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Some Practical Guidance
In Brief
The COVID-19 pandemic has disrupted life around the world, but business, in altered fashion, goes on. Companies will have to report on their operations, financial condition, and cash flows during this crisis, and those reports will have to be audited. The author details considerations management and auditors will need to take when preparing and auditing financial statements.
There will likely be many interrelated financial reporting and auditing implications of the coronavirus (COVID19) pandemic and its impact on economic activity. Numerous articles have already been published on the subject; a selection of materials appears in the Exhibit. The purpose of this article is to highlight some of the most common matters for consideration, and to provide practical guidance for auditors and preparers, especially in cases where substantial judgment and professional skepticism are necessary to assess the facts and ensure that the operative standards are applied. This article is intended only to help identify possible audit scope limitations and other issues, and make such judgments. In most cases, it does not offer reliable resolutions of the issues identified, tailored to specific fact scenarios. Although references are made to certain accounting and auditing standards, it is beyond the scope of this article to summarize all relevant provisions of the authoritative literature.
Underlying Principles
Use of estimates. One principle that pervades the issues arising from the pandemic is the use of estimates to ensure timely financial reporting. As discussed below, many of the issues will require greater-than-usual reliance on accounting estimates; due to the higher level of uncertainty, these estimates will be inherently more difficult and less reliable.
Auditors must exercise considerable professional skepticism and vigilance, staying alert for indications of management bias, intentional or not, in its estimates. For example, it is common to be overly conservative in a bad year when providing for loss contingencies, to facilitate improved earnings in a succeeding period. (When intentional, this fraudulent practice is known as "taking a big bath.")
Each time financial statements are to be issued, virtually all estimates carried forward from prior periods will need to be revisited in the light of COVID-19 risks and developments, subject to the accounting and disclosure provisions of Accounting Standards Codification (ASC) Topic 250, "Accounting Changes and...