PROVIDING GUIDANCE TO THE PROFESSION
When one thinks of the professions which have been severely affected by Covid-19, images of workers in the healthcare, law enforcement and transportation sectors inevitably pop up, followed by travel and tourism, food and beverage, and the list goes on, especially as the pandemic continues.
While the disruption to the accounting and auditing segments has not been hogging the headlines, accounting and audit professionals are up against an array of challenges in a battle to uphold the quality and integrity of financial information in these trying times.
To help the accountancy profession address some of these challenges, ISCA’s Covid-19 Working Group has published guidance in the form of Frequently Asked Questions (FAQs). ISCA, through its Auditing and Assurance Standards Committee (AASC) and Financial Reporting Committee (FRC), also issued:
- Audit Guidance Statement 12 (AGS 12) Group Audits: Inaccessibility Of Component Auditors’ Work Papers And Other Considerations (issued by AASC);
- Financial Reporting Bulletin 2 (FRB 2) Accounting Implications Arising From Covid-19 For Entities With 31 December 2019 Financial Reporting Date (issued by FRC);
- Financial Reporting Bulletin 5 (FRB 5) Covid-19 Government Relief Measures: Accounting For Singapore Property Tax Rebate From The Perspective Of The Landlord And The Tenant (issued by FRC).
ISCA COVID-19 WORKING GROUP
In view of the far-reaching accounting and auditing implications of Covid-19, the AASC and FRC, in collaboration with Accounting and Corporate Regulatory Authority (ACRA), have formed a joint Covid-19 Working Group to support the accountancy profession in dealing with these challenges.
Form of guidance
The Working Group publishes guidance in the form of FAQs to share its deliberations on the accounting and auditing issues faced by the profession. These FAQs are published after incorporating inputs from AASC, FRC and ACRA.
The FAQs do not constitute an authoritative pronouncement of ISCA; nor do they amend or override the Singapore Financial Reporting Standards (International) (SFRS(I)s) or Financial Reporting Standards (FRSs) issued by the Accounting Standards Council, or Singapore Standards on Auditing (SSAs); they are also not considered long-term solutions to be applied when normal circumstances resume. Nonetheless, we encourage the profession to apply the guidelines within.
Composition of the Working Group
The Working Group is co-chaired by AASC Chairman Hans Koopmans and FRC Chairman Reinhard Klemmer, and comprises practitioners and ACRA representatives.
ISSUANCE OF FAQS
The FAQs have been issued in batches since April 16. Among the issues addressed are:
FAQ 2: For entities with financial reporting dates after 31 December 2019, is the Covid-19 outbreak a post-balance sheet event or an event that occurred during the financial period?
It is likely that the Covid-19 outbreak is not a post-balance sheet event for entities with financial reporting dates after 31 December 2019. This is because in Singapore, we consider the Covid-19 to be an outbreak in January 2020 as prior to this, it was considered to be isolated cases.
However, other related developments, in relation to Covid-19, put in place subsequent to the entity’s financial reporting date will be post-balance sheet events. Careful consideration and judgement is required to assess whether these post-balance sheet events are adjusting or non-adjusting. This assessment depends on factors such as the financial reporting date of the entity and the particular event under consideration.
To illustrate, consider the following examples (important note: the following examples are purely illustrative in nature; entities are required to assess the impact of the Covid-19 outbreak and other related developments according to their specific facts and circumstances):
- Financial reporting date: 31 January 2020
- Singapore-incorporated entity, with significant operations in the Hubei province in China (example, suppliers, customers and manufacturing facilities are located in the Hubei province in China)
- During the month of January 2020, the number of Covid-19 cases in China has been increasing and Wuhan was placed under quarantine (on 23 January 2020) with Hubei province following suit within days.
- The World Health Organisation (WHO) declared a global public-health emergency on 30 January 2020.
- The Covid-19 outbreak is an event that occurred during Entity A’s financial reporting period. Therefore, the impact of Covid-19 outbreak on Entity A’s assets and liabilities should have been assessed and recognised in Entity A’s financial statements as at 31 January 2020.
