Trickier stocktakes

They would also have to test the value of their inventory, whether lockdowns had impaired stock, whether it was still saleable above cost or whether the company had too much stock and whether there was still a market for it.

Stocktaking might be more difficult for auditors that had not had access to their client’s premises at balance date and the client’s staff working offsite may also complicate the audit and mean it took longer.

Similarly, property, plant and equipment would have to be tested for impairment.

The past few years had been ‘‘very benign’’ but now auditors would have to decide whether the client’s cash flow justified the value of such assets.

It would be a very brave person who said one set of assumptions would be the right one, so companies would have to stresstest outcomes by using different assumptions.

Companies that had been using an 8%12% range for assessing cost of capital might need to widen that range to 8%14%.

If a company had restructured postbalance date, ‘‘under the accounting rules, you can’t include the savings you’re going to make from that restructuring into your impairment calculations’’.

The outcome of all this process would show up in the auditor’s list of key audit matters (KAMs).

Regulators around the world have made it clear blanket statements about the impact of Covid19 would not be sufficient, so companies would have to be specific about the impacts on their operations.

Items that could end up as KAMs are treasury and other valuations, impairments, and onerous leases.

If a matter was not adequately disclosed in the company’s accounts when it should have been properly disclosed, that would not be treated as a KAM but could lead to the audit report being qualified.

Companies and auditors usually worked to avoid a qualified report.

There were three reasons for qualifications — the auditor didn’t believe the accounts were true and fair, the auditor didn’t know if the accounts were true and fair or the auditor believed not everything that should be disclosed had been.

Mr Kensington described this as often being ‘‘a traffic ticket but not a court case’’, but a still serious situation and a situation that normally related to one aspect of the accounts that the auditor did not agree with.

When an auditor believed a set of accounts did not present a true and fair view and were fundamentally misleading, that was likely to lead to the auditor’s resignation shortly afterwards, Mr Kensington said. — BusinessDesk