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:

https://www2.sgx.com/media-centre/20200207-sgx-regco-gives-issuers-30-june-2020-hold-agms-approve-fy-dec-2019-results 

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 extended date of the AGM, except for non PRC-based 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) read with SGX Rule 705(2A) and 705(2B).

On 22 April 2020, SGX RegCo published a regulatory announcement titled “SGX RegCo grants auto-extension for release of unaudited financial results for FYs ended Feb, Mar and April 2020”.

SGX RegCo will grant an automatic 2-month extension to issuers with financial year-ends (FY-end) of 29 Feb 2020 or 31 March 2020; and a 1-month extension to issuers with a 30 April 2020 FY-end, to release their full year unaudited results.

The revised deadlines for these issuers to announce their unaudited full year financial statements is set out below:

Please refer to this link for the regulatory announcement: https://www.sgx.com/media-centre/20200422-sgx-regco-grants-auto-extension-release-unaudited-financial-results-fys-ended

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^[1], 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?

^[1] 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. 

Credit Facilities 

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. 

Financial Support 

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. 

Stress Testing 

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. 

Disclosures 

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: 

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.

Paragraph 7 of FRS 20 states that an entity shall not recognise government grants until there is reasonable assurance that it will comply with the conditions attached to them and the grants will be received. As the JSS was first announced in the Unity Budget on 18 February 2020, the grant did not exist as at 31 December 2019. Accordingly, the entity should not recognise a grant receivable as at 31 December 2019. The earliest date on which the entity could recognise a grant receivable is 18 February 2020 (i.e. date of the Unity Budget). 

For the entity with a financial reporting date of 31 December 2019, the JSS is an event occurring after the end of the reporting period. Although the JSS is a non-adjusting event (i.e. an event that is indicative of conditions that arose after the reporting period [paragraph 3 of SFRS(I) 1-10]), the JSS should be disclosed in the entity’s financial statements if it is material (see paragraph 21 of SFRS(I) 1-10). Judgement is required in assessing whether a non-adjusting event is material. 

For more details on the accounting of JSS grant, please refer to ISCA Financial Reporting Bulletin 6 [https://isca.org.sg/standards-guidance/financial-reporting/technical-guidance-issued-by-isca-technical-division/technical-guidance-issued-under-codification-framework/financial-reporting-bulletins]. FRB 6 also includes an illustrative example of how the JSS grant income should be recognised by an entity with a financial reporting period ended 31 March 2020.

The related costs that the JSS pay-outs are meant to compensate are staff costs. This is in line with the purpose of the JSS which is to provide wage support to employers to help them retain their local employees (Singapore Citizens and Permanent Residents) during this period of economic uncertainty.

The accounting for the JSS pay-outs 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 6 (FRB 6) COVID-19 Government Relief Measures: Accounting for the grant provided by the Singapore Government under the Jobs Support Scheme.

According to SFRS(I) 1-20 paragraph 12, the grant is recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grant is intended to compensate. 

In ISCA’s view, the ‘related costs’ for which the JSS grant is intended to compensate is the salary costs incurred by the entity during the ten-month period of economic uncertainty till January 2021. Judgment is involved in determining the appropriate period. For most companies, the ten-month period of economic uncertainty is likely to commence in April 2020. However, for some companies in the more affected sectors, the period of economic uncertainty may commence earlier. 

Accordingly, the JSS grant income should be recognised in the profit or loss on a systematic basis over the ten-month period of economic uncertainty in which the entity recognises the related salary costs (but not earlier than the date of the Unity Budget which was announced on 18 February 2020). 

According to SFRS(I) 1-20 paragraph 29, the JSS grant income can be presented either (1) separately as “grant income” or under “other income”; or (2) deducted in the reporting of the salary costs. The presentation approach should be applied consistently to all similar grants. 

For greater transparency, entities are encouraged to present the JSS grant income as ”grant income” in the financial statements, instead of as a deduction against the salary costs. Disclosure requirements of paragraphs 31 and 39 of SFRS(I) 1-20 should also be considered.

