COVID-19 has changed risk considerations and the way audit planning is conducted. But many smaller businesses issue reviewed, not audited, financial statements. If you are one of those companies, below are some changes you might expect as your accountants conduct year-end review procedures.

1. Changes to Analytical Procedures

Reviewed financial statements provide limited assurance that the statements are free from material misstatement and conform with the applicable reporting framework, typically, U.S. Generally Accepted Accounting Principles (GAAP). Financial analytics are often used as a key source of review evidence. This involves developing expectations and comparing financial statement amounts and ratios to those of the prior period to expected amounts. It also includes assessing the reliability of the data used.

Applying analytic procedures has generally become more challenging during the pandemic. There may be uncertainty about the data used as a result of changes to business operations or processes, as well as changes in personnel responsible for procedures and controls. In addition, there’s a potential lack of comparability affecting ratios because of the economic downturn from COVID-19. Possible reasons for material differences between the current period and prior periods include:

• Reductions in revenues,
• Changes in cost of goods sold due to supply chain issues,
• Changes in payroll costs due to workforce changes and regulation,
• Increased costs for customer and employee safety, and
• Loan and lease defaults or modifications.

If the results of analytics are inconsistent or differ significantly from expected amounts, accountants must investigate through inquiries of management and additional review procedures.

2. New Questions During Management Inquiries

During a review, the accountant interviews management about anomalies detected during analytical procedures and any high risk items, as well as your company’s accounting policies and procedures. Some management inquiries that may necessitate additional focus during the pandemic include:

• How internal control systems have been modified for remote working arrangements,
• Knowledge of fraud or suspected fraud,
• Compliance with laws and regulations,
• Litigation, claims and assessments,
• Communications from regulatory agencies,
• Related parties and related-party transactions,
• Unusual or complex situations, and
• Significant transactions.

Your management also should anticipate questions about major subsequent events that require adjustment to, or disclosure in, the reviewed financial statements. Examples of material subsequent events that may need to be evaluated include:

• Location closures or temporary shutdowns,
• Employee terminations,
• Supply chain disruptions,
• Customer losses,
• Changes in debt, including any additional PPP loans issued after year-end, and
• New contingent liabilities.

Evaluation of subsequent events is especially important given ongoing uncertainties for businesses in many industries and the continued negative economic consequences of the pandemic.

3. More Ground to Cover During the Risk Assessment

Because of the significant changes to businesses in all industries from COVID-19, many new matters must be assessed and evaluated during your review. Risks identified this year won’t likely be the same ones as those from last year’s review — and risks that were previously identified could still exist but potentially be greater as a result of the pandemic.

During the COVID-19 crisis, potential new or increased areas of accounting and reporting risks include:

• Values of investments and financial instruments,
• Valuation and impairment of tangible (such as inventory and fixed assets) and intangible assets (such as acquired brands and goodwill),
• Collectability of accounts receivable and loans and reasonableness of related reserves,
• Contract modifications with customers or third parties, such as for lease arrangements,
• Cash requirements for accounts payable, debt and lease payments,
• Debt defaults or modifications,
• Treatment of PPP loans received,
• Restructuring costs, and
• Contingencies.

Many of these items are based on subjective accounting estimates. Your accountant will likely ask about the assumptions that underlie those estimates to determine whether they seem reasonable in today’s uncertain conditions.

4. Operational Changes and Liquidity Issues Impacting Going Concern

The impacts of the pandemic may have resulted in operational changes and liquidity issues that can impact a company’s ability to continue as a going concern. Examples include permanent decreases in cash flows, debt defaults and the need for new financing sources.

When preparing financial statements under GAAP, management (not the external accountant) is responsible for determining whether the company will be able to continue as a going concern for a reasonable period. Going concern assessments are uncharted territory for many companies. During review procedures, your accountant will evaluate the assumptions underlying your assessment and inquire about your plans to navigate the ongoing uncertainty caused by the pandemic, including review of year-to-date results and forecasts. Due to the uncertainty inherent with the pandemic, there may be certain additional disclosures included in the notes to the financial statements, even if the company has not experienced a significant impact due to COVID-19.

Calendar year-end businesses are currently getting ready to prepare their annual financial statements, which may be subject to new audit or review procedures. Work closely with you service team if you have any questions about how to report or disclose the effects of COVID-19.

Contact Mike Demko at mdemko@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.