In view of the far-reaching accounting and auditing implications of COVID-19, the ISCA Auditing and Assurance Standards Committee (AASC) and Financial Reporting Committee (FRC), in collaboration with ACRA, have formed a joint COVID-19 working group to address the challenges faced by the accountancy profession.
Guidance will be published in the form of FAQs to share the working group's deliberations on the accounting and auditing issues faced. These FAQs are published after incorporating inputs from AASC, FRC and ACRA.
While the FAQs do not constitute an authoritative pronouncement, nor do they amend or override the Singapore Financial Reporting Standards (International) (SFRS(I)s) or Financial Reporting Standards issued by the Accounting Standards Council (FRSs) or Singapore Standards on Auditing (SSAs), and nor are these considered long term solutions to be applied when normal circumstances resume, we encourage the profession to apply the guidelines within.
About the ISCA COVID-19 Working Group
The Working Group is co-chaired by AASC Chairman Hans Koopmans and FRC Chairman Reinhard Klemmer, and comprises practitioner and ACRA representatives.
Hans Koopmans (Chairman)
Reinhard Klemmer (Chairman)
Bong Yap Kim
Chan Yen San
Tan Bee Nah
Wong Yew Chung
As highlighted in ISCA Financial Reporting Bulletin 2 (“FRB 2”), adjusting events are those that provide evidence of conditions that existed at the end of the reporting period; whereas non-adjusting events are those that are indicative of conditions that arose after the reporting period.
To reiterate, FRB 2 shared ISCA’s views that the COVID-19 outbreak is a non-adjusting event for entities with a 31 December 2019 financial reporting date. Non-adjusting events would not affect the amounts included in the financial statements. However, disclosure is required of material non-adjusting events.
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 its specific facts and circumstances.
If the COVID-19 outbreak is assessed by the entity to be a non-adjusting event which is material, the entity shall disclose the nature of the COVID-19 outbreak and an estimate of its financial effect. If the entity is unable to estimate the financial effects of the outbreak after making the best efforts to do so, it is required to disclose that fact.
For more detailed considerations of items to be disclosed, please refer to section 2(a) of FRB 2 on “Other accounting implications arising from the COVID-19 outbreak”.
When there is a deterioration in operating results* and financial position* after the reporting period, the entity should reassess if the going concern assumption is still appropriate up to the date that the financial statements are authorised for issue.
*Important note – other potential indicators that the going concern assumption may no longer be appropriate include indicators of possible financial difficulties (e.g. default on loans, denial of usual trade credit from suppliers), external matters (e.g. legal proceedings, loss of principal customer). This is not an exhaustive list of potential indicators.
In assessing whether the going concern assumption is appropriate, management’s analysis shall include, but not limited to the following information:
- all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period
- whether the entity has ready access to financial resources or access to government assistance and other financial support programs to mitigate the liquidity shortfall
- a wide range of factors relating to current and expected profitability, debt repayment schedules and potential sources of replacement financing
- updates to cash flow forecasts taking into consideration the uncertainties and reduced cashflows observed after the reporting period
Where there are material uncertainties which cast significant doubt over its ability to continue as a going concern, the entity shall need to disclose those uncertainties. If the going concern assumption is no longer appropriate, this would result in a fundamental change in the basis of accounting (i.e. the financial statements are prepared on a liquidation or realisation basis of accounting). These are required to be disclosed in the financial statements [paragraph 25 of SFRS(I) 1-1 Presentation of Financial Statements and paragraph 16 of SFRS(I) 1-10 Events after the Reporting Period].
For both listed and non-listed entities – Conduct of AGMs
On 13 April 2020, ACRA, MAS and SGX RegCo have released a checklist to guide listed and non-listed entities on the conduct of general meetings during the period when elevated safe distancing measures are in place.
The checklist provides further guidance on Part 4 of the COVID-19 (Temporary Measures) Act 2020 (Act) and the COVID-19 (Temporary Measures) (Alternative Arrangements for Meetings for Companies, Variable Capital Companies, Business Trusts, Unit Trusts and Debenture Holders) Order 2020 (Order). The Order was issued by the Ministry of Law on 13 April 2020.