To clarify, the illustrative example in FRB 6 assumes that the entity has one local employee who is paid a gross monthly wage of $4,600 from October 2019 to January 2021. The grant income recognised by the entity is in line with the level of JSS support from the government for each month (i.e. 75% per month for April and May 2020; 25% per month for June to December). This should not be taken to mean that the grant income is recognised on a ‘straight-line’ basis for the months of June 2020 to January 2021.

On IRAS’ webpage on JSS, it is stated that: 

The entity should note that “where there is evidence of irresponsible and unfair treatment, employers may be denied employment support (including JSS) and have their work pass privileges curtailed”. Accordingly, the company should treat the employees fairly and retain local employees (Singapore Citizens and Permanent Residents) during this period of economic uncertainty. This is also in line with the purpose of the JSS. 

Prior to recognising grant income on a systematic basis, there needs to be reasonable assurance that the entity has satisfied all conditions relating to JSS [paragraph 7 of SFRS(I) 1-20]. In the event that the entity has reduced its headcount, there would be uncertainty as to whether the conditions for JSS have been fulfilled. 

In ISCA’s view, from September 2020 to January 2021, the entity would be able to recognise the JSS grant income for the actual staff costs incurred for those months (i.e. based on the staff costs of 20 local employees). However, there is uncertainty as to whether the entity is entitled to the JSS that was previously calculated based on the wages paid to 50 local employees from October 2019 to March 2020 (excluding January 2020). Judgement is required to determine whether there is reasonable assurance that the JSS conditions have been satisfied for the 30 local employees who were let go in September 2020. 

As the COVID-19 situation is still evolving, there may be new legislations or regulations being issued in relation to the JSS. You should continue to monitor the developments so as to ensure appropriate accounting of the JSS grant income.

When an entity’s ability to continue as a going concern is dependent on the financial support from a related party or third party (“supporting party”), the auditor needs to perform the necessary assessment to obtain sufficient appropriate audit evidence on both the intent and the ability of the supporting party to provide such financial support. Such an assessment is especially important under the current COVID-19 environment as the supporting party’s business plans and/or financial strength may also be adversely impacted. 

Intent of the supporting party 

Audit evidence may be obtained from performing one or more of the following procedures: 

• In a group situation where the supporting party is a related party

The auditor to consider if there has been any change in management plans and overall strategy of the supporting party, especially if the group operates in industries that are adversely impacted.

For a group operating in adversely impacted industries, the supporting party may re-assess its decision to continue to provide such financial support.

If Singapore or the region where the entity operates continues to be an important market for the group, or if the entity continues to serve an important function to the group, the supporting party may be more inclined to continue providing such financial support. 

If the supporting party is the holding company, one way of obtaining such evidence could be through discussions with the group auditor, who would have obtained an understanding of the group and its environment as part of its group audit, in accordance with SSA 315 and SSA 600. 

• Letter of financial support

A common audit procedure is to obtain the letter of financial support provided by the supporting party to the entity. 

If deemed necessary, the auditor should obtain written confirmation of the terms and conditions attaching to such financial support. The COVID-19 situation could result in events or conditions that trigger the need for going concern assessment by management beyond twelve months from the end of the reporting period and as such the auditor should be mindful that the same period is covered by the financial support letter. The auditor should also check if the letter is signed by an authorised party and review the wording of the letter and be satisfied with the intent to commit to the financial support arrangements. Professional judgement should be exercised on whether legal advice is required to determine the legal enforceability of the letter on a case-by-case basis so as to strengthen the qualtiy of audit evidence. 

• A Board of Directors resolution passed to confirm the supporting party’s Board’s consent to provide financial support to the entity may be evidence of such intent. The auditor may consider obtaining a copy of the resolution or an extract of the board meeting minutes as further evidence.   

•  Audit evidence of past financial support obtained from the supporting party when such support was needed, such as in the form of capital injection, advances or loans may indicate such intent. However, this serves only as an indication and it cannot be assumed that past financial support in itself is sufficient evidence of intent of the supporting party to provide financial support.   

The auditor should assess if a combination of these or other procedures would need to be performed to gain comfort over the supporting party’s intent, especially since in Singapore’s context, such letters are typically not legally enforceable.

