Lockdown conundrum for auditors

The three-week national lockdown aimed at curbing the spread of Covid-19 has made conducting audits tricky for both auditors and their clients.

Under the Companies Act, a company must prepare annual financial statements within six months of its financial year-end and submit them to the Companies and Intellectual Property Commission (CIPC).

With many companies having a March 31 year-end, auditors will have at least two fewer weeks to verify issues that can only be conducted in person.

Industry bodies are encouraging auditors and their clients to do as much of the audit remotely.

However, this limits their ability to verify issues such as the existence of inventory, the absence of ‘ghost workers,’ and to match up original invoices to their electronic versions.

Complying with the legislation while under lockdown is difficult as there is nothing specifically in the law that allows for an audit to be delayed.

‘No legislative override’

“There is no legislative override that allows for the postponement of audits or independent review of the annual financial statements,” says Hayley Barker Hoogwerf, assurance project director at the South African Institute of Chartered Accountants (Saica).

South Africa’s financial regulators do have some discretion. The Independent Regulatory Board for Auditors (Irba) points out that the JSE, for example, notes that although all parties still have an obligation to submit filings, they should engage with it regarding any possible missed deadlines, including audits or audit opinions.

The JSE, which requires members to publish results twice a year, understands the difficulty the lockdown presents and will extend the reporting period on a case-by-case basis based on the specific circumstances.

For its part, the CIPC announced on March 24 that it would be shutting down all services relating to companies, close corporations and co-operatives until April 1. A limited electronic service resumed from April 1, with all other services only resuming at the end of the lockdown.

The shutting down of the CIPC has, in effect, extended the filing period and deferred the submission of compliance checklists and annual financial statements as well as penalties.

Consequences 

If, despite the best efforts of all involved, the lockdown prevents the auditors from getting the necessary information, thus rendering them unable to declare the audit free of material misstatements, it will generally be declared a “limitation on the scope of the audit”, Iraba says.

When this happens, the auditor is required to modify the opinion in the auditor’s report. Depending on the severity of the limitation of scope, the auditor will either express a qualified opinion or a disclaimer of opinion, indicating that it is not possible to form an opinion on the financial statements, says Iraba.

Barker Hoogwerf says under the JSE’s listing requirements, if a company has not submitted year-end results after four months, it will be annotated on its trading system with ‘RE’ to show that it has failed to submit its annual financial statements on time. It will then be in danger of having its listing suspended.

Covid-19 looms over books 

Aside from the difficulty in conducting audits, Barker Hoogwerf says Saica members have raised issues of how to account for the impact of Covid-19 in their books. These can range from technical matters like whether it be accounted for as a balance sheet or post-balance sheet event, to whether the business can even be considered a going concern.

She says the pandemic is also affecting impairments of financial and non-financial assets as well as companies’ ability to meet their financial commitments.

Saica members are also concerned about whether they can verify the actual stock counts at the end of March 31, as well as their inability to assess original documentation, adding that this “brings into question the reliability of audit evidence”.

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