Audit in a health emergency

The worldwide health emergency situation, and particularly in Uruguay, has affected practically all activities. The auditors’ work is no exception.
During an audit, auditors must (to meet the objective of being able to issue an opinion on the reasonable presentation of the financial statements), among others, obtain an understanding of the entity’s processes and internal control, analyze the risks to that the audited entity is exposed and verify integrity, accuracy and adequacy of the disclosures made by management.

In the current circumstances and taking into account the social distancing recommended by the competent authorities and the uncertainty in the economic situation that this entails (shops, offices and educational centers closed or with implementation of remote work, among others), the work of the auditor it may be altered and it may even be necessary to apply new or different audit tests to those originally planned.

In order to better analyze how the auditor’s work was affected, we must consider that we can find ourselves in 3 different situations:

• Work in which most of the audit tests on controls, transactions and balances had already been carried out before
  the declaration of a health emergency, but in which the auditor’s report will be issued later (probably they are audits of institutions whose closings fiscal year occurred at the end of 2019 or in the first months of 2020).
• Audit work in entities with financial year closings prior to the declaration of a health emergency, but with few audit tests carried out up to that time.
• Audit work in entities with financial year closings after the declaration of a health emergency.

In any of these situations, it will be necessary to analyze whether the declaration of a health emergency and the call for social distancing increased the operational risks to which the audited entity is exposed. These risks may be due to various factors, such as the concentra- tion of activity in a market sector such as com- mercial companies that see their sales decrease due to the lack of circulation and closure of shopping centers, or the closure of plants. suppliers from abroad. The auditor always analyzes whether the disclosure of these risks is adequate and whether the current situation of general uncertainty creates an additional difficulty to this analysis.

Likewise, for the first two cases, the possible effects of the health emergency will be subsquent to those that provide evidence of circumstances that did not exist at the end of the fiscal year. In any case, it is necessary to analyze the convenience of disclosure in notes of such events, including a quantification of the effects or clarifying that it is impossible to quantify them yet. In the case of entities whose yearend closure is subsequent to the declaration of a health emergency, the possible effects will be directly reflected in the financial statements.

Another aspect of fundamental importance is the evaluation of the entity’s ability to continue as a going concern, for the period of at least 1 year from the date of issuance of the financial statements. Some of the effects of the pan- demic and the consequent declaration of emergency, may affect the finances and oper- ating results of the entities. For example: substantial decrease in sales by closed branches in shopping malls, decrease in ticket and ticket sales due to voluntary reduction in the mobility of people, decrease in sales capacity in restaurants due to the need to comply with a minimum distance between customers , discounts or waits granted in the terms of collections that may generate mismatches in payments (with perhaps higher financial costs), among other factors. These elements may lead the company, depending on the time of stoppage involved, to not resume its activities or to do so in a very vulnerable situa- tion.

It is the responsibility of the management of the company to analyze and evaluate if there are problems of the company in progress, as well as its responsibility to plan actions aimed at reducing the risk that the company may not continue as a going concern. The auditor’s responsibility is to analyze and verify that the analysis performed by management is based on reasonable estimates and assumptions based on the information available and that it has adequate supporting documentation.

Finally, there are certain difficulties that will mainly affect the jobs found in the last two situations. For example (non-exhaustive list):

• Impossibility of participating in the taking of inventories: either because the clients’ deposits remain closed, or because due to their policy and as a form of care during the pandemic, people outside the deposits are not received.
• Impossibility of conducting face-to-face meetings
• Impossibility of verifying in person the operation of the internal control mech anisms applied by the entity, with the aggravating circumstance that
  perhaps many of these controls have changed due to the health emergency situation.
• Additional difficulty in validating the valuation of assets, and impairment losses (assets “unemployed” or with out an active market).
• Additional difficulty in estimating, for example, the increase or not in bad debts.

Due to social distancing, many audits are being carried out remotely or with minimal visits to the offices, branches and warehous- es of the audited entities. The auditor should analyze whether the audit risk is substantially increased by these circumstances and plan new audit tests when deemed necessary and also possible.