Ability of the supporting party

The auditor should obtain sufficient appropriate audit evidence to evaluate the supporting party’s ability to meet the obligation under the financial support arrangement. Such evidence may be obtained from procedures such as: 

• Reviewing the most recent financial statements (including interim/quarterly announcements) of the supporting party and other available information about the supporting party or the industry that the supporting party operates in. In light of the current environment, the auditor should also take note of any disclosures relating to the negative impact of COVID-19 on the supporting party and consider their implications. The auditor should review such information and disclosures with heightened scepticism in the current environment.

• Where available, the auditor may obtain the going concern assessment performed at the group level by group management if the support is to be provided by the holding company or seek support from the group auditors.

• Obtaining bank statements or information on personal wealth if the supporting party is an individual, or evidence regarding the valuation of the assets held by the supporting party that are set aside to provide such financial support. However, the auditor should be mindful that these procedures might not provide evidence regarding other claims on the pledged assets that would limit the ability of the supporting party to use the assets to provide such financial support.

The auditor should assess if a combination of these or other procedures would need to be performed to gain comfort over the supporting party’s ability.

The adequacy of the audit evidence to be obtained would depend on the auditor’s assessment of the risks and circumstances. 

The auditor may refer to FAQ 10 [Auditing] – What are the audit considerations of the impact of COVID-19 on going concern assessments? for the implications to the auditor’s report under various scenarios.

The widespread uncertainty and market volatility arising from the Covid-19 pandemic may lead to significant uncertainties in the valuations of certain assets, such as real estate. Given the unknown impact of this pandemic, auditors may encounter instances where a valuer includes a clause, which may effectively be a caveat or disclaimer, relating to significant valuation uncertainty or qualifying statements in relation to certain aspects of the valuation in a valuation report which is relied upon by management. 

The auditor should first understand management’s evaluation of the valuation. While management may largely rely on the valuation conclusion, management still needs to be satisfied that the valuation is appropriate. The auditor’s understanding should include management’s assessment of the implications of such clauses and how management has concluded that the valuation report is fit for its purpose. 

As there may be multiple variations of such clauses and various terms or jargons, the auditor will need to carefully assess the implications of such clauses on the audit. 

The following are some areas for the auditor’s consideration when assessing the implications of such clauses. 

• Obtain an understanding of the challenges faced by the valuer which led to the inclusion of such clauses and how the valuer has dealt with these challenges. How have these impacted the fair value as at the reporting date?

• Consider whether there are restrictions or instructions under the terms of engagement between management and the valuer which may impede the valuation process (for instance, where management restricts the valuer to certain valuation methods or assumptions). 

• Understand if the valuation is affected by a lack of market evidence in the current environment.

• With the valuation uncertainties or limitations, consider whether the valuation still adhere to the requirements under SFRS(I) 13 Fair Value Measurement.

• Consider whether the valuation uncertainties or limitations and basis to support the valuation have been adequately disclosed in the financial statements.

With the current level of uncertainty surrounding global markets, it is expected that not many industries or asset classes would be unaffected. As such, even when the valuer has not highlighted any form of uncertainty or limitation in a valuation report, the auditor should understand if the valuer has considered the impact arising from Covid-19 and apply the considerations above.

The auditor should ensure that the assessment of the implications of such clauses are sufficiently documented in the audit work papers. This may include the documentation of minutes or salient points of discussion with the valuer and management. 

Implications on the auditor’s report 

Significant valuation uncertainty 

Certain valuation reports may contain a clause which resembles an emphasis of matter, to inform the users that the valuation is subject to significant uncertainty and that values may change significantly and unexpectedly over a relatively short period of time. Similarly, as highlighted above, valuations may also be subject to a similar degree of uncertainty even where the valuer might not have included any such clause in the valuation report. Where material, management would need to highlight such uncertainty as part of its disclosure of estimation uncertainty.  

The auditor shall, after applying the considerations highlighted above, evaluate the implications of such uncertainty on the auditor’s report. Where the auditor is of the view that such uncertainty is of such importance that it is fundamental to users’ understanding of the financial statements, the auditor shall include an emphasis of matter paragraph in the auditor’s report to draw users’ attention to the disclosure of this estimation uncertainty in the financial statements (or highlighting this in the Key Audit Matters section where SSA 701 Communicating Key Audit Matters in the Independent Auditor’s Report applies). An emphasis of matter paragraph should only be included where the matter has been adequately disclosed in the financial statements and is not a substitute for a modified opinion, or disclosure which is required or otherwise necessary to achieve fair presentation in the financial statements. 

