definition alone already answers the question that the same reasonable assurance can no longer be granted due to the changes in risks. Within any audit of financial statements, Public Company Accounting Oversight Board (2010) mentions two primary risks. The first is the risk of material misstatements. These risks involve any portion of the financial statement containing any material misstatement. Given the size of the business, the degree of materiality of the misstatement may vary. Prior to the pandemic, these risks were already clear cut and the appropriate measures and quality needed for them had been set. A good example of this is the performance of an inventory count. One of the first steps needed in the audit of inventory is the cutoff analysis. This is the period wherein auditors would examine the warehouse or shipments and perform a physical inventory count while preventing any entrance or exit of inventories (Accounting Tools, 2021). However, with the pandemic, it would be a lot more difficult for the auditors to even get to the warehouse, let alone the interactions they would need to do with the employees in the location to assist them in their count while putting themselves at risk. It is important to remember that the International Standard on Auditing 501 mentions that auditors are required to attend inventory counts to provide audit evidence relating to existence or condition (International Federation of Accountants, 2021a). Despite the strict requirement, the field of auditing is not meant to be heartless to its auditors and concurrently presented its flexibility. In the United Kingdom for example, the Financial Reporting Council issued a specific bulletin in 2019 that mentioned various alternative procedures to gather evidence through remote means (Institute of Chartered Accountants in England and Wales, 2021). First, it allows for a disclaimer of the audit of opinion or a qualification arising from a limitation of a scope to be provided depending if the circumstances placed on the auditors makes it right to do so. Second, it would also be possible that the management of the company to be audited would decide not to push through entirely with the inventory count and just decide to use its recorded book value or reasonable estimate. While this could be deemed as a red flag previously, this would now simply result in the auditors reassessing the impacts on risk assessment, particularly with the tests of control. Certain issues such as the risks of theft may no longer be properly tested, and as such, the professional judgement of the auditor must come through. Third, it would also be possible that the management would decide on changing the entity’s year end to a future date in the hopes that health restrictions would no longer impede the audit. While there is no specific provision that prevents this from being done, this could complicate other factors in accounting such as tax filing. With that, this serves as one of the less ideal options for management, however could still serve as a valid option depending on the situation of the business. Fourth, it is also possible that the management would push through with the inventory count and request that the auditor would not come due to safety concerns. Similar to one of the earlier options, this could have also been seen as a red flag, however it is a lot more understandable given the situation. The appropriate recommendation for this may be to just limit the scope of the audit opinion due to a lack of audit evidence relating to the inventory count procedure. Finally, the use of new technology such as video conferences or robotics could be used to attend an inventory count remotely. Out of the different options presented this is one of the better ones, assuming that the company to be audited makes it available. However, the auditor in this case must not get complacent s several considerations must still be made such as determining who is controlling the device, how evidence to completeness will be obtained, how conditions of inventory can be assessed, and any other considerations relevant to specific cases of inventory. However, for Philippines in particular, no publication was found regarding specific alternative procedures that could be applied in light of the pandemic. Another major consideration with regards to the risk of material misstatement is the assumption of going concern. The International Standard on Auditing 570 covers the topic of going concern and it briefly defines it as the continuing of the business for the foreseeable future with the assumption that the business neither has the intention nor necessity to liquidate, cease trading, or seek protection from its creditors (International Federation of Accountants, 2021b). This assumption is crucial for several parts of the financial statement such as depreciation, amortization, and fair value estimates. According to the International Accounting Standards 1, going concern is reassessed at least, but not limited to, 12 months from the reporting date (Klynveld Peat Marwick Goerdeler, 2020). With this in mind, the going concern assumptions made prior to the pandemic should be reassessed by the auditor. Depending on the