Financial Reporting and Auditing Implications of the COVID-19 Pandemic

By Levy, Howard B. | The CPA Journal, May 2020 | Go to article overview

Financial Reporting and Auditing Implications of the COVID-19 Pandemic


Levy, Howard B., The CPA Journal


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 Error Corrections."

For an accounting estimate to be acceptable as reasonable by an auditor, it must be supported by sufficient objective evidence to enable a conclusion that it is based on the best information available at the time the financial statements are issued and is free from management bias. The latter entails careful risk assessment and the exercise of professional skepticism.

If management's best estimate is viewed as subject to material variability, that fact should ordinarily be disclosed, at least qualitatively. When a single-point estimate relates to a loss contingency, its additional maximum exposure to loss should be disclosed if possible. FASB's Conceptual Framework for Financial Reporting states that "if the level of uncertainty ... is sufficiently large, that estimate will not be particularly useful" (Concepts Statement 8, para. QC 16). If insufficient evidence is available, and no reasonable estimate can be made, that fact ordinarily should be disclosed. In some extreme circumstances, however, the inability to make an estimate may constitute a material scope limitation that necessarily leads to a qualified, or a disclaimer of, opinion by the auditor [AU-C 705 or Auditing Standard (AS) 3105]. Report modifications due to scope limitations are generally not acceptable to the SEC because they are viewed as noncompliant with federal securities laws.

As of this writing, the AICPA's Accounting Standards Board (ASB) and the PCAOB have recently proposed (https://bit.ly/3cIb12I) or issued amendments intended to strengthen their respective standards controlling the nature and extent of audit procedures required to support management's estimates. These standards (AU-C 540 or AS 2501) and the outstanding proposed amendment to AU-C 540 afford considerable useful guidance to auditors. (AS 2501, in its latest form, is currently scheduled to become effective for audits of financial statements for fiscal years ending on or after December 15, 2020. …

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