It should be noted that the existence of such uncertainty or such clause in the valuation report does not automatically warrant an emphasis of matter paragraph in the auditor’s report. The auditor should also seek to avoid drawing users’ attention to generic disclosures which describe general market uncertainty without highlighting information which is specific to the entity. An example where an emphasis of matter paragraph may be required is where the entity discloses in the financial statements, that an updated valuation report shows a significant change in fair value since the financial reporting date or where certain key valuation inputs such as discount rates, rental rates or capitalisation rates have changed drastically subsequent to the end of the reporting period, indicating a significant change in valuation between the financial reporting date and the date of the auditor’s report. 

Where assets carried at fair value are less significant to the financial statements as a whole, it is less likely that the fair value uncertainty arising from the Covid-19 situation would be fundamental to the users’ understanding of the financial statements. As such, even if there is a qualifying statement included in a valuation report, an emphasis of matter paragraph may not be warranted. 

Other limitations 

There may also be valuation reports which contain a clause which resembles a disclaimer, where it indicates that the valuation might not meet the measurement requirements under SFRS(I) 13. An example would be where a valuer highlights a limitation of market evidence due to a lack of recent transactions and thus, relies on outdated transaction data without appropriate adjustments to account for changes in market conditions. The auditor should seek to discuss any matters indicating potential non-compliance with SFRS(I) 13 with management and the valuer. Where this is not satisfactorily remedied, the auditor shall consider the implications on the auditor’s report based on the requirements of SSA 705 Modifications to the Opinion in the Independent Auditor’s Report. 

Under Section 199–2(A) of the Singapore Companies Act, an entity is required to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurance that:

1. assets are safeguarded against loss from unauthorised use or disposition; and
2. transactions are properly authorised and that they are recorded as necessary to permit the preparation of true and fair financial statements and to maintain accountability of assets

Arising from the Circuit Breaker measures and employees working remotely, entities will need to consider the implications of a remote working environment on internal controls. Entities should review if there are changes to existing standard operating procedures and determine if existing controls need to be re-designed or new controls need to be implemented in response to remote working arrangements.

Such an assessment of the internal control environment can be performed using the following general approach: 

Entities should also closely monitor if existing controls or newly implemented controls are being executed as designed in a remote working environment.

As best practice, such assessments and changes to standard operating procedures and controls should be documented as part of the business continuity plan. Entities should also retain evidence of execution of controls in a remote working environment as an audit trail.

For internal control areas that an entity may need to re-assess, please refer to FAQ 2: What are some internal controls which an entity might need to reassess?

For potential areas of misstatements in financial statements, please refer to FAQ 3 – Economic activities of many entities are adversely affected by measures put in place to contain the COVID-19 virus. This has implications for entities preparing financial statements for financial reporting periods ending in Year 2020. What are some potential areas of misstatements that an entity should be mindful of? 

Below are some common areas that may be affected when an entity implements remote working arrangements due to the Circuit Breaker measures. The list is non-exhaustive, and entities should also look out for other areas relevant to their business and operations.   

Financial Statement Closing Process 

Under normal circumstances, the typical process of recording journal entries would involve a preparer submitting draft journal entries, together with supporting documents, to a supervisor/manager for review before they are posted into the system. Under remote working arrangements, such supporting documents may not be readily available for the review to be carried out in an effective manner. 

For more complex areas of accounting, such as where discounted cash flow (DCF) models are used, it is likely that the preparer would need to obtain various inputs from multiple departments within the organisation or even external parties in preparing the DCF computations. Similarly, it may be challenging to obtain such inputs under the current environment where employees are working remotely and external parties may be closed for business. 

Estimates and adjustments made to financial statements arising from COVID-19 should be properly reviewed for their nature and substance to ensure that they are not used to explain unusual transactions that are not in the ordinary course of business. 

