By this time, when the Accounting and auditing community are busy with the finalisation of Financial statements for the year ended 2020, they might have gone through The ICAI ACCOUNTING & AUDITING ADVISORY Impact of Coronavirus on Financial Reporting and the Auditors Consideration.
It runs through 49 passages on:
1. Impact of Coronavirus on Financial Reporting
2. Impact of Coronavirus on Audit of Financial Statement
Part I deals with 13 items on specific Accounting both under Indian GAP and under INDASs and Part II deals with 2 Items as detailed in the Advisory.
From page no.25, it deals with the Impact of Coronavirus on Audit of Financial Statements Coronavirus (COVID-19) on Audit of Financial Statements for the Financial Year ending March 31, 2020.
From page no.25 to 49, it deals with Principles of Specific Standards on Auditing used in this Advisory in preparation of specific Audit Reports and MR for specific Company.
CORONA impact on the economy across the globe:
Thanks to COVID-19, the Audit is in process and progress online.
Since the issue of ICAI Advisory, the Corona spread across the world as on date has worsened further. As on 30/04/2020, the position was precarious and as follows with possible prolonging:
1. Total cases- 3,307,691
2. Total deaths- 234,075
3. Active Cases-2,034,434
Roughly, 8 Nations caused a major junk (USA, Spain, Italy, UK, France, Germany, Turkey and Russia more than -70%. Total cases in India as on the date are hovering around 34,863. For our population size, it may appear minimal but threatening.
But, from the international angle, the world is united because of international trade. Investments are flowing across the globe and borders. Therefore, if the nations mostly from EUROPE and USA are affected heavily, it has grave consequences and bearing on the world economy around . Besides, because of CARONA, there is heavy impact on the local industry- big and small -with consequential ill- effect on employment. Owing to the abnormal situations, the Central and state governments have to extend enormous subsidies and freebies to less fortunate involving crores of rupees making a dent on the exchequers.
Further, there is a call on the government-centre and states-to address the issue. It is easy to talk than done.
Keeping the above view in the back of our mind, the Accounting and Auditing community has to rise to the dictates of the time and issue in tune with various standards as applicable that are essentially emphasised in ICAI Advisory
Again,it is easier said than done. Let us see now.
Reverting back to ICAI Advisory:
A glance through the Advisory will highlight the various /relevant Accounting Standards both under the Indian GAP and Ind As regime as well as follow. It means the impact of the situation is assessed/ valued in terms of standards.
For example, let us take Inventory and Investments.
Inventory:
There are two aspects –
• One on physical verification aspects and
• Another on valuation aspects.
SA 501 copiously deals inter alia with the various aspects of:
- Attendance at Physical Inventory Counting Inquiry Regarding Litigation and Claims
- Valuation and Disclosures D: Segment Information.
Verification:
• Whether the procedure of physical verification in place is in order?
• Where a perpetual inventory system is maintained, management may perform physical counts or other tests to ascertain the reliability of inventory quantity information included in the entity's perpetual inventory records?
• If physical inventory counting is conducted at a date other than the date of the financial statements, the auditor shall, in addition to the procedures required by paragraph 4, perform audit procedures to obtain audit evidence about whether changes in inventory between the count date and the date of the financial statements are properly recorded. (Ref: Para. A9-A11 of SA 501).
• If attendance at physical inventory counting is impracticable for auditors alternate audit procedures to obtain sufficient appropriate audit evidence regarding the existence
• Implementation and maintenance of controls over changes in inventory determines whether the conduct of physical inventory counting at a date, or dates, other than the date of the financial statements is appropriate for audit purposes. SA 330 establishes requirements and provides guidance on substantive procedures performed at an interim date. And, so on and forth.
It is requested to visit the SA 501 with its Implementation Guide for details and clarity. For brevity, much is not quoted.
Valuation of Inventories:
In accordance with Ind. AS 2 Inventories, and AS 2 Valuation of Inventories, it might be necessary to write down inventories to net realizable value due to reduced movement in inventory, the decline in selling prices, or inventory obsolescence due to lower than expected sales.
Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Net realisable value refers to the net amount that an entity expects to realise from the sale of inventory in the ordinary course of business. The management may consider written down of inventories to net realisable value item by item.
