#9 – COVID 19: Emerging Challenges in Year End Preparation & Audits
Every year around this time, Ziyo is very busy assisting organisations to finalise their financial records and prepare their annual financial statements for audit as the financial year end for many organisations falls either on 31 December, 28/9 February or 31 March. The lockdown has made this process more difficult from a practical point of view this year, but many audits are approaching completion with the hard work of finance staff and the cooperation of the auditors and funders.
We would like to share with you a number of emerging issues and challenges, related to COVID 19, that affect the financial year-end, the audit and the content of the annual financial statements:
- It is best practice, and often a requirement of funders, that audits take place at the premises of the organisation.The reason for this is so that the auditors can observe and better understand the operations and controls of the organisations that they are auditing and so better assess the risks and plan their audit work accordingly.It also means that assets can be physically verified.Lockdown restrictions have meant that, for the most part, this has not been possible and audits have had to be carried out from a distance. Auditors may ask for photos of assets, and if an organisation cannot access its premises in order to obtain these, it should check what the consequences are from an audit perspective. Communication with funders, if an audit visit is their requirement, is also recommended.
- This leads us to the next challenge as the auditors cannot access the physical evidence for transactions. Documents must now be made available electronically, so that the auditors can carry out their tests remotely.Many organisations had already begun to transition from paper-based filing systems to electronic systems of filing and some even to “cloud- based” systems, such as Xero, and this is likely to be an increasing trend.However, just like paper-based systems, the electronic or cloud based systems must be accessible and therefore logical – finding documents will be a struggle if they are simply dumped, for example, into Dropbox or Google Docs.We strongly recommend that documents are still numbered systematically (for example using bill numbers or requisition numbers) and that these numbers are used both in the accounting records and on the documents themselves. They can then be filed in this order, thereby retaining a good audit trail from the accounting records to the documents.
- Aside from these two very practical challenges, the COVID 19 crisis also raises some serious concerns for organisations, and for their auditors, around the concept of “going concern”.The annual financial statements of an entity are generally prepared on the going concern basis; in other words, on the assumption or premise that the entity will be able to continue operating into the foreseeable future. The annual financial statements are required to include a statement in this regard and the auditors need to evaluate the directors’ assessment. As we have highlighted in our previous newsletters, the COVID 19 crisis is impacting the sector, which in some cases is threatening going concern and sustainability.
We are finding that auditors are asking important questions such as:
- What is the possible long term impact of the pandemic on the operations of the organisation, and will the organisation have sufficient funding to cover all its operational costs in 2021 and beyond?
- Has there been any communication from current funders indicating a possible reduction in future funding? Indeed, have any funders been lost or have any funders indicated that they would be dedicating their funding elsewhere?
- Are there any additional measures that are being implemented by the organisation to ensure that all operational costs are covered (e.g. will the organisation be applying for any government relief)?
The annual financial statements for most organisations should include a note (e.g. in the director’s report) regarding the impact of COVID 19 and the organisation’s response to it.
Here are two examples of such a note:
“The COVID-19 pandemic has presented an unprecedented impact on the organisation’s mission to improve lives through education within the communities that it supports. During this time, the organisation is preparing to support its communities with COVID-19 care packages that help families keep safe, educated and healthy. The organisation is also in the process of ensuring we continue to reach beneficiaries with our group educational workshops via written, video and online mediums until we are in the process of resuming in person workshops in accordance with government regulations.
“Given that the membership is unable to practise and to generate an income during the resulting COVID-19 pandemic lockdown, EXCO has assessed and concluded that there will be an impact on the ability of the membership to continue paying fees for the lockdown months. EXCO has therefore extended a 4 month fee waiver to the membership for the months of April, May, June and July 2020 with the option of extending such waiver as is deemed reasonable. However, based on such assessment of the financial health of the organisation and the revised 2021 budget, EXCO has concluded that the association will continue to operate as a going concern.”
Your auditors will need the directors to demonstrate that the organisation will be able to continue operating through realistic (revised) budgets and cash flow forecasts.
Remember that it is the responsibility of the leaders of the organisation to consider the likely impact of COVID 19 on the organisation in terms of its stakeholders (including employees and funders), activities and finances. The disclosure and audit requirements are in addition to this and part of the critical communication to stakeholders.
Need a bit of help? Ziyo can assist you with preparing adequately for audit and the compilation of the annual financial statements.