The COVID-19 crisis creates additional challenges for preparation of financial statements and conduct of audits. The Dutch Authority for the Financial Markets (AFM) emphasizes that in particular under challenging circumstances, there is a high public interest in high quality financial statements and audits for 2020. The AFM therefore highlights some points of attention.
- Sound information on COVID-19 impact needed
- Additional points of attention for 2020 audits
- Audit procedures hampered due to limitations
- Responsibilities in reporting chain
Sound information on COVID-19 impact needed
COVID-19 hugely impacts companies. They may be confronted with major uncertainties regarding their short and medium-to-long term outlooks. They are required to include reliable and relevant information thereon in their financial reporting. Additional points of attention for 2020 audits De AFM asks for additional attention regarding the following matters during 2020 audits:
• Valuations. Companies will be making estimates under more complex circumstances and with potentially larger estimation uncertainties. In addition, revised ISA 540 ‘Auditing accounting estimates and related disclosures’ will be applicable for the first time for 2020 audits.
• Going concern assumption. The level of uncertainties impact the assessment of the assumption of going concern by companies’ management. As a consequence, the audit will be more complex.
• Additional disclosures. Companies need to provide additional disclosures in the financial statements, including on the impact of the pandemic. These will increase in length and relevance and will require more attention in the audit.
• Use of governmental schemes. The schemes from the government and their related reporting and audit requirements calls for meticulous control that the terms of the schemes are complied with. The impact of the schemes will need to be reported and disclosed accurately.
• Changes to the companies’ governance, systems and processes. These may have been changed by companies in view of changed circumstances. This may result in increased likelihood of fraud, for instance because the control environment operated differently. The auditor will need to evaluate these changes as part of the audit.
The Dutch professional body NBA will issue further guidance in Practice Note 1147 – Impact corona pandemic for auditors, including on how these matters need to be considered in audits.
Audit procedures hampered due to limitations
Auditors that face difficulty in obtaining audit evidence, will need to discuss that timely with the company. This may occur when the auditor (due to travel restrictions) is unable to be on site, and there faces additional challenges in assessing the appropriateness and reliability of audit evidence. When sufficient appropriate audit evidence cannot be obtained, this will impact the auditor’s report. Audits may take more time than in prior years. Audit teams may face difficulty to cooperate due to remote working. This requires adjustments in directing, supervising and reviewing of audit procedures.
Responsibilities in reporting chain
Auditors, companies, and where applicable audit committees are advised to discuss the quality of financial reporting and the quality of the audit, so that each of them can play their respective roles.
The AFM is committed to promoting fair and transparent financial markets.
As an independent market conduct authority, we contribute to a sustainable financial system and prosperity in the Netherlands.