With news of vaccines offering hope of a conclusion to the COVID 19 pandemic, we must remember that many businesses will continue to operate in the “new normal” for many more months to come. The Financial Reporting Council (FRC) published bulletins of updated guidance for companies and auditors carrying out audits during the ongoing pandemic.
The bulletin reminds auditors that even in challenging times the flow of high quality, independently assured information to support the function of capital markets. Reporting on audit engagements should be driven by the information needs of users of audited financial statements. Some of the increased risks the FRC identified are:
Planned Audit Approach
At a time when entities are under increased pressure, staff may be working remotely and/or following changed procedures and internal controls may be not be operating as planned, the auditor should consider whether their assessment of risks of material misstatement due to fraud or irregularity needs to be heightened as a result, and additional audit procedures need to be carried out.
The COVID-19 crisis means that there may be situations where there is a greater risk of fraud. The control environment may be operating differently to expectations, for instance impacting on segregation of duties. The auditor considers the need for additional procedures to address the risk.
Risks of material misstatement due to fraud or irregularity may be heightened as a result of, for example:
- New ways of working resulting in less effective preventative and detective controls;
- Key staff absent due to illness;
- Increased pressures to meet financial targets;
- Challenges to keep the business operational;
- Management and TCWG focusing on operational issues with less attention to fraud risks;
- Eagerness to enter into transactions with reduced checks over counterparties;
- Reduced security over physical assets;
- Improper claims for financial support, such as mistakenly or deliberately claiming furlough payments for employees who are actually working.
Compliance with Laws and Regulations
Improper claims for financial support, for example making claims under the Coronavirus Job Retention Scheme for employees said to be furloughed but who are actually working, could result in liabilities for repayment and fines. The auditor takes this into account when assessing the risks of material misstatement in the circumstances of the entity and, if the auditor becomes aware of such claims, considers the impact on audit.
The full bulletin for auditors is here: https://www.frc.org.uk/getattachment/ae0044e3-a7bf-4b75-8aa2-4e39e20f525b/Bulletin-Coronavirus-Guidance-December-2020.pdf
Because of the ongoing challenges companies face, the FRC encourages companies, as appropriate, to make use of the extension announced by the FCA to the deadline for publication of audited annual financial reports from four to six months from the end of the financial year.
The FRC flagged the following:
- Risk Management
Relocation of staff and the inaccessibility of some business locations may lead to risk management processes and internal controls becoming unworkable or otherwise relaxed. Such changes may be unavoidable or considered necessary in the short-term to maintain some level of operations.
The FRC urges boards to monitor changes carefully, introducing alternative mitigating controls where necessary and practicable to support the operation of an effective control environment.
The risk of fraud may be elevated given changes to working arrangements and normal controls, and boards should be alert to this risk. Some changes to controls may need to be maintained in the medium-term and boards will need to consider how these become embedded in existing practices.
- Strategic Report
Stakeholders are interested in how business models and strategies have evolved in response to the pandemic and, in particular, how companies intend to navigate the short and medium-term uncertainty posed as a result of COVID-19. In understanding how a company’s strategy and business model has changed in response to COVID-19, stakeholders are interested to know how this has influenced the company’s risk appetite and its approach to managing those risks.
In setting out its principal risks and uncertainties, a company should consider the specific resources, assets and relationships that are most under threat and the steps being taken to protect them. The protection and retention of staff, maintenance of relationships with customers and suppliers, and defence of the supply chain will be of concern to all stakeholders, including investors.
- Leases and COVID-related rent concessions.
The FRC noted that the IASB has issued an amendment, ‘Covid-19-Related Rent Concessions (Amendment to IFRS 16)’. This allows companies granted certain rent concessions to use a practical expedient to avoid having to assess whether the concession should be accounted for as a lease modification.
The full bulletin for companies is here: https://www.frc.org.uk/getattachment/1c657620-7e15-401d-a74f-25e2305f1104/Company-Guidance-Covid-19-Updated-December-2020.pdf
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The information and opinions contained in this blog are for information only. They are not intended to constitute advice and should not be relied upon or considered as a replacement for advice. Before acting on any of the information contained in this blog, please seek specific advice from Gilson Gray.