Should listed entities (i.e. a company, variable capital company, debentures, unit trust or business trust listed on the Singapore Exchange) require certain essential persons to be in the same physical location to facilitate the conduct of a ‘virtual’ meeting, the Ministry for Trade and Industry would grant an automatic time-limited exemption to permit temporary operations at the same physical location, provided that the number of persons does not exceed 6, and safe distancing measures are complied with at the venue.
The listed entities whose AGMs are due to be held during 16 April to 31 July 2020 may alternatively choose to defer the meetings by up to 60 days (as explained below).
Please refer to this link for the media release and checklist: https://www.acra.gov.sg/news-events/news-details/id/545
For both listed and non-listed entities – ACRA filing
On 7 April 2020, ACRA published a media release on “Extension of Deadline for Holding Annual General Meetings and Filing Annual Returns”.
In light of the COVID-19 situation, ACRA will grant a 60-day extension of time for all listed and non-listed companies whose AGMs are due during the period 16 April 2020 to 31 July 2020. Companies that had previously been granted extension of time to hold their AGMs within this period will also be given a further 60 days of extension from the last date of extension. The AR filing due dates for the period 1 May 2020 to 31 August 2020 for all listed and non-listed companies will also be extended for 60 days. There is no need for these companies to apply for the extension of time with ACRA.
Please refer to this link for the media release: https://www.acra.gov.sg/news-events/news-details/id/544
For listed entities only – SGX filing
On 7 February 2020, SGX RegCo announced that a time extension of up to 2 months (i.e. till 30 June 2020) would be granted to issuers holding AGMs to approve their 31 December 2019 financial results if they fulfil certain criteria, which include having business with significant operations in the People’s Republic of China (PRC) or where their principal place of business is in the PRC. Issuers who are granted with this time extension must issue annual reports at least 14 days before the date of its AGM.
Please refer to this link for the regulatory announcement:
On 7 April 2020, SGX RegCo published a regulatory announcement titled “SGX RegCo grants automatic 60-day extension for issuers to hold AGMs”.
SGX RegCo will automatically extend by 60 days the deadline for all issuers with financial year-end on or before 31 March 2020 to hold their annual general meeting (AGMs). Issuers must issue their annual reports to shareholders and the exchange at least 14 days before the date of the AGM, except for issuers with 31 December 2019 financial year-end, which will still need to issue their annual reports by 15 April 2020.
Please refer to this link for the regulatory announcement: https://www.sgx.com/media-centre/20200407-sgx-regco-grants-automatic-60-day-extension-issuers-hold-agms
An issuer should seek an extension of time if it foresees that it is not able to meet any of the deadlines.
Issuers are reminded of the following arising from a modification of audit opinion or where the auditor expressed a material uncertainty related to going concern:
- Immediate announcement of such matter in accordance with SGX Rule 704(5); and
- Issue quarterly announcements no later than 45 days after the quarter end in accordance with SGX Rule 705(2)(d) or 705(2)(e).
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 judgment 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 increase. 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, amongst 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 skepticism 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 (for e.g. password encryption) and controls that prevent unauthorised edits (e.g. read-only access), amongst 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 subjected to relevant controls due to working remotely, the auditor should obtain an understanding of the mitigating controls.
A possible way is to walk through and observe the information preparation process and controls with the preparer / control owner 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 immediate response to the circuit-breaker measures. In such instances, if planning to rely on the digitised information from management, the auditor should perform substantive procedures to establish 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?
 This encompasses situations such as employees working from home or accessing accounting systems and company shared drives remotely as a result of Circuit Breaker measures.
In accordance with SSA 501, Audit Evidence – Specific Considerations for Selected Items, attendance at physical inventory counting is required if inventory is material to the financial statements, unless impracticable, for auditors to obtain sufficient appropriate audit evidence over the existence and condition of the inventory.
Under normal circumstances, the auditor typically attends the entity’s physical inventory count conducted either on, or close to, the financial reporting date. However, in a situation such as during the Circuit Breaker period, the auditor may not be able to attend the physical inventory count or the entity may not even be able to perform its own physical inventory count.
