For auditors performing calendar year-end audits, the December 31, 2020 audit cycle will present unknown COVID-19 related challenges, in addition to the ‘normal’ challenges faced by auditors.  This blog post will highlight some areas for auditors to consider and review as part of the year-end audit process as well as some basic practices to have in place to prepare for the unknown challenges.

New Fraud Risks

The pandemic has ushered in some new areas of fraud risk.  Initial fraud assessments and planned procedures may need to be modified to ensure that the most susceptible areas are addressed during fraud-related testing.  While the areas assessed as higher risk in previous years may still exist, it is probable that new areas of concern should be considered for assessment. 

Some of these areas are:

• Estimates and valuations - any financial statement calculation based partially or wholly on a future event is higher risk, especially during 2020.  There is a greater risk of uncertainty in the information being used to calculate the estimate.

• Segregation of duties - because of the shift from working in the office to working from home, as well as staffing changes and downsizing, there is an increased risk of management override of previously established controls.  These risk factors increase the risk of fraud because employees are trying to operate with changed or shifted duties that may not meet the controls in place to minimize fraud.

• Materiality - previously considered methods of calculating materiality should be reassessed.  Current circumstances and economic challenges may increase the need for establishing the materiality of the financial statements as a whole.  

Implementing Stronger Practices

To ensure that the areas of heightened risk are being addressed in their entirety, audit firms need to review their current practices to minimize the chance of missing an area of audit concern.  Some key areas for firm-wide review:

• Involve upper-level employees and partners - because the audit team will be evaluating significant estimates, assumptions, and judgments, there may be a need for partners and upper-level management to take a more active role in the earlier stages of the audit, specifically in the development of the tests of internal controls.  

• Maintain independence - firms should re-evaluate their independence in light of the pandemic’s effect on many companies and employees.  Maintaining independence is considered key for the performance of a high-quality audit.  Communications with audit committees regarding independence should be reviewed to ensure it is of the highest quality.  Firms should also document the review and update of firm independence forms for both audit and significant non-audit services.

• Encourage training and coaching - because the pandemic is presenting new audit challenges, staff should be encouraged to take related continuing education to ensure they are knowledgeable about the pandemic-associated risks.  It is also a good time for staff to be mentored and coached by senior management on how to handle these complicated circumstances.  Staff meetings to share what employees are learning as part of planning and performing year-end audits can be very helpful to all staff members. 

• Emphasize the basics - reminding employees to maintain a high level of skepticism and exercise due professional care is always important, but is increased in importance due to the pandemic disruptions.