Jun 11, 2021

New Perspectives and Challenges for the Audit Committee Review of Audits

Charlie StephensBy Charlie Stephens, CPA

The annual post-audit meeting between an audit committee and its external auditors is an important part of good corporate governance. While it is always a valuable opportunity for the audit committee to see its company’s financial results, controls environment, and culture from an outsider’s perspective, the audit committee must focus on several specific areas in light of the coronavirus and its impact on the company and its industry.

Here are some points to get on the agenda for your audit committee meeting after the completion of the 2020 audit.

Footnote Disclosures

Many companies’ 2019 audit reports will have contained a new disclosure calling out the potential impact of the coronavirus pandemic on the business. Those in industries particularly affected by pandemic lockdowns (such as travel, entertainment, and hospitality) will have more bulk in their footnote.

Audit committee meetingIn the most severe cases, COVID-19 impacts may require the auditor to evaluate the company’s ability to continue as a going concern. Regardless, expect the 2020 audit report to have a disclosure even if the impact on your company did not rise to that level.

Note that there is no standard language, or even location, for this disclosure. Audit firms will provide their own write-up, and while the 2019 audit report would have likely included the disclosure in the subsequent events footnote, it will likely reside elsewhere this year.

Wherever the disclosure, the audit committee’s first question ought to be whether the substance is “vanilla” or something more. Every business was affected by the pandemic in some way, so every audit report will contain such a disclosure. But ask your auditors whether their work turned up any concerns large enough to warrant additional warning to the reader.

Audit Procedures

If the pandemic precluded the normal on-site contact between audit staff and your personnel, then physical inventories, interviews, and information gathering would have been done without the physical meetings that have been integral in past audits.

The auditors will be eager to explain the ways in which they adapted their audit procedures to accommodate the changed environment. Ideally, your accounting personnel will have risen to the challenge as well, ensuring that responses to the auditors’ requests were complete, accurate, and provided on time.

The audit committee should not hesitate to ask whether the company’s same high standard for information accuracy and timeliness was met during the 2020 audit as in past years. It may be tempting to excuse shortcomings with the usual list of challenges associated with the pandemic – logistical challenges, delays in communication, and maybe even reduced staff levels. While those obstacles are real, the audit committee has a duty to determine whether they prevented the auditors from gathering needed evidence or performing adequate testing.

Furthermore, the audit committee should pay particular attention to whether the auditors received the same unrestricted access to nonfinancial personnel. The audit goes beyond the accounting department –discussions with legal personnel, information technology personnel, the chief executive, and more are common. In the past, your accounting staff would have simply walked the auditors down the hall to the next department. Take note of whether the remote work environment is used as a scapegoat for deprioritizing this vital element of the financial statement audit.

Internal Controls

A discussion of internal controls will be found in any auditor’s report to the audit committee. The auditor has a duty to point out significant deficiencies and material weaknesses in controls, but this year a further discussion of the internal controls environment during the audit committee meeting is a must.

Changes such as working from home or a reduced headcount do not inherently cause a weakened controls environment. But what if the management team could not properly supervise its staff’s work? What if a reduction in force eliminated an important segregation of duties? And what if pressure to reduce audit fees put an excessive burden on your already-stretched accounting team to prepare analyses that the auditors needed?

The above are only a few elements that audit committees need to focus on after the disruptions of the past year. And, for the most part, the audit committee is asking about the same topics that it always has.

However, it is essential to focus on the areas of the audit most likely to fall short of standards after businesses worldwide strained to cope with COVID-19. Audit committees have an important role in the business every year, and proper preparation can ensure that discussions of the 2020 audit bring clarity to the audit committee’s understanding of their company’s financial results, operating environment, and culture.

Charlie Stephens, CPA, is a finance manager at Wind River Holdings in King of Prussia, Pa. He can be reached at charlieastephens8@gmail.com.

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Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of PICPA officers or members. The information contained in herein does not constitute accounting, legal, or professional advice. For professional advice, please engage or consult a qualified professional.