Where the entity cannot carry out its physical inventory count
Where the entity’s physical inventory count cannot be performed during the Circuit Breaker period, the auditor should discuss with the entity’s management for the count to be scheduled as soon as it is practicable to do so. Where the count is performed at a later date, the auditor shall perform the necessary procedures to obtain audit evidence about whether changes in inventory between the count date and the financial reporting date are properly recorded, which will include roll backward procedures.
For businesses that have closed store fronts and warehouses, performing roll backward procedures may not be a difficult task because there may be very few receipts or shipments coming in if facilities have been closed between year-end and the count. Auditors may consider if it is necessary based on the circumstances to perform procedures to obtain assurance that client inventory locations have in fact been locked down for that period of time. This might include obtaining live feeds of security camera footage taken of the retail locations and warehouses during that time and reviewing shipping and receiving records to ensure movement was minimal during that period.
Where the entity can carry out its physical inventory count, but the auditor is not able to attend
The auditor should first discuss with management whether it is possible to perform another count at a later date when it is practicable for the auditor to attend. Where the count is performed at a later date, the auditor shall perform the necessary procedures as mentioned above.
Where delaying the count is impracticable, such as prolonged extension of the Circuit Breaker measures or other government-imposed restrictions, or if the nature of the entity’s business is such that inventories are voluminous and fast-moving resulting in difficulties performing roll backward procedures (such as a food supplies company that continues to operate during Circuit Breaker), alternative procedures can be considered. However, the auditor should carefully assess whether the conditions really result in an impracticable situation with reference to paragraph A12 of SSA 501 Audit Evidence – Specific Considerations for Selected Items and document the assessment accordingly.
Alternative procedures that the auditor may perform to obtain evidence over the existence and condition of inventories include, but are not limited to:
- Inspecting the documentation of subsequent sale of specific inventory items acquired or purchased prior to the year-end physical inventory counting
- Performing substantive analytical procedures, such as analysing cost of sales to inventory ratio. The auditor should be mindful when performing such procedures as predictive relationships based on historical trends may no longer be appropriate arising from the implications of COVID-19.
- Assessing the effectiveness of controls over inventory counts performed during the period under audit. The auditor may conclude that such controls are operating effectively through audit procedures performed during current period cycle counts before the Circuit Breaker period. During such assessment, the auditor should also consider past experience with the entity’s inventory management, such as if there is a history of differences between management’s count results and inventory records. The auditor may refer to paragraphs 13 and 14 of AGS 4, Existence and Valuation of Inventories in the Context of the Historical Cost System for further guidance.
- Observing the count remotely by leveraging on the use of technology, such as video-conferencing. However, in doing so, auditors need to plan and execute the observation to achieve the results intended. This includes, amongst others, directing the way the observation is conducted as if it was performed physically, being able to see the inventory clearly and selecting the samples that they wish to count. Auditors should be mindful that video-conferencing may only allow them to have a restricted view of the location where the inventories are kept, and they should be alert to situations where the inventories may be moved around and counted twice. Accordingly, this approach must be applied with great care.
The auditor may refer to paragraphs 25 to 31 of AGS 4, for further guidance. However, the auditor is reminded to consider the impact on the operating effectiveness of controls arising from COVID-19.
The auditor should be mindful that it may not always be possible to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory by performing these, or other, alternative procedures.
Inventories at third party locations
If the entity’s inventories are held at a third-party warehouse, the auditor may be able to rely on the third-party confirmation of the quantity and condition of inventory.
When relying on third-party confirmations, the auditor should assess the reliability of the confirmation and apply the requirements and guidance under SSA 505 External Confirmations. This may include understanding how the third-party was able to ensure the accuracy of their inventory records and the responsibilities of the third-party based on their agreement with the entity, such as if the third-party bears responsibility of stock loss or damage.
The auditor should note that operations at these third-party locations might be similarly disrupted by the Circuit Breaker measures.