In conclusion, an entity should consider how such changes to the internal control environment will affect its ability to complete its financial statement closing process timely, as delays may increase the potential for errors in the financial statements. An entity should also consider planning for the possible course of action where there is a risk that reporting deadlines might be missed. 

Changes to Contract Terms 

Arising from disruptions of operations, existing contract terms or revenue arrangements may be changed, affecting the timing of revenue recognition. As such, the finance team should communicate with the relevant operations teams to understand these changes and assess their impact on revenue recognition.   

Accounts Payable and Cash Disbursement Process 

When processing an invoice from a supplier, a typical control is to perform a three-way match between the supplier invoice, purchase order and proof of delivery before the accounts payable are processed. Again, such documents may not be readily available for the control to be carried out in an effective manner during the Circuit Breaker period.   

Another common cash disbursement procedure is processing payments using original invoices and marking them as “paid”. Making disbursements from alternative source documents such as scanned invoice may give rise to risk of duplicate payments. 

To facilitate payments in a remote working environment, entities may set up alternative payment methods, for example, switching from cheques manually signed off by authorised signatories to online banking that can be executed by a single employee using a digital token. In such situations, consideration should be given on the risk of unauthorised payments and controls or safeguards which could be implemented.   

Inventory Management 

Entities may also not be able to perform their inventory cycle counts or year-end inventory counts because of warehouse closures. In such situations, entities should schedule for counts to be conducted as soon as it is practicable to do so. 

Where inventories are held at third-party warehouses, entities would typically obtain the inventory listing and movement information from the third-party to perform reconciliations of inventory movement. However, the third-party may not be able to provide such information readily due to warehouse closures. 

With the inability to execute certain controls over inventory management, entities need to consider the implications to the accuracy of inventory balances and management’s review of slow-moving/damaged goods.  

IT-related risks 

Entities may not have factored in the strain on their IT resources arising from remote working arrangements. Stop-gap measures implemented to facilitate employees working from home may create risks. As such, there is a need to consider the implications on the IT environment. 

Remote access rights granted to employees who previously had no such rights, if not properly implemented, may increase risks of unauthorised system access. Also, entities need to consider if expanded access rights granted to employees to allow them to perform additional tasks will override segregation of duties.  

Entities should also be mindful of the increased vulnerability to cyber-attacks with the surge in employees accessing the network remotely. 

In general, entities need to consider how a lack of access to information that is essential to the effective operation of processes or internal controls may cause a breakdown in controls. Unavailability of personnel (for e.g. due to illness/quarantine orders or lost headcount or employees on unpaid leave) may result in an increased risk of management review controls¹ being circumvented. A lack of headcount may also impede effective segregation of duties. Where segregation of duties is affected, mitigating controls need to be put in place. 

Where required, management review controls would need to be tightened for the period of remote working and if preventive controls are unable to be executed, more detective controls should be employed. However, it should also be noted that the quality of reviews may be affected and management should consider alternative arrangements if needed.

In situations where the entity determines that controls are not adequate to address the risks arising from a remote working arrangement, the affected transaction or activity should only be resumed when the situation permits (e.g. after the Circuit Breaker measures are lifted). Entities should also consider the need to perform a subsequent review of all the transactions performed by employees while working remotely, which is all the more important if transactions or activities were carried out without mitigating controls in place.  

¹Management review controls are the reviews of key financial information conducted by a company’s management to assess its reasonableness and accuracy.  

When preparing its financial statements, an entity should be mindful of the following potential areas of misstatements (note: this is not an exhaustive list): 

• Is the going concern assumption still appropriate when there has been a substantive change in the operational business model of the entity?

The going concern assumption underlies the preparation of financial statements and an entity is required to assess whether it will continue in operation for the foreseeable future.

The pandemic and subsequent developments such as measures taken by the government to control the virus may have adversely affected the entity such that it resulted in the entity substantively changing its operational business model. When this happens, the entity needs to reassess whether the going concern assumption used in preparing its financial statements is still appropriate.

For considerations when performing the going concern assessment, please refer to FAQ 4 – For entities with a 31 December 2019 financial reporting date, in relation to the COVID-19 outbreak, how would they go about performing the going concern assessment?

• Has any of the entity’s contracts become onerous?

