The coronavirus lockdown has put India Inc.’s auditors in a fix. Travel restrictions and remote working are impacting their audit schedules. And while regulators may have relaxed some deadlines, with no clarity on when ‘normal’ life will resume, auditors are relying on a mix of technology and guidelines issued by Institute of Chartered Accountants of India to ensure timely completion of statutory audits.

Listed companies generally undergo annual statutory audits between March and May every year for their fourth quarter as well as annual earnings. An audit process can span weeks and generally involves physical inspection and visits to a company’s premises by an auditor.

Here’s how auditors are coping with the complexities.

Dealing With Digital Laggards

Auditors deploy a team for onsite inspection of company’s accounts. But the lockdown has curtailed such deployment. Here’s where technology is making the process easier, auditors BloombergQuint spoke with said.

Wherever feasible, we’re accessing a company’s ERP (enterprise resource planning) system through virtual private networks, Milan Mody, partner at NA Shah Associates LLP, told BloombergQuint. This is possible only if all vouchers, supporting documents and invoices are scanned and uploaded in a legible format, he said.

The information dump should be available on the cloud for the auditors to complete the work in time, Amarjit Chopra, senior partner at GSA Associates, said. He pointed out that successful audit completion will depend on the presence of security controls and if all key audit-related documents are digitised.

“Whether a client allows an auditor to retain certain documents as an audit evidence is also of key significance. An audit cannot start before May in the absence of this.”

Amarjit Chopra, Senior Partner, GSA Associates

Clients are giving auditors read-only access to books of accounts and supporting documents, Sushrut Chitale, partner at Mukund M. Chitale & Co., said. In case of a typical sale transaction, he pointed out, auditors look at the sale agreement, sale invoice and corresponding entries to check whether money has been received against such sale.

“We also inspect sales, debtors balances and corresponding bank entries. All this can be done remotely if proper and timely access to all these documents is available,” Chitale said.

But technology is of little help if records aren’t digitised and where documents need to be verified, Mody said while pointing to challenges that face the audit industry during the lockdown.

“Certain agreements or documents may not be scanned by companies or may be kept in custody of officials. Authenticating whether a document is in fact an original is also a challenge in certain instances. In some cases, vendors may not have provided invoice copies .”

Milan Mody, N.A. Shah Associates LLP

And so, successful completion of audit work hugely depends upon how robust a company’s digital process is, Mody added.

Creative Ways For Inventory Audit

Inventory verification and valuation is a critical component in the audit process. Inventories include assets held by a business for sale, or assets which are held for production or are meant to be consumed in the production process. As such, substantial funds of a company can remain locked in inventories.

Since physical check of inventories isn’t possible, auditors are coming up with creative ways to get the job done.

Auditors are employing backward reconciliation to ascertain inventory as on March 31, Chopra pointed out.

“Let’s say, the audit is taking place in April. The auditor will note the inventory number on April 22. He will then find out the physical inventory number from the books of account as on March 31. And work backwards by observing the purchases, sale and consumption of material between these two dates to determine what should be the inventory on April 22.” 

Amarjit Chopra, Senior Partner, GSA Associates

If the inventory numbers get reconciled, the auditor can proceed or otherwise ask further questions to the management, Chopra said.

The second method which auditors are using to check inventory involves digital means, Deloitte’s Audit Partner Khazat Kotwal said.

“Auditors are considering to address some of the challenges for physical verification of inventory by the use of technology or virtual observations through mediums like live videos wherever possible. In some cases they are using internal auditors or other specialist working under their supervision to verify stock.” 

Khazat Kotwal, Partner, Deloitte 

Finally, auditors are also relying on data provided by the management if the company has been historically credible with record-keeping. But in some situations, auditors may give a disclaimer that they were unable to verify the inventory, Mody said.

Besides accessing books of accounts and inventory checks, auditors are also struggling with revenue recognition for those goods which are ready and earmarked for customers but cannot be delivered due to logistical issues.

Mody explained that auditors are demanding electronic acknowledgements from third parties to allow revenue recognition for such goods. Auditors are seeking evidence from companies for transfer of risk and reward—companies are obtaining documents from their customers specifying that the delivery of goods has been deferred as a result of the lockdown, he said.

Source : https://www.bloombergquint.com/law-and-policy/audit-season-how-india-incs-auditors-are-coping-with-the-covid-19-lockdown