If the auditor is unable to obtain sufficient appropriate audit evidence over the existence and condition of the inventories such as where:
- the management is unable to perform its year-end physical inventory count;
- the auditor is unable to attend the entity’s physical inventory count or carry out remote observations to achieve the auditor’s objectives;
- the auditor is unable to perform roll backward procedures from the inventory count date to the financial reporting date; or
- alternative procedures do not provide sufficient appropriate audit evidence,
this will likely present scope limitations that will impact the auditor’s report. In cases where inventory balances are material but the scope limitations are not pervasive, this will result in qualified audit opinions.
If determined to be necessary, the auditor might discuss with the management on performing a separate assurance engagement on the inventories balance after the restrictions are eased.
Procedures to obtain evidence over the existence and ownership of fixed assets include but are not limited to:
- Inspecting the title deeds of land or properties.
- If the asset is held by a custodian, obtaining confirmation from the custodian.
- Inspecting the motor vehicle or vessel registration or transcript documents.
- For fixed asset additions during the year, relying on controls over fixed asset procurement and management if the entity has robust controls over this process.
- A possible way that the auditor can perform the sighting remotely is through technological means.
The auditor should assess if a combination of these or other procedures would need to be performed to gain comfort over the existence and ownership of fixed assets.
Where these or other alternative procedures do not provide sufficient evidence and the auditor deems it necessary for the fixed assets to be sighted physically, the auditor should discuss with management to arrange for physical sighting to be conducted when conditions allow, otherwise this will likely present scope limitations that will impact the auditor’s report.
Obtaining bank confirmations is a typical procedure for the audit of cash and bank balances as other than confirming the bank balance, confirmations may include other relevant audit evidence such as letter of guarantees issued, outstanding foreign exchange contracts, securities or pledges for loans or overdrafts and/or bills payable.
However, in accordance with paragraph 13 of SSA 505, External Confirmations, if the auditor has determined that a response to a positive confirmation request is necessary to obtain sufficient appropriate audit evidence, such as when there are specific fraud risk factors that prevent the auditor from relying on evidence from the entity, the auditor cannot perform alternative procedures and would need to obtain the bank confirmation. Otherwise, the opinion in the auditor’s report should be modified as a result of the scope limitation.
In other situations where, based on risk assessment, the auditor has determined that it is not critical to obtain bank confirmations for certain accounts but decided on seeking bank confirmations and is now unable to obtain any response (even in electronic form), the auditor may obtain the required audit evidence through other means such as the following:
- Agreeing bank balances to bank statements
- If the entity has access to its banking facilities such as internet banking accounts, inspecting the balances through technological means such as video conferencing
- Reading directors’ resolutions
- Reviewing statutory registers, especially the Register of Charges, and correspondence with banks to search for these transactions
- Reviewing bank facility letters
Depending on the assessed risk, a combination of these procedures may need to be performed.
For confirmations in electronic form that are not received through a secure platform, the auditor is reminded to take precautions to validate their authenticity, such as verifying the source and contents of the confirmation with the bank through a telephone call.
Evaluate Management’s Assessment
The auditor shall evaluate management’s assessment on whether the current events and conditions cast significant doubt over the entity’s ability to continue as a going concern, and in severe cases, if the use of going concern basis of accounting remains appropriate. The auditor assesses the adequacy of audit evidence obtained regarding management’s assumption of going concern and considers the implications on the auditor’s report.
In doing so, the auditor needs to understand the impact of the current events and conditions on the entity’s operations or forecasts, and cashflow requirements of the entity’s investing and financing activities. This would include assessing the ability of the entity to comply with debt/contract covenants throughout the period of assessment.
Access to Liquidity
With business closures taking place and the possibility of an economic downturn, the auditor will also need to evaluate if the entity has access to sufficient liquidity to meet its obligations when due. For instance, while an entity may be granted deferral of payments (such as rental or loan instalments), the auditor needs to assess the entity’s ability to meet these obligations after the deferment period.
Evaluate Management’s Plans
The auditor needs to understand management’s strategy in sustaining the business through the looming economic downturn, which may include its plans to conserve cash, cost-cutting measures, seeking new credit facilities and disposal of assets. The auditor may also consider the potential benefits from government support measures which may be applicable to the entity.
The auditor also evaluates whether management’s plan appropriately considers the length of time that the COVID-19 situation will affect the entity, including both the immediate effects and the likely recovery period. This will vary depending on the industry, business model and other relevant circumstances. For example, once safe distancing measures are eased and people are permitted to travel freely, there may still be other social or economic factors that might delay the recovery of entities in the tourism industry.