SFRS(I) 1-37 Provisions, Contingent Liabilities and Contingent Assets defines an onerous contract to be a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. SFRS(I) 1-37 explains that the unavoidable costs is the lower of the cost of fulfilling the contract and any compensation or penalties arising from failure to fulfil it.

When a contract is assessed to be onerous, the entity is required by SFRS(I) 1-37 to recognise and measure the present obligation under the contract as a provision.

With disruptions to economic activities, the entity’s contracts should be reviewed to determine if any contract has become onerous. For instance, the entity may be unable to fulfil a customer’s order due to the shut-down of its manufacturing facilities. The entity should review the contractual terms and determine:

-     whether the unavoidable costs of fulfilling the contract (lower of the cost of fulfilling the contract and any compensation arising from failure to fulfil the contract) has exceeded the consideration to be received.

-      whether there are contractual terms which may relieve the entity of its obligations (for instance, force majeure clauses). If an entity can cancel a contract without any penalty or compensation made to the counter-party, the contract does not become onerous since there is no obligation.

• Are impairment losses on the entity’s non-financial assets overstated or understated for the effects of the pandemic?

The key principle under SFRS(I) 36 Impairment of Assets is that an asset must not be carried in an entity’s financial statements at more than its recoverable amount (either by using it or selling it). The asset is impaired if its carrying amount exceeds its recoverable amount.

SFRS(I) 36 requires impairment assessments to be performed on non-financial assets at the end of each financial reporting period as follows:

-     Intangible assets with indefinite useful lives and goodwill – to be tested for impairment at least annually or more frequently if impairment indicators exist

-   Other assets (e.g. property, plant & equipment, investments in associates and joint ventures) – to be tested for impairment only when impairment indicators exist

With the recent developments of the pandemic, there could be indicators indicating that assets may be impaired (e.g. shut-down of manufacturing facilities, falling demand and selling prices of goods and services).

The recoverable amount of an asset is the higher of its value in use and its fair value less costs of disposal.

When determining the recoverable amount, future cash flows are estimated based on management’s best estimates of the economic conditions that will exist over the remaining useful life of the asset.

Although the above judgement can be difficult to make in light of the current uncertain situation, entities are reminded that the assumptions used should be reasonable and supportable and which reflect conditions existing at the financial reporting date.

• Are the entity’s estimates of expected credit losses appropriate in light of the current uncertain situation?

As highlighted in the IASB’s publication titled “IFRS 9 and COVID-19 – Accounting for expected credit losses”, IFRS 9 sets out the framework for determining the amount of expected credit losses (ECL) that should be recognised. It requires that lifetime ECLs be recognised when there is a significant increase in credit risk (SICR) on a financial instrument. However, IFRS 9 does not provide bright lines nor a mechanistic approach in accounting for ECLs. Accordingly, companies may need to adjust their approaches to forecasting and determining when lifetime losses should be recognised to reflect the current environment.

Estimating ECL can be difficult to make in light of the current uncertain situation, entities are reminded that the information used should be reasonable and supportable (historical, current and forward-looking to the extent possible) and which reflect conditions existing at the financial reporting date. With COVID-19, previous assumptions and design of respective ECL models may also need to be relooked at and reassessed, and not just updated.

Important note: Entities are reminded to take note of the following:

• Ensure appropriate and sufficient disclosures in the financial statements to enable users of the financial statements to understand the impact of the pandemic and the various containment measures imposed on the entity.
• Be alert to ‘unusual’ changes to an entity’s financial performance, and ensure that there are valid explanations for such changes. Do not without a reasonable basis attribute all such changes as effects of the pandemic and the containment measures.

Entities may wish to note that ACRA has published Financial Reporting Practice Guidance No. 1 of 2020 to help directors in their reviews of financial statements during the COVID-19 situation. It highlights warning signs of some possible non-compliance(s) with accounting standards, and provides directors with questions to ask management and statutory auditors when assessing the impact from COVID-19 on the financial statements. 

When preparing its financial statements, an entity should be mindful of the following potential areas of misstatements (note: this is not an exhaustive list): 

• Is the going concern assumption still appropriate when there has been a substantive change in the operational business model of the entity? 

