Audit Risks in a COVID-19 Environment

By Tom Parry, Navolio & Tallman LLP

As auditors plan audits of clients with 2020 fiscal year-ends, they will need to consider how the clients have been affected by the pandemic. The US Auditing Standards Board has identified four areas that may present heightened risks for auditors:

Internal control

Client controls may have changed during the pandemic to accommodate remote workforces, requiring the auditor to conduct evaluations of controls in place both before and after the pandemic commenced.

While an auditor may have historically placed reliance on the effectiveness of a given control, such an approach may no longer be possible, requiring the auditor to revise the nature, timing, and extent of substantive testing.

Fraud risk

COVID-19 also presents a “perfect storm” for fraud risk: incentives or pressure, opportunity, and rationalisation. There may be pressures to make fraudulent journal entries to sustain the appearance of an entity’s viability to lenders, or to misappropriate assets if personal financial situations have worsened.

Opportunities could arise from breakdowns in internal controls, allowing for fraudulent financial reporting or misappropriation of assets.

Employees could rationalise these fraudulent activities, thinking, “I’m only changing the numbers to help the company survive”, or “I’ll pay this back as soon as things return to normal”.

Noncompliance with laws and regulations

The risk of noncompliance may be heightened as a result of many small businesses finding it necessary to participate in various forms of federal economic stimulus funding. Regulations put in place to ensure proper use of the funding can be onerous, and the complexities of these regulations and short time frame to submit applications, may have led to a heightened risk of inadvertent noncompliance.

Accounting estimates

Auditors will need to identify audit areas that would have a heightened risk, such as the allowance for doubtful accounts or impairment of goodwill or intangible assets.

Tom Parry

Tom Parry

GGI member firm
Navolio & Tallman LLP
Advisory, Auditing & Accounting, Tax
San Francisco (CA), USA
T: +1 415 956 1750
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Navolio & Tallman LLP is a boutique CPA firm located in San Francisco. Their holistic approach to working with clients, their relationships based on trust, and their advanced accounting and tax expertise are the perfect combination to help clients meet and exceed their goals.

Tom Parry oversees quality control at Navolio & Tallman. He is the immediate past chair of the AICPA Peer Review Board, member of the CA Peer Review and Accounting Principles and Auditing Standards Committees and serves on the Quality Control task force of the US Auditing Standards Board. He also provides peer review and quality control services for other firms.

Published: Auditing, Reporting & Compliance Newsletter, No. 04, Autumn 2020 l Photo: Image'in -

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