Where management has considered the entity’s credit facilities in its assessment, the auditor may need to evaluate if these credit facilities will be available throughout the period of assessment and whether there is continued support from the bank/lender.
Where an entity relies on financial support from another party, it is critical for the auditor to carefully evaluate whether the other party has the intent and ability to provide such support. The auditor should be mindful that the other party’s business plans and/or financial strength may also be adversely impacted in the current environment.
Given the uncertainties arising from the COVID-19 situation, the auditor may consider requesting management to perform a variety of analyses (e.g. scenario analysis, stress tests, break-even analysis).
The auditor may request for an assessment of the impact of multiple scenarios, including, for example, a prolonged suspension of business due to a further extension of the Circuit Breaker period and the number of months the entity can sustain before triggering going concern issues.
Considerations of the risks and probabilities of these scenarios may aid in the auditor’s evaluation of management’s assessment. As part of the evaluation of management’s assessment, the auditor may also perform independent stress tests or break-even analysis.
Extend Beyond Twelve Months
In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period in accordance with SFRS(I) 1-1 Presentation of Financial Statements paragraphs 25 – 26.
Where the COVID-19 situation results in events or conditions that trigger the need for an assessment by management beyond twelve months from the end of the reporting period, the auditor will need to critically evaluate the quality of any audit evidence obtained in support of management’s assessment as the degree of uncertainty associated with the outcome of an event or condition increases as the event or condition is further into the future.
Alert to Changes in Conditions
As the COVID-19 situation is fast evolving, the auditor should be alert to changes in conditions up to the date of the auditor’s report when performing the evaluation of management’s assessment on the entity’s going concern assumption.
During such uncertain times where the situation is fluid, disclosures are ever more critical to enable users of financial statements to understand the basis of management’s assessment. The auditor should critically evaluate the adequacy of the disclosures surrounding going concern.
The following table sets out the implications to the auditor’s report for the possible scenarios which the auditor may face when there are events or conditions identified that may cast significant doubt on an entity’s ability to continue as a going concern:
Scenario when events or conditions are identified
Implications to the auditor’s report
Use of going concern assumption is inappropriate
If financial statements are prepared on going concern basis
- The auditor shall express an adverse opinion, regardless of whether or not the financial statements include disclosures on the inappropriateness of the use of the going concern basis of preparation.
If financial statements prepared on another basis such as liquidation basis
- The auditor may be able to express an unmodified opinion if there are adequate disclosures regarding the use of the alternative basis in the financial statements.
- The auditor may consider it appropriate or necessary to include an Emphasis of Matter paragraph to draw attention to the alternative basis of accounting and the reasons for its use.
Use of the going concern assumption is appropriate, but material uncertainty exists1
If adequate disclosures are made in the financial statements
- The auditor shall
If there are inadequate disclosures in the financial statements
- The auditor shall issue a modified opinion
Where events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern but, based on the audit evidence obtained, the auditor concludes that no material uncertainty exists (a “close-call” situation)
If adequate disclosures are made in the financial statements
- The auditor shall express an unmodified opinion
- The auditor may consider highlighting this as a Key Audit Matter (where SSA 701 applies, or include an Emphasis of Matter paragraph for audits where SSA 701 does not apply.)
If there are inadequate disclosures in the financial statements
- The auditor shall issue a modified opinion
Where the auditor is unable to form a conclusion on the appropriateness of management’s assessment (for example, where there is lack of evidence available to support management’s forecasts)
The auditor shall express a disclaimer of opinion when the auditor concludes that the effects on the financial statements could be both material and pervasive.
1 Where management’s use of the going concern basis of accounting has been assessed to remain appropriate, the auditor is required to assess and conclude whether a material uncertainty exists about the entity’s ability to continue as a going concern. In situations involving multiple material uncertainties, the auditor may consider it appropriate in extremely rare cases to express a disclaimer of opinion.
