The first two sections of this document are relevant for all entities. The last section, dealing with AASB 1058 Income of Not-for-Profit Entities and AASB 15 Revenue from Contracts with Customers, is only relevant for not-for-profit entities that apply these two standards for the first time.
Impact of COVID-19 (all entities)
Audit Specific Questions
- What unintended consequences of COVID-19 may increase incentives or pressures on management that may result in management override of controls?
- Are there changes in controls over financial reporting that need to be evaluated to ensure management certifications are adequate?
- Are we able to ensure continued proper segregation of duties and monitoring controls given changing physical work situations?
- Have any significant risks or material weaknesses been identified as a result of impacts from COVID-19?
- What changes in risk assessments have auditors determined need to be made and how will that impact the audit strategy?
- Are there known impediments – either by management or by the auditors - that may delay timely filing of financial statements? (e.g., lack of access or ability to obtain audit evidence or other information)
- What additional resources or expertise may be needed by management to properly account for judgments or estimates or changes related to circumstances brought on by COVID-19?
- What additional efforts may be required by the auditor to ensure the performance of a high-quality audit?
- Does my audit firm have the depth of or access to adequate resources to address complex accounting and auditing questions, including industry-specific matters, as they arise?
- Do my management teams, as well as my auditors, have the ability to properly supervise and direct the work of their staff and teams?
- Are there additional challenges in performing auditing procedures due to multi-geographical considerations?
- Has COVID-19 impacted circumstances that may call into question the company’s ability to continue as a going concern? What are management’s plans to address?
- How do these impact the auditor’s going concern evaluation?
- Are there any auditor independence issues that have arisen with respect to COVID-19?
Corporate Governance Specific Questions
- As an audit committee, how are we maintaining our education with respect to COVID-19 considerations, relief efforts and related risks and opportunities?
- Are we appropriately engaging with internal and external stakeholders and providing transparent and consistent communications about significant impacts on our business?
- Are we allocating enough time and making ourselves available to discuss critical issues as they arise with management, the auditors and the board?
- Are we keeping the full board appropriately updated as to significant challenges with respect to financial accounting and reporting?
- Are we considering responses to anticipated questions from shareholders during upcoming annual meetings?
- Is management actively and effectively engaging with lenders, customers and other stakeholders in a timely and productive manner and are the results of those engagements reflected in the financial accounting and reporting?
- Are we, as a board committee, appropriately considering additional risks that have arisen related to other stated committee responsibilities as described in our Audit Committee Charter – e.g., COVID-19 cybersecurity and data privacy risks?
Questions on the new accounting standards (all entities)
- How could these new accounting standards impact shareholder value? How can we mitigate the potential negative impact of these accounting standards on shareholder value?
- Would the organisation be able to continue to declare dividends? Would these dividend declarations be aligned to our current dividend policy?
- How do these accounting standards impact the profit of the organisation in year of implementation and thereafter?
- How do these accounting standards impact the balance sheet position (assets, liabilities & equity) of the organisation in the year of implementation and thereafter?
- How have we updated and incorporated these new accounting standards into our budgets and forecasts?
- Would the organisation be able to continue to meet their current bank covenants?
- Should the organisation renegotiate their bank covenants to minimise the potential impact of the new accounting standards on their current bank covenants?
- What is the impact of the new accounting standards on current remuneration structures and incentives to key management personnel and other employees?
- Does the organisation need to adjust performance hurdles and KPIs of key management personnel and other employees, to reflect the impact of the new accounting standards?
- How are we going to communicate the immediate and future impact of the new accounting standards to our shareholders and other users of our financial statements?
- Has the organisation performed and documented an impact and/or risk assessment of the implementation of the new accounting standards?
- Does the organisation have documented position papers to support and justify the appropriate accounting treatment of existing transactions under the new accounting standards?
- Has the organisation updated their accounting policy manual to reflect the requirements of the new accounting standards?
- Has the organisation obtained independent accounting advice in relation to the implementation of the new accounting standards?
- Have the auditors of the organisation been involved in the discussions and impact assessment of the new accounting standards on the organisation?
- What research has been done on the potential impact of the new accounting standards on the organisation’s industry?
- Has the organisation considered their technology needs and required changes to their existing systems and processes to deal with the new accounting standards?
- How can the directors access further information on the requirements and potential implications of the new accounting standards?
AASB 16 Leases
- Has the organisation decided on an appropriate transitional approach?
- What process did the organisation follow to decide on the appropriate transitional approach in relation to AASB 16?
- What is the impact of each of the three possible transitional approaches on the organisation’s:
- Retained earnings at the date of initial application
- Lease liabilities and right-of-use assets at the date of initial application
- Profit before tax (i.e. depreciation and interest expenses).
- Does the organisation have a register of all leases?
- Does the organisation have a copy of all lease agreements?
- What process did the organisation follow to identify all leases, including embedded leases?
- How did the organisation decide whether it is reasonably certain to exercise lease extension options, termination options and purchase options included in lease agreements?
- Does the organisation have a technology solution to manage leases on an ongoing basis, i.e. after the date of initial application?
Interpretation 23 Uncertainty over Income Tax Treatments
- Has the organisation performed and documented an impact and/or risk assessment of the transfer pricing arrangements and other uncertain tax positions, particularly if the entity had any of the following occur in the previous 5 years:
- Material international related party dealing
- Material research and development concession claims
- Material incurrence and/or utilisation of tax losses
- Material business restructuring or transactions, including but not limited to:
- Internal (transfer of functions, assets, or risks offshore)
- External (acquisition or divestiture of business component)
- Any ATO investigation or audit activity
- Material (greater than 10%) difference between accounting profit and taxable income?
Questions on the new accounting standards (not-for-profit entities only)
AASB 15 Revenue from Contracts with Customers
- Has the organisation identified and assessed all the different types of grant and other contracts it enters into with customers and third parties?
- Has the organisation performed and documented an impact assessment of each of the different types of grant and other contracts?
- Has the organisation assessed all the different types of grant and other contracts it enters into to ensure that they aligns with the organisation’s objectives and business model?
- Has the organisation assessed whether any of its customary business practices contradict our contracts?
- Is there is a need for the organisation to review and amend all grant and other contracts with customers, for example to ensure that deliverables (outputs) are documented in sufficient detail to be considered ‘sufficiently specific’ performance obligations?
- Has the organisation made changes to systems and processes to capture and record the information required to apply the new AASB 15?
AASB 1058 Income of Not-for-Profit Entities
- How will AASB 1058 impact the timing of the recognition of government and other grants?
- How will AASB 1058 impact the organisations future fundraising activities?
- How will the organisation assess whether transactions occur in an agreement with another party that creates enforceable rights and obligations, which is necessary to apply AASB 15 instead of AASB 1058?
- How will the organisation assess whether the organisation’s performance obligations are sufficiently specific, which is necessary to apply AASB 15 instead of AASB 1058?
Aletta Boshoff is an IFRS advisory specialist with BDO with over 25 years experience in financial reporting and accounting, including IFRS.
BDO is a longstanding partner of the AICD.