The impact of Covid-19 on the auditor's risk assessment process

Abstract

PURPOSE: The objectives of this study are (i) to understand how COVID-19 has altered auditors’ identification and assessment of risks; ii) to evaluate any changes in the timing, nature and extent of the risk assessment procedures involved in the audit risk assessment; (iii) to assess how COVID-19 may have modified the methods used to gather sufficient and appropriate audit evidence on the identified risks; and (iv) to investigate whether COVID-19 will have a long-term impact on the audit risk assessment and how this is anticipated to evolve in a post-COVID world. DESIGN: To attain these objectives, the researcher adopted a mixed-methods research approach. A total of fifteen semi-structured interviews were conducted with audit partners/senior managers from the Big Four and mid-tier audit firms. FINDINGS: This research deduced that obtaining an understanding of clients’ businesses and their operating environment required a greater degree of audit effort due to substantial changes to entities’ operations, requiring auditors to be mindful of any emerging audit risks. Going concern was commonly the biggest risk identified followed by impairment of assets, including PPE, trade receivables and fraud. Consequently, professional scepticism, professional experience and audit firm’s size were crucial as to challenge the heightened audit risks emanating from COVID-19. Additionally, the pandemic has resulted in adjustments to the timing, nature and extent of the risk assessment procedures (RAPS), as RAPS were continuously revisited and performed more extensively, where inquiries and analytical procedures were used more widely as opposed to observation and inspection. Furthermore, the implementation of IT tools led to a significant change in the way auditors gather audit evidence including verification of inventory and PPE, third party confirmations, communication with clients and within the audit team, inspection of documents and observation procedures. Electronic file sharing solutions and videoconferencing were essential to still perform high-quality risk assessments during the health crisis. Finally, the study highlighted the lessons learnt for auditors to gain a more comprehensive understanding of material risks and be more vigilant about how external events could affect companies. CONCLUSIONS: COVID-19 has resulted in renewed concern on the audit risk assessment, nonetheless, auditors still managed to perform high quality risk assessments despite the added complexities brought about by COVID-19. It was also concluded that although the pandemic was a game changer for auditors and for the procedures performed, ultimately positive aspects also emanated from COVID-19 as the new ways of working shall continue to be useful in a post-COVID world. IMPLICATIONS: This study hopes to provide insights on how COVID-19 has impacted the audit risk assessment process. The proposed recommendations seek to help audit firms learn from COVID-19 in developing more efficient and effective audits, possibly using the implications of the global pandemic as a reference for other similar external events, such as the Russia-Ukraine War, future pandemics and as the audit process undergoes digital transformation.