Audits need hard, realistic assumptions
When it came to that company’s call with analysts to discuss the results, the company was grateful because most of the analysts’ questions had centred on the assumptions behind the numbers.
If it had stuck with the original assessment, it would have likely been met with hostility from the analysts, he said.
For auditors, risks had also increased, and they needed to constantly reassess their audit planning, risk assessments, materiality and the available evidence to support what they were doing, he said.
Auditors also needed to look for any ‘‘disconfirming’’ evidence and alternative sources of information.
For example, when assessing the price of financial instruments, because spreads had widened, the same security might have widely varying values in different markets, so auditors would need to be able to justify why they had used a particular price and assess the impact of alternative sources of information.
A particular bond might be priced at $1.20 in one market but $1.60 in another.
‘‘You need to ensure the disclosure of what information you’ve selected, how you selected it and what stresstesting you’ve done.’’
Valuing debt
Where companies had reached an accommodation with their banks to modify their loans, they would have to completely redo the assessment of that loan’s value.
A key factor would be the decision directors and auditors made about how deep and how long the Covid19 impact was going to be, and they would then need to assess both the direct and indirect impacts, he said.
What shape would the recovery take, would there be a second wave or another deadly virus.
Companies and their auditors would need to document what they had done and explain why.
‘‘Globally, audit regulators have been pretty consistent in saying that Covid represents an impairment event.’’
That meant assets to be tested for impairment would go beyond goodwill and intangible assets, which had to be revalued annually, to include assets that had previously been accepted as not impaired.
Companies would have to test the value of their debtors books to assess whether all the people who owed them money had the capacity to pay and whether debts were otherwise collectable.