The going concern assumption underlies the preparation of financial statements and an entity is required to assess whether it will continue in operation for the foreseeable future. 

The pandemic and subsequent developments may have adversely affected the entity such that it resulted in the entity substantively changing its operational business model. When this happens, the entity needs to reassess whether the going concern assumption used in preparing its financial statements is still appropriate. 

For considerations when performing the going concern assessment, please refer to FAQ 4 – For entities with a 31 December 2019 financial reporting date, in relation to the COVID-19 outbreak, how would they go about performing the going concern assessment? 

• Are the fair values of the entity’s investment properties overstated? 

The current global economic crisis, projected negative global growth for 2020, technical recession in Singapore and the potentially “new normal” of remote working, among other factors, have created economic implications for the real estate industry and property markets. 

An entity whose investment property accounting policy is the fair value model under SFRS(I) 1-40 Investment Property should ensure that the fair value measurement of investment properties in the financial statements is appropriate, both for financial year end reporting and interim reporting. 

An entity needs to be aware that fair values of investment properties determined prior to the pandemic (e.g. as at 31 December 2019 or earlier) may no longer be appropriate for reporting during 2020. Accordingly, an entity needs to carefully assess the appropriateness of the fair values of investment properties to be reported in its balance sheet (and the corresponding change in fair values reported in profit or loss) as it issues financial reports during 2020. This may include assessing whether the inputs and assumptions used in its valuation techniques are still appropriate, whether they reflect current market conditions, and whether these need to be updated. 

An entity should consider whether expert advice is needed in the assessment, or if an updated valuation exercise is required to be performed. 

Paragraph 122 of SFRS(I) 1-1 Presentation of Financial Statements requires the disclosure of significant judgements that management has made in the process of applying the entity’s accounting policies in the preparation of financial statements. 

As significant judgement is likely to be required to be exercised in the assessment of the fair value of investment properties, an entity should ensure that appropriate disclosures of the judgements and assumptions are included in the financial statements. The disclosures should be entity-specific, clear and concise, without obscuring material information in unnecessary detail. This also applies to cases where an entity concludes that the fair value of its investment property has not changed significantly since the outbreak of COVID-19. In that case, if it is considered a significant judgement, the basis for that judgement should be clearly explained in the financial statements. 

• Have any of the entity’s contracts become onerous? 

SFRS(I) 1-37 Provisions, Contingent Liabilities and Contingent Assets defines an onerous contract to be a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. SFRS(I) 1-37 explains that the unavoidable costs are the lower of the cost of fulfilling the contract and any compensation or penalties arising from failure to fulfil it. 

When a contract is assessed to be onerous, the entity is required by SFRS(I) 1-37 to recognise and measure the present obligation under the contract as a provision. 

With disruptions to economic activities, the entity’s contracts should be reviewed to determine if any contract has become onerous. For instance, the entity may be unable to fulfil a customer’s order due to the shut-down of its manufacturing facilities. The entity should review the contractual terms and determine:

-       whether the unavoidable costs of fulfilling the contract (lower of the cost of fulfilling the contract and any compensation arising from failure to fulfil the contract) has exceeded the consideration to be received.

-       whether there are contractual terms which may relieve the entity of its obligations (for instance, force majeure clauses). If an entity can cancel a contract without any penalty or compensation made to the counter-party, the contract does not become onerous since there is no obligation. 

• Are the entity’s non-financial assets (carried at cost) overstated and impairment losses required for the effects of the pandemic? 

Under SFRS(I) 36 Impairment of Assets, an asset must not be carried in an entity’s financial statements at more than its recoverable amount (where recovery of the asset may be either by using it or selling it). The asset is impaired if its recoverable amount is below the carrying amount. 

SFRS(I) 36 requires an entity to assess at the end of each reporting period whether there is any indication that an asset may be impaired. Impairment assessments to be performed on non-financial assets as follows:

- Goodwill and other intangible assets with indefinite useful lives – to be tested for impairment at least annually or more frequently if impairment indicators exist

- Other assets (e.g. property, plant & equipment, investment properties carried at cost, investments in associates and joint ventures) – to be tested for impairment only when impairment indicators exist

 With recent developments, there could be indicators that assets may be impaired (e.g. shut-down of manufacturing facilities, falling demand and reduced selling prices of goods and services) for both the financial year-end reporting and/or interim reporting.