Where the entity is listed on the Singapore Stock Exchange and an adverse opinion, disclaimer of opinion, qualified opinion, emphasis of matter (or a material uncertainty relating to going concern) is included in the auditor’s report of
- the entity; or
- any of its subsidiaries or associated companies (if the adverse opinion, disclaimer of opinion, qualified opinion or emphasis of a matter has a material impact on the issuer's consolidated financial statements or the group's financial position),
the entity will need to immediately announce this fact in accordance with SGX Rule 704 (5).
Fundamental to Users’ Understanding of the Financial Statements?
Where the COVID-19 related events have had, or continue to have, a significant effect on the entity’s financial position and/or operations, management should include the necessary disclosures in the financial statements. The auditor considers whether the disclosures are of such importance that they are fundamental to users’ understanding of the financial statements. If yes, an Emphasis of Matter paragraph in the auditor’s report would be necessary to draw users’ attention to those disclosures.
Not a Substitute for a Modified Opinion
The auditor should understand that the use of an Emphasis of Matter paragraph is not a substitute for a modified audit opinion or an avenue for the auditor to share additional information that is not presented or disclosed elsewhere in the financial statements.
Not a Substitute for a Key Audit Matter
If the impact from the COVID-19 outbreak has been determined to be a key audit matter in accordance with SSA 701 Communicating Key Audit Matters in the Independent Auditor’s Report, the auditor should note that the use of an Emphasis of Matter paragraph is not a substitute for a description of individual Key Audit Matters.
Highlight as Key Audit Matter or Other Matter
If the auditor considers it necessary to communicate a matter other than those that are presented or disclosed in the financial statements that, in the auditor’s judgement, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report, the auditor shall highlight those matters as Other Matters, if they have not been determined and disclosed as Key Audit Matters in accordance with SSA 701.
SGX Rule 704 (5)
Where the entity is listed on the Singapore Stock Exchange, the entity will need to immediately announce the fact that an Emphasis of Matter paragraph is included in the auditor’s report of the entity (or any subsidiary or associated company if it has a material impact on the entity’s consolidated financial statements or the group’s financial position) in accordance with SGX Rule 704 (5).
As highlighted in AGS 12 Group Audits - Inaccessibility of Component Auditors’ Work Papers and Other Considerations, apart from visiting the component auditor’s office to review work papers 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, especially on the significant risks of material misstatement and areas of significant estimates and judgements.
Discussions with the component auditor including the salient areas of the discussions should be duly documented by the group engagement team in the audit work papers.
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 the issues were resolved. This can also include discussions with component auditor’s Engagement Quality Control Reviewer (EQCR), where applicable, to understand critical issues raised by the EQCR and whether they were satisfactorily addressed, and also corroborate certain matters documented in the detailed memorandum with the EQCR.
Please refer to AGS 12 for further information and considerations.
Understand Impact to Existing Internal Controls and Implications to the Audit
The auditor is required to obtain an understanding of how a remote working environment affects the design and operating effectiveness of existing internal controls and the implications on the audit risk assessment and planned procedures. The auditor should also consider any new controls implemented, where relevant.
Where the system set-up remains unchanged in a remote working environment (for example, set-up of journal entry preparer and approver in an accounting system that can be accessed online remains unchanged regardless of whether the system is accessed in office or remotely from home), there may be little impact on the operating effectiveness of automated controls.
However, in some cases, changes made to the entity’s IT general controls and/or other system changes to facilitate remote working may create new IT risks relevant to the audit. For example, remote access rights granted to employees who previously had no such rights, if not implemented properly, may increase the risk of unauthorised system access.
Another potential risk of personnel working remotely is an increased risk of fraud, including management override, resulting from the changes in internal control in ways that may involve less direct supervision of the entity’s staff, greater access authority and/or a lack of segregation of duties. The risk of fraud can result in a misstatement through actions taken after the reporting date (e.g., post year end journal entries). Therefore, it is important that the auditor takes into consideration the impact of these fraud risks and design of relevant controls on the audit.
Where there have been changes that impact the audit, the auditor will need to update the audit risk assessment, strategy and planned procedures to respond to the increased risk.
