AOB Communications to Auditors and Audit Committee

7 April 2020

Impact of Covid-19 Pandemic on Financial Reporting of Public Interest Entities 
The Securities Commission Malaysia (SC)’s Audit Oversight Board (AOB) closely monitors the impact of the Covid-19 pandemic on the financial reporting of public-interest entities (PIEs) that operate in the Malaysian capital market. The SC’s AOB is cognisant of the difficulties faced by auditors in carrying out their audits due to travel restrictions imposed. Audit teams might have no or limited access to their respective clients’ books and records. This may slow down or dampen the progress of the audit engagements and lead to difficulties in meeting reporting or regulatory deadlines for the issuance of audited financial statements or Annual Reports.

During this period, it is understandable that the focus of management and directors are to ensure the continuity of the PIEs’ business operations and the PIEs’ ability to withstand the volatility of its marketplace or industry. Nevertheless, the SC’s AOB wishes to reiterate that Directors and, in particular Audit Committees and/or Those Charged with Governance are responsible for overseeing the PIEs’ financial reporting process to ensure that reliable audited financial information is provided to users of financial statements for informed decision making.

Members of the Audit Committee and/or Those Charged with Governance play a critical role in supporting the audit process of their PIEs and, auditors are reminded that audit quality should still be upheld at all times. The SC’s AOB would like to take this opportunity to reiterate the areas of focus, which auditors and Audit Committee and/or Those Charged with Governance may wish to pay particular attention to when discharging their responsibilities during this challenging period:
  • Auditors
    • To take a step back and revisit and/or revise the audit plans to ensure that they have adequate time to perform the audits and in certain circumstances, to consider carrying out alternative procedures to ensure that sufficient appropriate audit evidence is obtained to support the conclusion of their audits;
    • To be cautious and highly skeptical when scrutinising areas such as going concern and assessing potential indicators of asset impairment. When evaluating the management’s significant judgement made in the going concern assumption, focus should not only be the future revenue streams of the PIEs but considerations should also include external inputs such as availability of the PIEs’ supply chain for raw materials and inventory purchases which are equally important in assessing the ability of a PIE to continue to operate; 
    • As group auditors, to plan and ensure that sufficient appropriate audit evidences regarding financial information of the components have been obtained in view that on-site review of component auditors’ work papers might not be possible or there is a delay in accessing or inability to access the information of the components;
    • To determine whether disclosures in annual reports related to effects of the Covid-19 pandemic on the current operations and future prospects of the PIE are sufficient to keep the users of the financial statements informed;
    • To assess whether there are any events that occur between the financial reporting date and the date of auditor’s report that required additional audit procedures to be performed on matters which had been previously concluded;
    • To assess if there are any significant economic, regulatory, industry or other developments arising from the Covid-19 pandemic which would constitute to a significant event or transaction during the period and require the auditor’s utmost attention and whether such circumstances need to be disclosed as a Key Audit Matter in the auditor’s report;
    • To consider the inclusion of modifications to the audit opinion expressed on the financial statements if the effects of inability to obtain sufficient appropriate audit evidence are material and/or pervasive to the financial statements; and
    • In promoting consistency of engagement performance, to identify key risk areas and consider issuing and/or providing additional subject matter-specific guides or technical guides to audit teams.
    In the event where auditors have to reassess the work performed previously (or at an interim stage) with the development of the current situation, auditors should communicate it with the audit committees and/or Those Charged with Governance and work with management of the PIEs to ensure that high quality audit is not compromised within the required timeframe. In the event where the auditors are unable to complete the audits within the required timeframe, strong tone-at-the-top in the audit firm is needed to address intimidation from clients to sign off the auditor’s reports before the reporting timelines.

    Auditors should note that one of the main responsibilities of audit committees and/or Those Charged with Governance is to be aware of the progress of the audit of their companies and ensure that the PIEs’ management are providing the relevant and adequate information to auditors in a timely manner to enable the auditors to meet the stipulated reporting timeline.
  • Audit Committees and/or Those Charge with Governance
    • To focus on significant judgements made by management in assessing whether there is any impairment of assets and going concern status of the PIEs when discharging its functions to review year-end financial statements;
    • To challenge management on relevance or appropriateness of any forward-looking statements, if any, made in the annual report; 
    •  To ensure that the audit time frame and reporting deadlines set by management to auditors are reasonable and achievable in order to ensure that audit quality is not compromised;
    • To make any judgement required in determining the appropriate reporting response to events after the reporting date and the extent to which qualitative or quantitative disclosures may be appropriate;
    • To consider any disruptions in the usual flow of information from subsidiaries, associates and joint ventures to the group and communicate promptly its impact to the financial reporting process to the auditor;
    • To assess the impact on the risk management processes and systems of internal control which may have an impact to the financial reporting function of the PIEs and communicate promptly to the auditor;
    • To ensure that proper assessment and adequate disclosures are made by management in respect of any material uncertainties arising from the going concern assumptions used by management in the preparation of the audited financial statements and the auditor has obtained sufficient appropriate audit evidence in concurring with management’s assumption; and 
    • To discuss the draft Key Audit Matters (KAM) with respective auditors to ensure that issues that are most significant in the audit are disclosed and to address the issues highlighted by auditor with management, if any, and determine whether such issues should be addressed in the Audit Committee report to the shareholders.
    The above guidance for auditors and Audit Committee and/or Those Charged with Governance are not exhaustive in view of the difference in the complexities of structures, industries, situations and operating environments for which the PIEs operate.

    Close co-ordination between the auditors and Audit Committees and/or Those Charged with Governance are required during this period to uphold audit quality and enable the audits to be performed in compliance with the required standards.
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