ICAI issues norms for auditors to assess going concern, key audit matters

Institute suggests engaging internal auditor or another CA in cases where physical verification of stocks is not possible for statutory auditor

The institute of chartered accountants of India (ICAI) has issued detailed guidelines for auditors to assess the going concern nature of the company and key audit considerations during Covid-19. 

“The auditor would be more skeptical about impairment assessment in current scenario….It should be noted that the auditor is not performing procedures to assess the impact of Covid-19 itself rather the procedures are being performed in respect of specific items of financial statements or assumptions,” ICAI guidelines said.

ICAI has also asked auditors to consider industry reports, analyst reports, third party studies for the purpose of his assessment.

Auditors have to include a paragraph on emphasis of matter (EOM) to highlight aspects “fundamental to users’ understanding of the financial statements” after assessing the impact of Covid on the backdrop of the pandemic. 

“Such EOM paragraph shall be included by the auditor only when all related disclosures are appropriately made  by the management. Otherwise, it could even lead to modification of auditor’s opinion,” ICAI guidelines said. This means that the auditor may have to give an adverse opinion, qualification or a disclaimer in the report if disclosures are not satisfactory. 

The guidelines suggest that the auditor should take into account regulatory, operating environment and liquidity considerations to form an opinion about the going concern. 

“Due to Covid 19, there are several accounting and auditing issues on which auditors and industry has been seeking guidance...a detailed guidance was missing on going concern, physical verification of inventory and auditors’ report till now,” said Sanjeev Singhal, partner, SR Batliboi. 

ICAI has said that the auditor should consider whether the management has performed a preliminary assessment order to assess the ability of the company to continue as a going concern. 

Auditors have to take into account any financial difficulties, resulting in additional credit risks, higher than usual bad debts and potential impairments and write-offs because of the Covid-19 outbreak.

The auditor also has to check if the risk of inadequate disclosures in the financial statements related to the Covid-19 outbreak and management’s recovery plans has been considered in the report. 

The ICAI has said that when highlighting the key audit matters the auditor should be very specific and articulate in bringing out the complexities arising out of Covid-19. 

ICAI has also asked auditors to cross-verify any “other information” if it contradicts their understanding of the impact of Covid on the company’s business. 

ICAI has also suggested an alternative audit procedure for physical verification wherever it is not possible to observe the inventory and balance sheet which can include engaging the internal auditor or another chartered accountant to observe stock verification on their behalf, leveraging the use of technology.