Considerations for Controls with Planned Reliance
In respect of those controls over which there is planned reliance, the auditor needs to consider if the period during which controls are not operating as intended falls within the period of reliance. For example, where the auditor has evaluated the design and tested the operating effectiveness for the first nine months of the audit period and plans to perform limited update testing for the last three months of the audit period, this may no longer be an effective approach if the design of the controls has changed by virtue of the control operator now working remotely during the last three months. If the design of the control has not changed, the auditor should consider whether with the remote working arrangement, there is any indication that the design and/or operation of the control during the last three months of the audit period may not be effective.
The auditor will need to consider revisions to the planned audit response (for example by obtaining more substantive audit evidence) if it may no longer be possible to rely on the controls for audit evidence at least in the last three months of the audit period. If the auditor needs to change the level of expected controls reliance, it is important to document this and any other resulting changes to the planned audit response. In accordance with paragraph A26 of SSA 260 Communication with Those Charged with Governance, the auditor should consider if there is a need to communicate with those charged with governance about modifications to the overall audit strategy and audit plan.
The current environment could introduce new incentives, pressures and opportunities for financial reporting fraud. For example, there may be a pressure to overstate profits or demonstrate the ability to continue as a going concern despite the challenges presented by the current situation. The pressure to meet stakeholders’ expectations and demonstrate continued compliance with financial covenants related to loan facilities could cause the entity to withhold or mask certain information. These heighten the need for increased professional scepticism by the auditor.
Conversely, the auditor should also be wary that entities may have the incentive to defer the recognition of profits or create ‘cookie jar reserves’ in order to present improved financial results in future periods. This risk is potentially heightened in industries/entities which have been severely affected and/or where share prices have declined significantly. The risk of management bias in its use of estimates and assumptions may also be increased as management may take on an overly pessimistic or optimistic view (for example, deliberately adopting discount rates at the higher or lower ends of the acceptable range without sufficient appropriate justification).
The auditor should recognise and assess the risks of material misstatement due to fraud and take responsive actions to obtain sufficient appropriate audit evidence to form the conclusion on the audit of the financial statements. The auditor would likely need to revisit the prior risk assessments as it is no longer business as usual for many, if not most, entities.
Areas More Susceptible to the Risk of Material Misstatement Due to Fraud or Error
Areas of financial statements requiring significant management judgements or estimates could be more susceptible to the risk of material misstatement due to fraud or error. Some of the common areas which could be subjected to material risk of fraud or risk of management bias include, but are not limited to the following:
- Revenue recognition
- Goodwill and intangible asset impairment
- Valuation of accounts receivable (or loss allowance for expected credit losses)
- Property, plant and equipment impairment
- Inventory obsolescence/waste
- Related party transactions
- Unrecorded liabilities
- Unusual business transactions
- Debt covenant compliance
- Contractual penalty clause liabilities
These matters should also be considered in group audit situations.
SSA 230 Audit Documentation requires the auditor to assemble the audit documentation in an audit file and complete the administrative process of assembling the final audit file on a timely basis after the date of the auditor’s report. It also requires that after the assembly of the final audit file has been completed, the auditor should not delete or discard audit documentation of any nature before the end of its retention period.
SSA 230.A21 states that an appropriate time limit within which to complete the assembly of the final audit file is ordinarily not more than 60 days after the date of the auditor’s report ("documentation completion date"). In relation to this, SSQC 1 Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements requires firms to establish policies and procedures for the timely completion of the assembly of audit files.
The auditor should be mindful that, apart from the exceptional circumstances highlighted in SSA 230.A20, the assembly of the final audit file after the date of the auditor’s report should not involve the performance of new audit procedures or the drawing of new conclusions. Only changes which are administrative in nature can be made to the audit documentation during this final assembly process. It would typically be expected that work papers are not modified after the documentation completion date.
Audit files can be in any of these forms:
- electronic form only;
- electronic form with one or more paper files; or
- one or more paper files only.
In the case of electronic workpapers, the location would likely be a server. Paper files, on the other hand, need to be received and stored in a physical location. Typically, audit firms would have one or more central storage locations either within the office premises or externally to receive on or before the documentation completion date and retain the final audit file for the required period of retention. Under the government's Circuit Breaker measures, such storage facilities will not be available for access at least till 1 June 2020.
