What is the Impact of Covid-19 on Internal Financial Controls in F.Y. 2019-20 and How Auditor deal with.
Section 143(3)(i) of the Companies Act, 2013 requires that the auditor’s report should state whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls. Also, internal control testing is an integral part of audit procedures, as this determines the level of substantive procedures to be carried out by the auditor.
Following are the Key factors to be considered while doing the audit:
(1.) Make inquiries on the change in the company’s mode of carrying out operations in response to the COVID-19 impact.
for example, people working remotely, and consequently, the change in the company’s policies and procedures, including execution of controls.
(2.) Rewriting the audit plan to address the Impact on Internal Financial Controls framework, including those relating to the design and operation of internal controls and review controls.
(3.) Testing the design and operating effectiveness of the updated controls framework including the segregation of duties in line with the requirements set out in the “Guidance Note on Audit of Internal Financial Controls over Financial Reporting” with the help of the related experts.
(4.) Communication with those charged with governance at every stage of the audit. including the implications on the audit of the financial statements and the reporting thereon.
(5.) Non-remediation of material weakness noticed during the period for which internal control testing had already been carried out.
(6.) Specific matters for consideration: The impact of changes to the auditor’s understanding of the company’s system of internal control, including:
i. The control environment.
ii. Changes to the planned reliance on controls in determining responses to identified risks of material misstatement.
(7.) Evaluating the availability of electronic and digital evidence made available by management, and the review controls around the same, specifically for reliability, security, and storage of such evidence.
(8.) Remain alert to the possibility of lapse of controls and fraud.
Reporting on Internal Financial Controls with reference to Financial Statements.
(a.) Main audit opinion is not modified; Emphasis of Matter paragraph has been included to highlight the impact of COVID-19 assessment; the auditor has considered the key factors mentioned above in testing the design and operating effectiveness of the internal controls with reference to financial statements, and if,
(i.)Material weakness is identified in the design or operation of internal controls:-
In such cases, the auditor should modify his opinion on the internal financial controls; evaluate the impact of such modifications on the main audit report and as appropriate, modify the auditor’s opinion on the financial statements as well.
(ii.) No concerns have been noted by the auditor with regard to the design and operating effectiveness of internal controls:-
Under these circumstances, the auditor should include a cross-reference in the opinion on internal financial controls to the Emphasis of Matter paragraph included in the main audit report with regard to COVID-19 assessment.
(b.) Where the main audit opinion is modified in respect of any matter (including that
relating to COVID-19);
the auditor should evaluate the key factors mentioned above, and determine whether the modification also leads to a modification of the report on internal financial controls and where applicable, modify the report on internal financial controls accordingly.
(c.) Where the auditor is unable to obtain sufficient appropriate audit evidence to form an opinion on the design and operating effectiveness of internal financial controls with reference to financial statements,
the auditor should issue a disclaimer of opinion.