ICAI Released Guidance note on Going Concern & Key Considerations for Auditors amid COVID-19

This guidance has been prepared to highlight key areas of focus in the current environment in India, when undertaking procedures relating to,
and concluding on, the appropriateness of management’s use of the going concern basis of accounting in accordance with the Standards on Auditing (SAs). This guidance does not amend or override the SA’s. Reading this guidance is not a substitute for reading the SA’s. Preparers, those charged with governance and users of financial statements may find this guidance helpful in understanding the auditor’s responsibilities in relation to going concern, as well as any modifications made to the auditor’s report in respect of any uncertainties related to going concern.

The Board of Directors of every company are required to make a statement in the Directors’ Responsibility Statement referred to in Section 134(5) of the Companies Act, 2013 that the directors had prepared the annual accounts on a going concern basis i.e. whether the Board has a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period of its assessment. Some companies have the impression that this issue of evaluation of going concern basis is more concerned with regard to the auditor rather than the Board of Directors. This is not true, management will need to give significant consideration to this area, especially in the current environment and early engagement on this topic will be important. As the situation is changing very rapidly and uncertainties crop up, the assessment by the Board needs to be dynamic and reflect the facts considering the latest conditions and information.

Timely and effective communication between the management and the auditor is essential in ensuring that both are able to fulfil their respective responsibilities in relation to going concern aspect during these uncertain times.

There are various factors that impact the ability of an entity to continue as a going concern. Out of such factors, the auditor, as well as the company, needs to essentially consider the impact of COVID-19 on going concern evaluation critically.

In completing work related to going concern in the current environment, auditors should focus on all the requirements set out in SA 570 (Revised), Going Concern, with full consideration given to the entity’s specific circumstances before any conclusions are reached. In completing the work on going concern, the importance of exercising professional skepticism is amplified, particularly where management have determined that the current circumstances are not expected to have any material financial impact on the entity and that no material uncertainties related to going concern exist for the entity. Reference should also be made to the “Implementation Guide to SA 570 (Revised), Going Concern” issued by the Auditing and Assurance Standards Board of ICAI.

AASB

This guidance focuses on the implications of the COVID-19 pandemic for the auditor’s work related to going concern, including the following:

  • Matters an auditor should consider for going concern assessment due to COVID-19 and inherent uncertainty;
  • Management and the auditor’s respective responsibilities in relation to going concern;
  • Period of going concern assessment;
  • Additional audit procedures required when events or conditions are identified which may cast significant doubt on the entity’s ability to continue as a going concern;
  • Implications for the auditor’s report – auditor’s report may include (depending on the nature and circumstances of the entity):
    • “Material uncertainty related to going concern” paragraph (in accordance with SA 570(Revised)), where appropriate.
    • Modifications of the auditor’s opinion (i.e., qualified, adverse or disclaimer of opinion) where necessary.
    • Enhanced or new key audit matters (where key audit matters are included in the auditor’s report).

This guidance includes specific FAQs to deal with various situations in the current environment.

Key questions/inquiries an auditor should consider due to COVID-19

  • Has management performed a preliminary assessment of the entity’s ability to continue as a going concern? Whether the auditor has discussed with management the impact of the COVID-19 outbreak, if any, on their assessment?
  • Were there interruptions in the supply and production cycle of the entity due to the COVID- 19 outbreak? If so, does management have a feasible recovery plan? Do these events or conditions cast significant doubt about the entity’s ability to continue as a going concern? Are these disruptions expected to continue for a foreseeable future and the action plan of the management to mitigate these risks?
  • Did the auditor note any contradiction in audit evidence provided by the entity (e.g., different assumptions or inputs used for different purposes)?
  • Are there any financial difficulties, resulting in additional credit risks, higher than usual bad debts and potential impairments and write-offs because of the COVID-19 outbreak? Has management considered these situations in their assessment of the entity’s ability to continue as a going concern?
  • Are there any potential issues related to debt, including debt covenants, which are applicable to the entity (for example, is the entity in compliance with debt covenants or do debt agreements contain material adverse change clauses or call provisions)? Has management considered these situations in their assessment of the entity’s ability to continue as a going concern?
  • Whether the auditor considered the risk of inadequate disclosures in the financial statements related to the COVID-19 outbreak and management’s recovery plans?

Read Full Guidance Note from here: Going Concern – Key Considerations for Auditors amid COVID-19

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