- Financial reporting date: 31 March 2020
- Singapore-incorporated entity, with no foreign operations
- Owns and operates a hotel in Singapore
- Hotel occupancy rates have dropped since February 2020
- The WHO declared the Covid-19 outbreak as a pandemic on 11 March 2020.
- The Singapore government announced on 3 April 2020, the closure of most workplace premises from 7 April to 4 May 2020.
- The Covid-19 outbreak is an event that occurred during Entity B’s financial reporting period. Therefore, the impact of Covid-19 outbreak on Entity B’s assets and liabilities should have been assessed and recognised in Entity B’s financial statements as at 31 March 2020.
- Although the “closure of most workplace premises” is an event that occurred subsequent to Entity B’s financial reporting period, the impact of this measure was reasonably expected as at 31 March 2020.
- The rationale is that the hospitality industry (which includes Entity B which owns and operates a hotel) was already impacted by travel restrictions imposed since February 2020, as well as safe-distancing measures which had been effective as at 31 March 2020, and there had been expectations that stricter measures may be further imposed by the Singapore government. Accordingly, Entity B should assess the reasonably expected impact of the “closure of most workplace premises” on its assets and liabilities as at 31 March 2020, and make the appropriate adjustments to the measurement of assets and liabilities.
FAQ 6: Can we perform the audit without sighting to the original documents?
Audit evidence can exist in electronic form, which includes documents that have been digitised, or system-generated reports. However, the auditor should be mindful that documents received from clients which are in digitised form are less reliable than original documents.
It is a matter of judgement to determine what audit procedures to perform when evaluating the authenticity of documents. The risk is higher as the volume of non-original documents used in an audit increases. Therefore, as with any heightened risk, the nature and extent of procedures performed to verify authenticity of these documents need to increase.
The auditor should remain alert to indicators that suggest that electronic information has been modified from the originals. Indicators can include missing basic information, changes to the usual format and missing or inconsistent-looking authorised signatories, among others. The auditor should also ensure that electronic information is consistent/corroborative with other audit evidence obtained throughout the audit when concluding on the authenticity.
Accordingly, auditors need to evaluate the quality of audit evidence received electronically and exercise greater professional scepticism as the proportion of such audit evidence increases. Some of the procedures which can be performed by the auditor include, but are not limited to, the following:
Testing the authenticity of electronic information
1) Testing controls over the preparation and maintenance of electronic information
The auditor should obtain an understanding of management’s process and controls over the preparation and maintenance of electronic information. Such controls can include controls that prevent electronic information from being shared with unauthorised personnel (example, password encryption) and controls that prevent unauthorised edits (example, read-only access), among others. Where reliance is placed on such controls, the auditor performs the necessary test of controls to determine whether the controls are operating effectively.
In circumstances where electronic information preparation and maintenance are not subject to relevant controls due to working remotely1, the auditor should obtain an understanding of the mitigating controls.
A possible way is to walk through the information preparation process with the preparer through technological means, such as video-conferencing.
Where reliance is placed on such mitigating controls, the auditor performs the necessary test of controls to determine whether the controls are operating effectively. The auditor should be mindful that any mitigating controls could be weak and there is potentially heightened risk in relying on such information.
It is possible that management may not have put in place controls over the preparation and maintenance of electronic information if management does not ordinarily convert information into digitised form and took this step only as an immediate response to the circuit-breaker measures. In such instances, if the auditor is planning to rely on the digitised information from management, he should perform substantive procedures to establish the reliability of such information.
2) Performing additional substantive procedures
Where controls over the preparation and maintenance of electronic information do not exist, or where testing of controls does not provide sufficient evidence to establish reliability of such information, the auditor should perform substantive procedures to obtain sufficient appropriate audit evidence over the authenticity of the electronic information used as audit evidence.
Depending on the assessed risk that such evidence may not be reliable, it may be necessary for the auditor to perform further procedures to verify the authenticity of the documents including confirming the documents with third parties. It may also be possible to perform independent verification of certain details in the document against publicly available sources such as Internet searches of vendor details, address, email, etc.
