As the COVID-19 pandemic continues to throw curveballs into daily business operations, 2020 fiscal year-end audits are also expected to be affected. Since the World Health Organization (WHO) declared the pandemic a public health emergency on Jan. 30, 2020, most businesses will have been impacted by the health crisis during the fiscal audit period. On top of gathering financial records, invoices, forms, management records, tax returns and more, this current climate also brings about unique challenges for audits, which are accompanied by heightened risks of material misstatement. Doeren Mayhew’s dedicated Accounting, Audit and Assurance Group presents four additional areas of risk for you to consider as you prepare your business for its upcoming fiscal year-end audit.

1) Redefine Your Internal Controls

When states issued stay-at-home orders in March and April, most companies shifted to remote work. As a result, the risk of breakdowns in internal controls was increased due to financial reporting processes shifting from in-person to virtual. Since auditors must evaluate the design and implementation of each business’s internal controls, it’s important to note how your controls may have changed extensively during the health crisis to facilitate employees working remote and any other process changes.

If your business has been affected by the pandemic (and it very likely has), take the time to conduct two evaluations of the design and implementation of your relevant controls: one for the controls set in place before the health crisis and one for their current controls (after the beginning of the pandemic). For example, if you owned a storefront which had no activity while the stay-at-home orders were in effect, controls during this time period would be less relevant than last year’s period. By listing out the differences in controls and preparing these in advance for your auditor, your audit process will be expedited.

Your auditor’s evaluation of your relevant controls affects the remainder of your audit, so it’s important to understand their audit approaches may change. For example, if they typically rely on the operating effectiveness of a certain control which has now been changed due to the pandemic, they may need to revise the timing, nature and extent of substantive testing to obtain appropriate audit evidence. This could cause a more complicated and lengthier audit, so prepare to be patient with this new normal.

2) Anticipate Increased Suspicion of Fraud

Whether through Paycheck Protection Program (PPP) loan fraud or identity theft, the COVID-19 pandemic has presented financial criminals with substantial opportunities for scamming. As a result, your auditor will have a healthy degree of professional skepticism when it comes to fraudulent behavior. The last thing you want is to be accused of any sort of fraud during an audit, so providing your auditor with the most accurate information possible is imperative. To steer clear of fraud during your audit:

  • Keep all your journal entries accurate and up-to-date
  • Provide correct staffing and payroll numbers
  • Avoid the misappropriation of assets at all costs

If you follow these guidelines and remain fully transparent with your auditor, your risk of further investigation and penalties will be greatly diminished.

3) Prepare to Prove Your Loan Compliance

During the COVID-19 crisis, many small businesses required emergency federal economic stimulus funding enacted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Like most emergency programs, the regulations put in place to ensure appropriate use of the funding were not cut and dry. Given the complexity of these new regulations and the urgent applications submitted by small businesses, a heightened risk of inadvertent noncompliance may result. Much like the increased air of suspicion for fraud, your auditor is privy to emergency funding risks which could materially affect your financial statements.

To create a line of defense, map out your management team’s mitigation strategy for the pandemic and future procedures. Have all your emergency funding application information accessible, as well as your application for loan forgiveness (if already completed). By providing an organized plan to explain your loan necessity to your auditor, the details of your application and how you used your funds, you can prove you had the best intentions for loan compliance, despite how ill-defined the regulations were.

4) Abide by Revenue Recognition Standards

The final risk worth noting is the auditing of accounting estimates related to revenue recognition. Reporting your revenue in the time it was earned is imperative, so much so that the Financial Accounting Standards Board (FASB) created a standard for deferring revenue, stating revenue is recognized when control of the products or services is transferred to the customer. If your business offers annual contracts, sales with future deliveries, tickets to future events, pre-orders of products or anything similar, it’s important to comply with this standard.

Auditors may discover allowances for doubtful accounts also increase the risk of material misstatement in addition to revenue recognition estimates. If you have goodwill or intangible assets, you may need to reevaluate them prior to your audit and compile them separately for your auditor. Despite the fact auditors have previously been able to evaluate estimates by considering historical results, due to the unprecedented issues COVID-19 presents, fiscal year-end audits may require valuation specialists.

Next Steps

As you begin to prepare for your fiscal year-end audit, keeping these potential risks in mind can be the difference between a successful audit and a drawn-out, complicated one. At the end of the day, your auditor is here to help your business, so be sure to be completely transparent with them as you navigate these uncertain times together. To learn more about preparing for your audit in this COVID-19 era, contact Doeren Mayhew’s Accounting, Audit and Assurance Group today.