Going Concern – Key Audit Consideration Amidst COVID-19
KORAH AND KORAH, CHARTERED ACCOUNTANTS
WHY SHOULD THE MANAGEMENT WORRY?
Section 134(5)(d) of the Companies Act 2013
Director’s Responsibility Statement should state that the Company has prepared the annual accounts on GC basis!
WHAT ARE MY OBJECTIVES?
- Obtain SAAE on the mgmt’s assessment of GC basis of accounting
- Conclude based on the above SAAE obtained whether there exists a material uncertainty
- Whether such MU is such that the E+C casts significant doubt on the ability of entity to continue
- To report properly
WHAT ARE THE STEPS INVOLVED?
- Mgmt to do a preliminary assessment – identification of E+C & plans for the future
- Check the nature of such E+C – financial / operating/other indicators
- Perform additional audit procedures to obtain SAAE to establish whether or not MU + mitigating factors
- Evaluate mgmt’s plans for the future – obtaining a WR
- Reporting requirements
EVENTS & CONDITIONS
Financial Indicators 
- Withdrawal of financial support by creditors
- Negative operating cash flows
- Adverse key financial ratios
Operating Indicators 
- Loss of key management without replacement
- Emergence of a highly successful competitor
Other Indicators 
- Pending legal & regulatory requirements
- Changes in law or Government policies
AUDIT PROCEDURES
- Analyzing & discussing the cash flow and relevant forecasts with the mgmt
- Reading the MOM for reference to financial difficulties
- Inquiring with the entiry’s legal counsel regarding the existence of litigations & claims
- Evaluating the mgmt’s plan for the future – liquidity, borrowing, expenditure
- Cash flow forecast – realiability of data
- SA 580 – WP
EXTRA CONSIDERATIONS DUE TO COVID-19
Have you discussed with the mgmt on the impact of COVID-19 outbreak?
Interruptions in the supply & production life cycles – feasible recovery plans?
Financial difficulties – additional credit risks, potential impairments and write-offs?
SUMMARY OF THE FAQ’S
What matters to be considered by the Management?
REGULATORY CONSIDERATIONS
- Measures taken by the Govt. in different countries
- Measures taken by the regulators (banks)
LIQUIDITY CONSIDERATIONS
- Receivables
- Business expansion into a new sector
MITIGATING FACTOR
Capital expenditure reduction
OPERATING ENVIRONMENT CONSIDERATIONS
- Restructuring of the entity
- Impact of foreign exchange fluctuations
- Supply chain management
- Inventory valuation
- Raw material pricing
- Overseas supplies
What period to be used at the time of evaluating the entity’s ability to continue as a GC?
If the mgmt’s assessment <12 months from the date of FS
Shall request the mgmt to extend the assessment period to at least 12 months from that date
Subsequent Events – Adjusting Events – Adjust FS
HOW THE MGMT SHOULD UPDATE ITS ASSESSMENT ABOUT THE ABILITY OF THE ENTITY TO CONTINUE AS A GC?
- Industry Reports
- Data from WHO or other local institutions
- Data from governmental sources about the severity and estimated duration
- Actions of the Govt. to mitigate the effects
REPORTING & DISCLOSURES
REPORTING & DISCLOSURES
MATERIAL UNCERTAINTY
A KEY AUDIT MATTER?
SA 701 – KAM PARAGRAPH
- If only E+C, then can use KAM Para
- If MU exists, then in addition to KAM Para, EOM Para will have to be filled
- If any qualification – no KAM Para