PCAOB Releases Staff Spotlight Reminding Audit Firms of Responsibilities During COVID-19 Crisis

Amid the evolving challenges and looming economic impacts of the COVID-19 pandemic, the PCAOB Staff released a Spotlight document reminding auditors of their responsibilities to identify, assess, and respond to risks of material misstatement and adhere to professional standards. The document primarily discusses the impact that the pandemic might have on an auditor’s risk assessment procedures, the execution of the audit, and potential impacts to client financial statements. Potential impacts to the auditor’s report and firms’ quality control considerations are also briefly discussed.

Risk Assessment

The PCAOB reminded auditors that the risk assessment process is not a discrete phase of an audit but rather a continual process that should be evaluated continuously over the course of the engagement. As new risks related to the pandemic emerge, auditors should consider these risks and design procedures that will adequately address them. Possible risks to consider include:

  • Changing incentives or increased pressures on management that might lead to new fraud risks
  • Changes or increased pressures on processes, systems or controls that might give rise to increased risk of error

As a result of these changes, initial responses to previously assessed risks might not be adequate, and revised procedures should be considered. If changes to the planned audit strategy or identified risks are significant, these changes are required to be communicated to the audit committee.

Execution of the Audit

The COVID-19 crisis may cause additional challenges in completing the audit, such as delays by management in responding to auditors’ inquiries or limited access to company personnel or information. These factors, along with a modified risk assessment, should cause the auditor to consider the following when modifying audit procedures or designing additional audit procedures:

  • Consider obtaining audit evidence of a different form. Reliability of such evidence should be evaluated.
  • Enhancing direction and supervision of less-experienced team members
  • Increasing the involvement of more senior or experienced team members in performing procedures related to complex issues
  • Involving, or increasing the involvement of, specialists

Presentation and Disclosure

Although the economic effects of the COVID-19 crisis on companies might vary widely, depending on industry, geography, or other factors, the auditor should evaluate and challenge management’s presentation of the financial statements, including the disclosures. The PCAOB specifically highlighted the following areas likely to be impacted:

  • Subsequent events disclosures
  • Going concern evaluation and disclosure
  • Asset valuation, including impairment triggers and related assessments
  • Accounting estimates, particularly those related to fair value measurement
  • Revenue recognition, particularly with regard to contract modifications
  • Leases
  • Hedging
  • Income taxes
  • Provisions, allowances, and loss contingencies
  • Debt modifications or restructuring
  • Debt covenants, other regulatory ratios, and minimum net capital requirements for broker-dealers
  • Disclosures related to liquidity, risks or uncertainties

Lastly, the Spotlight discusses potential impacts to the auditor’s report, such as the auditor’s determination and reporting of critical audit matters (CAMs), and firms’ quality control considerations in light of the COVID-19 pandemic. For additional details, the PCAOB Staff Spotlight document can be found here: https://pcaobus.org/News/Releases/Pages/PCAOB-staff-provides-reminders-audits-nearing-completion-COVID-19.aspx

Please visit our Coronavirus resource page at schneiderdowns.com/our-thoughts-on/category/Coronavirus for related content.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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