The recoverable amount of an asset is the higher of its value in use and its fair value less costs of disposal.

When determining the recoverable amount, future cash flows are estimated based on management’s best estimates of the economic conditions that will exist over the remaining useful life of the asset.

Although the above judgement can be difficult to make in light of the current uncertain situation, entities are reminded that the assumptions used should be reasonable and supportable and should reflect conditions existing at the financial reporting date.  An entity should consider whether expert advice is needed in the assessment,

• Are the entity’s estimates of expected credit losses appropriate in light of the current uncertain situation? 

As highlighted in the IASB’s publication titled “IFRS 9 and COVID-19 – Accounting for expected credit losses”, IFRS 9 sets out the framework for determining the amount of expected credit losses (ECL) that should be recognised. It requires that lifetime ECL be recognised when there is a significant increase in credit risk on a financial instrument (and other items in scope of ECL requirements). However, IFRS 9 (and SFRS(I) 9) does not provide bright lines nor a mechanistic approach in accounting for ECL. Accordingly, companies may need to adjust their approaches to determining ECL based on the best available information about past events, current conditions and forecast scenarios of future conditions (since the ECL model is forward-looking). 

Estimating ECL can be difficult in light of the current situation. Previous assumptions and designs of ECL models may need to be revisited, reassessed, and updated. 

Important note: Entities should take note of the following:

• Ensure appropriate and sufficient disclosures in the financial statements to enable users of the financial statements to understand the material impacts of the pandemic and the various containment measures that affected the entity.
• Be alert to ‘unusual’ changes to an entity’s financial performance, and ensure that there are appropriate explanations for such changes. Not  all such changes may be validly attributed as being effects of the pandemic and/or the containment measures.

Entities may wish to note that ACRA has published Financial Reporting Practice Guidance No. 1 of 2020 to help directors in their reviews of financial statements during the COVID-19 situation. It highlights warning signs of some possible non-compliance with accounting standards, and provides directors with questions to ask management and statutory auditors when assessing the impact from COVID-19 on the financial statements.

^[1]The guidance shared in this FAQ is also relevant for entities preparing financial statements for purposes of interim reporting in 2020.  

The impact on Entity A’s financial statements depends on the nature of the caveats. 

The caveats may range from highlighting that the fair value figure in the valuation report may be subject to significant valuation uncertainty due to the pandemic, to limitation of scope of the valuation work or that the valuer is unable to determine the fair value of the property at the reporting date. 

Management should take note of the following:

• Be alert for such clauses in the valuation reports.
• To examine the clauses carefully and engage with the valuer(s) to fully understand the nature of the clauses and its implications for financial reporting purposes. If the nature of the caveats is such that the fair value stated in the valuation report could not be relied upon, that valuation report should not be accepted by management.
• To engage with the auditor early and alert them to such clauses in the valuation reports.
• To assess and determine the resultant impact on the entity’s financial statements – which may range from ensuring appropriate and sufficient disclosures in the financial statements to possible qualifications being included in the auditor’s report.

ISCA has previously issued Financial Reporting Guidance 1 (FRG 1) which highlights best practices for preparers when engaging the valuers. FRG 1 also includes a recommended workflow of the engagement process between the valuer and the auditor; and matters to be considered in the scope of work and valuation report. FRG 1 states that the appropriate basis of value for financial reporting purposes is fair value as defined in SFRS(I) 13 Fair Value Measurement. SFRS(I) 13 sets out a single SFRS(I) a framework for measuring fair value. 

Under the current uncertain situation, there could be significant changes to the fair values of properties. Management is reminded to ensure that the fair values are appropriate and consistent with management’s understanding of the entity’s facts and circumstances.  

Entities may wish to note that the International Valuation Standards Council’s (IVSC) Technical Boards has issued a letter which provides guidance on performing valuations under uncertain times, given the impact of COVID-19 on businesses and valuations. Although the letter is mainly directed at valuers, it highlights some key areas that entities should take note of when commissioning a valuation during the COVID-19 situation.