ICAS issues updated guidance for auditors on attendance at stocktakes during the coronavirus outbreak
The spread of COVID-19 continues to escalate across the UK and this has led to the introduction of mobility restrictions. These will obviously have major implications for many businesses and indeed for auditors.
The Financial Reporting Council (FRC) issued guidance for auditors covering several areas on 16 March 2020 and subsequently issued a bulletin on 26 March 2020. Given the fluidity of the current situation it is likely that further guidance will be issued in due course. Members are therefore advised to sign up to news alerts from the FRC and to check their website on a daily basis.
Updated stocktake guidance from ICAS
ICAS has issued updated guidance on attendance at stocktakes to assist auditors in assessing whether, in light of their potential non-attendance at a stocktake, the use of alternative procedures would enable them to have sufficient and appropriate evidence in relation to the assertions of existence, condition and completeness of inventory.
The guidance highlights that the most relevant ISAs (UK) in terms on stocktake attendance, are ISA (UK) 501 (June 2016) Audit Evidence—Specific Considerations for Selected Items and ISA (UK) 705 Modifications to the Opinion in the Independent Auditor’s Report. It also recognises that the likelihood is that there will be far fewer stocktakes taking place in the coming months. Given the fluidity of the current situation this updated version of the ICAS guidance contains additional content at paragraphs 1.4, 1.5 and 4.7 to provide increased clarity to the earlier version published on 26 March 2020.
Alternative procedures
The guidance highlights matters that the auditor should consider and suggests potential alternative procedures that might assist them in obtaining sufficient and appropriate audit evidence. Amongst the alternative procedures discussed are: use of web or mobile based video-conferencing; stocktakes at a future date with appropriate rollback (including cut-off) procedures undertaken; and analytical review.
These of course are very much circumstances specific, and the auditor will need to exercise professional judgement as to their practicability. The auditor also has to ensure that all matters considered and implemented are appropriately documented to allow understanding of the thought process that was followed in their determination. Even if the above possibilities for alternative ways to remotely attend a stocktake are feasible, it may still be determined by the auditor that the inherent risk and/or materiality of the stock amounts are so significant that remote observation is not appropriate. In these situations, if there are no suitable alternative procedures, it is likely there will be a limitation of scope in the audit opinion.
Audit Opinion
Ultimately, before issuing their audit opinion the auditor has to assess whether they have obtained sufficient and appropriate audit evidence. During the current Coronavirus outbreak a limitation in scope in relation to inventory might be a more likely occurrence because:
(a) stocktakes may not happen;
(b) even if they do, auditors may not be able to attend in person or make remote observation work to a satisfactory level; and
(c) alternative procedures may not be possible.
Each situation, of course, has to be assessed on a case by case basis. If the auditor concludes that they have obtained sufficient and appropriate audit evidence, then there is no need to qualify the audit opinion on the basis of a limitation of scope with regards to inventory.
In circumstances in which the auditor is not able to obtain sufficient and appropriate audit evidence in relation to the existence and completeness of inventory, whether by procedures performed at the stocktake or by alternative procedures, there would be a limitation of scope. If the inventory is material then there would be a need to qualify the audit opinion on the basis of a limitation of scope.
In certain circumstances the auditor may need to issue a disclaimer of opinion if they conclude that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive. Where the auditor is to issue a limitation of scope opinion, reference should be made to illustration 3 in ISA (UK) 705. This provides an example of a limitation of scope audit qualification, but this does not relate to non-attendance at a stocktake. Therefore, this would need to be reworded appropriately but does illustrate how the concept should be applied.
Extension of accounting period
It should be noted that an audited entity could consider taking advantage of the ability to extend their accounting period. This is covered in section 392 of the Companies Act 2006 which allows this period to be extended (please note the accounting period cannot exceed 18 months) provided this has not been done in the previous five years. Certain conditions apply, so the audited entity’s directors should check these before pursuing this approach.