Entities should assess the significance of any write-downs and whether they require disclosure in accordance with Ind AS 2/AS 2 as well as paragraph 98 (a) of Ind AS 1, Presentation of Financial Statements, and paragraph 14(a) of AS 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies. It is unlikely that the normal production capacity is to be reviewed for allocating fixed production overheads for the year 2019-2020, because of adverse impact on the utilisation of the production capacity due to the impact of coronavirus on the overall economy or the segment (s) in which the entity is operating.
It may be observed ICAI Advisory follows by and large SA 501 and relevant AS & Ind.AS.
Investment:
Under the Indian GAP,
• The use of fair value is limited to current investments which are required to be valued at lower of the cost or fair value.
• But, the long term investments are always valued at cost less permanent diminution in value.
In respect of financial assets within the scope of AS 13, Accounting for Investments, entities may have to carefully consider the requirements of making provisions for decline in the value of investments, which is other than temporary. The Standard to my knowledge has not explained what the diminution other than temporary in nature is. In case the market revives before the accounts are finalized, perhaps, that could be a ground to reconsider. Even then and also when the management may take a view there is reasonable expectation of revival, and not to make any provision, is it not necessary for the auditor to insist for a note on accounts that give a ground to refer in the audit report with suitable observation to provide for proper insight to the shareholders
Ind. AS 113 Fair Value Measurement:
Individual IndASs such as Ind AS 109, Ind AS 16 etc. prescribe when to measure an asset or liability at fair value and how to recognize the resultant fair value gains and losses i.e. in profit or loss section or other comprehensive income section of Statement of Profit and Loss.
If it is through P & L, impact is immediately felt. If it is through another comprehensive account, it will impact the Balance sheet until sold/realized whence it will either move from one reserve to another reserve as the case may be as per the relevant Standard.
Equally, important is Ind. AS 113 Fair Value Measurement, which lays down certain fundamental principles in respect of Fair value, its definition, and how to determined. AS 113 Fair Value Measurement:
Ind AS 113 recognizes the fact that there are different ways in which fair value is determined i.e. it can be based on the observable market price
- Level 1- quoted price in an active market or
- Level 2 -application of valuation techniques or
- Level 3 -as of the reporting date.
The current financial and capital market environment across the globe has got affected by the rapid spread of COVID-19 and may have developed the following features.
• Significant volatility or indications of the significant decline in market prices of financial instruments like equity, bonds and derivatives.
• Significant decrease in volume or level of activity
The above features may need adequate management consideration and professional judgment to determine whether the quoted prices are based on transactions in an orderly market. It may not be always appropriate to conclude that all transactions in such a market are not orderly. Preparers should be guided by the application guidance in Ind AS 113 that indicates circumstances in which the transaction is not considered an orderly transaction.
Other consequential Standards on Going Concern, Taxation etc have to be taken care of as warrented.
It is necessary to consult Specific Standards on Auditing (refer page no.25to 49) used in this Advisoryin preparation of specific Audit Reports and MRs for specific Company.
The auditor has to insist on a note on accounts that give ground to refer in the audit report with suitable observation were felt necessary to provide for proper insight to the shareholders.
COVID19 Regulatory Package - Asset Classification and Provisioning (RBI):
RBI/2019-20/220
DOR.No.BP.BC.63/21.04.048/2019-20 April, 27th 2020
BI/2019-20/220
DOR.No.BP.BC.63/21.04.048/2019-20
Please the following link on the above for necessary guidance in provisioning relaxation
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11872&Mode=0
Conclusion:
As per SA 580, the auditor should obtain appropriate written representations from the management as to steps taken in the verification and valuation of Inventory.
If there is, in the opinion of the auditors, an audit observation/ opinion warranted, a correct stand is to be taken as to the type of qualification under which SA on Audit Report.
Our responsibility is to express an opinion on these financial results based on our audit of such interim financial statements, which have been prepared in accordance with the recognition and measurement principles laid down in Indian Accounting Standard 34 (Ind AS 34)for Interim Financial Reporting, prescribed, under Section 133 of the Companies Act, 2013 read with relevant rules issued there under; or by the Institute of Chartered Accountants of India , as applicable and other accounting principles generally accepted in India.
Ind AS 34 paragraph 28 requires an entity to apply the same accounting policies in its interim financial statements as are applied in its annual financial statements. It also states that 'the frequency of an entity's reporting (annual, half- yearly or quarterly) shall not affect the measurement of its annual results.
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