situation of the business, the 12-month minimum requirement may be too long and should make them feel free to reassess as often as they need to. Some of these considerations in determining a change in the going concern basis would include the extent of operational disruption, probable reduction in demand for products or services, contractual obligations that are due within one-year, potential liquidity and working capital shortfalls, and alternative access to existing sources of capital such as government aid or lines of credit (Deloitte, 2020). It is important to remember that the main objective of the financial statements is to provide its users with relevant and timely information that may affect their decision making. A change in going concern cannot be taken lightly as it would often affect any investors decision on keeping their investment in the company or withdrawing what they can before it inevitably closes. Therefore, as an auditor, when the management has decided that the business can no longer operate on a going concern basis, must ensure that it is appropriately discussed in the disclosures with the reasoning as to why the basis had changed (GrantThornton, 2018). To summarize, while the pandemic had only been in effect for the last two years, it had posed great challenges to businesses and auditors alike with effects that will be felt for years to come. It highlighted the need to quickly adapt to a changing environment despite having well established policies set forth in the auditing standards. The pandemic had contested different components of auditing, particularly with regards to providing reasonable assurance with inventories and going concern. As for the audit of inventories, geographical restrictions set by the government and health concerns make it a challenge to access the warehouses of the clients to conduct a year end inventory count. Several alternatives were recommended in the United Kingdom such as the use of technology in assisting the count. However, different considerations must be made to ensure that the inventory count made is as good, if not better than, one made with the auditor’s physical presence. On the other hand, going concern rapidly became an issue due to the length of time a lot of business were unable to operate normally. As per the appropriate standards, this must be assessed within 12 months of the reporting date but may be done earlier given the conditions of the business. This assumption greatly affects the depreciation, amortization, and fair value estimates of different parts of the financial statement. If it were found that the conditions of going concern changed, appropriate disclosures must be made, otherwise, the financial report will be prepared in the same way. Overall, while the discussion had presented the various alternative procedures, be they easier or more difficult than conditions before the pandemic, the quality expected from the auditors remain the same, if not greater. This is quite an interesting time for the field of auditing as its forced evolution brought about new approaches that further pushes creativity when conducting audits. References Accounting Tools. (2021, April 12). Inventory Audit Procedures. Retrieved from https://www.accountingtools.com/articles/2017/5/13/inventory-audit-procedures Biswas, R. (2021, April 9). Philippine Economy Hit by Rising COVID-19 Wave. Retrieved from https://ihsmarkit.com/research-analysis/philippines-economy-hit-by-rising-covid19-waveApr21.html Deloitte. (2020, October 29). Clearly IFRS – Accounting Considerations Related to Coronavirus Disease 2019. Retrieved from https://www.iasplus.com/enca/publications/publications/2020/clearly-ifrs-accounting-considerations-related-tocoronavirus-disease-2019 GrantThornton. (2018). IFRS Viewpoint. Retrieved from https://www.grantthornton.global/globalassets/1.-member-firms/global/insights/articlepdfs/ifrs/ifrs-viewpoint-7---when-the-going-concern-basis-is-not-appropriate.pdf Institute of Chartered Accountants in England and Wales. (2021). Coronavirus (COVID-19): Considerations for inventory audit testing International Federation of Accountants. (2021a). International Standard on Auditing 501. Retrieved from https://www.ifac.org/system/files/downloads/a023-2010-iaasb-handbookisa-501.pdf International Federation of Accountants. (2021b). International Standard on Auditing 570. Retrieved from https://www.ifac.org/system/files/downloads/2008_Auditing_Handbook_A170_ISA_570.p df Klynveld Peat Marwick Goerdeler. (2020, November 20). Impact of COVID-19 on the going concern assessment and disclosures. Retrieved from https://home.kpmg/xx/en/home/insights/2020/03/covid-19-going-concern-3a.html Public Company Accounting Oversight Board. (2005, October 6). Standing Advisory Group Meeting. Retrieved from https://pcaobus.org/News/Events/Documents/10052005_SAGMeeting/Reasonable_Assura nce.pdf Public Company Accounting Oversight Board. (2010, December 15). Auditing Standard 1101: Audit Risk. Retrieved from https://pcaobus.org/oversight/standards/auditingstandards/details/AS1101 Talabong, R. (2020, March 15). Metro Manila Lockdown Begins. Retrieved from https://www.rappler.com/nation/coronavirus-metro-manila-lockdown-begins