The following guidance can be considered by audit firms for application in dealing with situations where the audit documentation is wholly or partly contained in paper files, and the documentation completion date falls during the period of the circuit breaker measures.
- The engagement partner, being overall responsible for the audit engagement, should contact the members of the engagement team, and establish that the engagement has been completed in compliance with the supervision, review and documentation policies and guidance of the audit firm on or before the documentation completion date.
- The engagement team members should inform the engagement partner (or any other member of the engagement team who has the role of supporting of the engagement partner in the review and supervision role for the engagement team, such as the engagement manager) of the specific contents of the paper files, and protect and secure them until such point in time when the office premises become accessible.
Written communications among the engagement team and the dating of individual work papers could demonstrate that all documentation is complete as of the documentation completion date and that no new procedures were performed or audit evidence gathered after the date of the auditor’s report.
- A central tracking sheet maintained electronically (with controls in place to detect/prevent unauthorised amendments) by the audit firm may be helpful to document all instances where audit documentation in paper files were complete but not submitted to the central storage facility only due to the access restriction during the period of the circuit breaker measures. In maintaining such central tracking sheet, the audit firm needs to ensure proper assignment of administration rights with adequate segregation of duties.
Appropriate measures should also be taken to prevent amendments to the dates of the work papers and the documentation completion date (i.e. backdating).
Once the audit firm's office premise becomes accessible, and there is the ability to complete the assembly of the paper files, the engagement team should physically submit the paper files as soon as possible to the central storage facility in the usual manner as well as additional documentation that has been acknowledged by the engagement partner, that sets out the reason for the delay (i.e. beyond the documentation completion period) in submitting those files.
Electronic signature of the auditor’s report in Singapore is acceptable under the Electronic Transactions Act (Chapter 88) (“ETA”). However, in doing so, the auditor needs to take the necessary precautionary measures over the control and dissemination of the auditor’s electronic signature. This may include, at the firm level, a set of policies detailing the necessary approval process and controls in place to prevent unauthorised insertion of the auditor’s electronic signature and tampering of the signed reports.
The accounting for the abovementioned property tax rebate will come under SFRS(I) 1-20 Accounting for Government Grants and Disclosure of Government Assistance. For further details, please refer to the ISCA Financial Reporting Bulletin 5 (FRB 5) COVID-19 Government Relief Measures: Accounting for property tax rebate from the perspective of landlords and tenants.
The property tax rebate is given by the Singapore Government independent of the commercial terms of the individual lease agreements and is not intended to modify the existing terms of the leases. Under the COVID-19 (Temporary Measures) Act 2020, the landlord must pass the benefit to the tenant without attaching any condition. Accordingly, the property tax rebate that the landlord passes on as rental rebates to their tenants are in substance government grants and should be accounted for in accordance with SFRS(I) 1-20 rather than SFRS(I) 16.
Yes, the COVID-19 (Temporary Measures) Act 2020 is an adjusting event for entities with a financial reporting date of 31 March 2020.
Although the legislation was passed by Parliament on 7 April 2020, the Singapore Government had in its Unity and Resilience Budget in February and March 2020 respectively, clearly communicated that landlords are expected to pass on the property tax rebates received in full to their tenants. This expectation is also communicated by IRAS in its e-Tax Guide Property Tax Rebate for Non-Residential Properties in 2020. Accordingly, landlords with financial reporting period ended 31 March 2020 should determine the reasonably expected impact of the legislation as at 31 March 2020 and make the appropriate adjustments in the financial statements.
For the vacant portion of the property, the landlord itself will benefit from the property tax rebate.
The property tax rebate is accounted for as grant income by the landlord. Under SFRS(I) 1-20 paragraph 29, the landlord may present property tax rebate either (i) separately as grant income or under “other income”; or (ii) deducted against property tax expense. The accounting policy choice will need to be consistently applied by the entity.
Disclosure requirements of SFRS(I) 1-20 should also be considered. As part of the disclosure requirements, where the grant income is deducted against the property tax expense, the effects of the grant income on the property tax expense will need to be disclosed in the notes to the financial statements.
Share this Page