If management has access to the original hard copies, a possible way that the auditor can inspect these documents is through technological means.
The auditor should note that for procedures over higher risk areas, such as review of significant contracts, it is important to sight to the original documents. Where it is impractical to review the originals through technological means, the auditor would need to wait until conditions allow for it.
The auditor may also note that the annual returns filing due dates for the period 1 May 2020 to 31 August 2020 for all listed and non-listed companies will be extended by 60 days. For more information on annual returns filing, you may refer to FAQ 5: As a result of enhanced safe distancing and circuit-breaker measures imposed by the Singapore government, entities may experience difficulties holding AGMs and filing their Annual Returns on time. Would these entities have to seek an extension from ACRA or SGX?
The Working Group will continue to publish new FAQs to support the profession throughout this delicate period.
Under normal circumstances, the review of a component auditor’s work papers is ideally performed physically – with members of the group engagement team travelling to the component auditor’s office. With the travel restrictions due to Covid-19, this may not be an option for most group audits. While the use of technology may be of help, such as file-sharing or video-conferencing, it is worth noting that, in practice, this may not be common when the component auditor is not an affiliated network firm and where there may be regulatory restrictions on the sharing of documents.
ISCA has thus issued AGS 12, which provides guidance on reliance on the work performed by the component auditor in situations where the group engagement team has determined it to be necessary to review the component auditor’s work papers, but is unable to access the component auditor’s work papers due to an extraordinary event, such as the current pandemic.
Alternative method of performing review of work papers
Without visiting the component auditor’s office or reviewing the work papers remotely through the use of technology, such reviews can also be performed by way of requesting the component auditor to provide a detailed reporting memorandum, corroborated through the group engagement team’s discussions with the component auditor (which should be duly documented), especially on the significant risks of material misstatement and areas of significant estimates and judgements.
The group engagement team could also participate in the component auditor’s key meetings (such as planning meetings and finalisation meetings) with the component’s management team via video/conference call, so as to understand the key accounting/audit issues discussed, and how they were resolved.
AGS 12 also provides guidance on other applicable audit considerations arising from such extraordinary events.
FRB 2 addresses the question of whether the Covid-19 outbreak is an adjusting or non-adjusting event for entities with a 31 December 2019 financial reporting.
Is the Covid-19 outbreak an adjusting or non-adjusting event?
Although the first cases of Covid-19 surfaced in December 2019, there was no evidence of an outbreak and no adverse changes to the economic and market conditions (as a result of Covid-19) as at 31 December 2019.
The outbreak occurred after December 2019 and subsequently resulted in adverse changes to the economic and market conditions. Deterioration of economic and market conditions in 2020 may be traced to the fallout from the surge in Covid-19 cases after December 2019, such as regulatory actions like travel restrictions and quarantine measures by several countries.
These subsequent events are not indicative of conditions that existed as at 31 December 2019. Therefore, in ISCA’s view, the Covid-19 outbreak is a non-adjusting event for entities with a 31 December 2019 financial reporting date.
FRB 2 also highlights potential implications arising from the Covid-19 outbreak on financial statements disclosures and going concern assessments.
To help businesses deal with the impact from Covid-19, the Singapore government has given property tax rebates to qualifying non-residential properties for the period from 1 January to 31 December 2020.
FRB 5 was issued to provide accounting guidance and key considerations on how to account for these rebates granted by the Singapore government to the landlord (from the landlord’s perspective) and how to account for the related rental rebate granted by the landlord to the tenant (from the tenant’s perspective). FRB 5 also includes an illustrative example to aid in the understanding of the principles being applied.
ISCA’s Covid-19 related technical resources can be found here.
Lim Ju May is Deputy Director, and Terence Lam is Senior Manager, Technical, ISCA.
1 This encompasses situations such as employees working from home or remotely accessing accounting systems and company-shared drives as a result of circuit-breaker measures