The rapidly evolving COVID-19 situation is having a significant impact on FMC reporting entities’ financial reporting obligations and the ability to perform audits.
FMC reporting entities and auditors will face difficulties in preparing financial statements and annual reports, and carrying out audits in line with legislative requirements. Challenges include:
- uncertainties relating to the impact of COVID-19 on valuation of assets and liabilities, impacting ability to prepare financial statements
- access limitations as a result of remote working arrangements, health, safety and wellbeing considerations, and domestic and international travel restrictions.
The annual reports of FMC reporting entities are a key source of information for investors, so it is critical that these documents include appropriate disclosures and that audit quality is not compromised.
Auditors should continue to comply fully with required professional and ethical standards. It is important that sufficient time is taken by both the entity and the auditor to complete the annual financial reporting and auditing process, even if this results in a delay in reporting.
To comply with the relevant standards, we remind audit firms to focus on the following:
- The auditor’s risk assessment and whether it needs to be revised.
- How the auditor gathers sufficient, appropriate audit evidence. This includes recognising that the planned audit approach may need to change, particularly when performing group audits, and considering alternative procedures when needed. The auditor must gather the necessary evidence to support their audit opinion, or consider modifying their opinion.
- How the group auditor proposes to review the work of component auditors to meet the requirements in standards, including considering whether alternative procedures can be used where travel is restricted (for example, using video conferencing or other technology).
- In instances where audit teams have previously visited overseas locations to perform audit work, considering options for component auditors to perform the work.
- The auditor’s assessment of going concern and the prospects of an audited company, given increased uncertainty about the global economy and the immediate outlook for many companies.
- Ensuring disclosures made by management about the impact of COVID-19 on the company provide sufficient information for users of the financial statements, and accurately describe the company’s prospects and the impact of the situation – while recognising the high degree of uncertainty.
- The need for the auditor to reassess key aspects of their audit as a result of the fast-changing situation. This reassessment will take place right up to the point of signing the auditor’s report, and may require management to provide further evidence and information.
- Where the current circumstances have had a significant impact on the delivery of the audit, the auditor will need to consider how to explain this in their report, for example, by reporting this as a key audit matter.
Auditor engagement with entities
- Maintain continuous engagement with the entity, directors and the audit committee on the impact of COVID-19 on the entity and its financial reporting. This should include any impact on the auditor (such as employee restrictions, and any issues with the group auditor/component auditor).
- Communicate early and clearly on the expectation of obtaining audit evidence to support all areas of the audit.
- Consider advising entities to seek external assistance with accounting issues that may occur as a result of the current circumstances.
- Set clear expectations for the level of disclosure (both qualitative and quantitative) relating to the impact and risk of COVID-19 on the company, and the impact of insufficient disclosure on the audit opinion.
- Provide clear messages to entities, directors and audit committees about the importance of auditors having sufficient time and support to carry out their work to an appropriate standard, including reassessing work in light of changing circumstances. In some cases this may require companies to reconsider their announcement dates.
- Clearly and promptly explain the type of audit opinion that may be considered if sufficient, appropriate audit evidence cannot be obtained.
FMC reporting obligations
The FMA is providing relief for FMC reporting entities from financial reporting obligations under the Financial Markets Conduct Act 2013. We will also be reminding FMC reporting entities of their obligations regarding appropriate and sufficient disclosures, particularly for issues arising as a consequence of the emergence and spread of COVID-19.
When encountering barriers to completing the audit in a timely manner
Where an entity or audit firm expects delays beyond the required reporting timeframes, we expect the entity to promptly contact their regulators (NZX, FMA or the Companies Office) to notify them of the delay and the reasons for that.
After ensuring the safety and wellbeing of staff, your focus as an auditor during the COVID-19 pandemic should remain on providing investors with reliable audited information. If you wish to contact the FMA on areas that impact your compliance with the Auditor Regulation Act 2011 please email questions@fma.govt.nz.
