How to Avoid Auditing Pitfallsby
The impact of the COVID-19 pandemic on business around the globe has led to auditing challenges and changes, such as increased economic uncertainty and new legislation. CPAs and other accounting professionals should be aware of possible pitfalls in order to continue to provide high-quality audits and reviews to clients.
CPAs and accounting professionals in general should be aware of auditing best practices during the pandemic to avoid common pitfalls such as a lack of communication, the inability to audit in person and changes to the tax code.
The pandemic has increased financial uncertainty worldwide. Thus, CPAs and other accounting professionals may need to rely more heavily on accounting estimates. The CPA Journal reminds auditors to use “considerable professional skepticism and vigilance” when using estimates and to be on the lookout for any management bias, intentional or not.
In July of 2020, the Association of International Certified Professional Accountants (AICPA) Auditing Standards Board (ASB) issued two new statements on auditing standards, SAS No. 142 and SAS No. 143, focusing on audit evidence and accounting estimates. The former addresses audit evidence and the evolving nature of business, including the increased use of emerging technologies by both preparers and auditors. According to the AICPA, SAS No. 143, which focuses on accounting estimates and related disclosures, will help auditors “to appropriately address increasingly complex scenarios that arise from new accounting standards that include estimates.”
This advice would suggest that meeting with clients one-on-one is more important than ever; however, meeting in person remains a challenge due to COVID-19 restrictions. As an accounting professional, you are likely fully aware of how these restrictions have been detrimental to your audits and other offerings. A survey of CPAs working in Greece from June to August 2020 showed that the majority of them felt that client communication had deteriorated as a result of the pandemic and that performing audits required more resources, although they did report that most clients had adapted adequately to changes implemented as a result of COVID-19.
Remote work has impaired more than client communication in auditing. For CPAs who travel to warehouses and plants to do in-person inspections, social distancing and working from home have eliminated the possibility of being in the same room, a key aspect of auditing.
According to the Wall Street Journal, auditors’ efforts to “count inventory, assess changes in internal controls and track down evidence needed to sign off on companies’ financial statements” have all been hampered by corporate staff working remotely. The list of potential pitfalls is long, according to WSJ, and includes “internal controls, valuations like goodwill and going-concern assessments.”
In April 2020, as the pandemic was first spreading globally, the Public Company Accounting Oversight Board, which oversees the audits of public companies, highlighted potential obstacles and reminded auditors of their professional responsibilities. PCAOB recommended that auditors take particular care to ensure their opinions on financial statements and internal control over financial reporting were supported by “sufficient, appropriate evidence.”
In anticipation of challenges such as time constraints and obtaining and evaluating audit evidence, PCAOB suggested that auditors consider the following when modifying or designing audit procedures: increased direction to and supervision of less experienced team members, increased involvement of senior members who have experience working with complex issues, and increased involvement of specialists with subject-area knowledge. A firm may also want to modify its policies and procedures related to quality control to ensure sound judgments and conclusions.
CARES Act Changes
With so much uncertainty, accounting and finance professionals must be knowledgeable of the Coronavirus Aid, Relief and Economic Security (CARES) Act and how it may affect business valuations. The CARES Act, signed into law in March 2020, was crafted to stymie the effects of an economic downturn caused by the coronavirus. To help CPAs and other accounting professionals understand how to adjust business valuations in the wake of the CARES Act, the American Institute of CPAs issued a list of FAQs.
According to the AICPA, the key provisions impacting business valuations include the business tax provisions, the Paycheck Protection Program (PPP), Economic Injury Disaster Loans (EIDLs), Emergency Economic Injury Grants (EEIGs) and the Small Business Debt Relief Program (SBDRP). It’s important that a valuation analyst consider the “known or knowable” aspect of these provisions. Because it may prove difficult to pin down what was known about the coronavirus on a specific date, the valuation analyst will likely need to create two categories. These two segments, according to the AICPA, can be categorized as “[the virus’s] existence, and the date when it affected the U.S. economy,” and the valuation analyst will need to consider the two different dates they each represent.
Despite all of the challenges of COVID-19, it has created an opportunity for auditors to consider how to stay relevant in a world that is becoming more and more reliant on technology. According to the Institute of Internal Auditors (IIA), CPAs and other accounting professionals should leverage the crisis “as an opportunity to change their own mindsets, adopt other ways to work, and embed those actions in the operations of their functions and organizations going forward.” For example, as the pandemic creates the need for new processes, auditors can be more proactive in identifying risk exposures and contributing advisory services. According to the IIA, it’s also an opportunity for auditors to embrace technology to provide assurance about “new risks and new plans to mitigate them."
Amy Anthony has been writing professionally for more than a decade, including as a news reporter for the Associated Press and the Cape Cod Times. Her articles have appeared in U.S. News & World Report, USA Today, the Miami Herald, the Star Tribune, Business Insider, the Hartford Courant, The Boston Globe, HuffPost, The Mercury News, Newsday...