The Pandemic has Changed Auditing. What Do You Need to Know?
October 6, 2020
The COVID-19 pandemic has changed the way businesses function in a multitude of ways. A major change was the move to remote operations, which meant financial reporting processes went from in-person to virtual. As a result, any business with a 2020 fiscal year end or that received an Economic Injury Disaster Loan (EIDL) through the Coronavirus Aid, Relief and Economic Security (CARES) Act needs to be aware that preparing for audits will be different than in previous years. As businesses prepare for upcoming audits and the year ahead, owners should start talking to their auditors sooner rather than later about the impact of the pandemic and related legislation on their operations. This will enable auditors to prepare for accessibility issues in terms of obtaining the information they require and speaking with the employees they must interview for the audit.
Below, we focus on three key areas that are shifting for our audit clients: Inventory, Internal Controls and Fraud.
Businesses should begin thinking about their plans for inventory counts well in advance, especially with the additional considerations around employee health resulting from COVID-19. Businesses that perform inventory counts on an on-going rather than annual basis are probably already addressing this. To get ahead on inventory observations, businesses that perform traditional year-end inventory counts need to consider the following questions so that they are prepared for their audits:
We continue to perform inventory observations on-site. The pandemic has not affected that aspect, but it does mean that our auditors will discuss safety procedures each business has in place so that we can follow them.
As a result of transitioning to work-from-home operations, businesses need to consider which of their existing control procedures may have been circumvented. Businesses that were already using technology may have experienced little to no change. Others, however, will have some questions to answer:
If a business implemented changes to controls, your auditor must be informed early about alterations that have taken place so they can understand and take them into account when planning the audit. The auditor can also determine if any additional audit procedures are necessary. It is important for businesses to consult with their auditor to ensure that any changes implemented are understood and can be correctly audited.
The Association of Certified Fraud Examiners created a model called The Fraud Triangle, which explains the factors that may compel someone to commit fraud in the workplace. The model consists of three components – need, opportunity and rationalization. The financial stress caused by the COVID-19 pandemic may have exponentially increased the probability of these occurring:
The Paycheck Protection Program, which was part of the CARES Act and was created to provide loans to small businesses, has been linked to dozens of cases of fraud. Applicants have lied about the size of their operations and costs in order to get funding from the Small Business Administration. There were several instances where businesses that did not need the funds nonetheless applied for and received loans. Some even created shell companies, illustrating the elaborate lengths to which fraudsters have gone during the pandemic. It is because of this abuse of the program that the SBA stated anyone who received more than $2 million in funds would be audited.
There are several other matters that need to be considered when preparing for 2020 fiscal year audits. Among them:
As we said at the beginning of this article, it is important to talk to your auditor early. The pandemic has had a huge impact on many businesses, and legislation like the CARES Act and PPP could lead to more complicated audit processes. If you have any questions or concerns about how to prepare for an upcoming audit, please contact your Smith & Howard assurance advisor or fill out the form below. Additionally, if you have any tax, controls or fraud concerns, we recommend you speak with a professional.
Source of information on The Fraud Triangle:
The Association of Certified Fraud Examiners – https://www.acfe.com/fraud-triangle.aspx
If you have any questions and would like to connect with a team member please call 404-874-6244 or contact an advisor below.CONTACT AN ADVISOR
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