Three COVID-19 Audit Risks for 2020

Illumeo Customer Success's Profile

As we head towards the end of 2020, it is expected that most auditors will have to deal with auditing the books of companies greatly impacted by COVID-19.  Many of the situations will be new and unique to audit teams, although they are likely to see them often in the next couple of years.  This post addresses three unique situations that audit teams will likely need to evaluate during their audit work.

FRAUD RISK

The pandemic has created the need for auditors to be on a heightened alert for increased fraud risk.  It’s time for auditors to go back to the basics, review the sides of the fraud triangle, and apply the information to the client being audited.  The pandemic presents areas of fraud risk that fall within any of the three sides of the triangle - incentive/pressure, opportunity, and rationalization.  

  • Incentive/pressure: employees may feel pressure to commit fraud on both a professional level and a personal level.  Professionally, employees may feel pressure from upper management to manipulate the financials through the use of journal entries.  Fraudulent entries could make the company appear sustainable for the future.  On the personal side, an employee may be suffering financially due to reduced work hours or furloughs (self or spouse) and this reduction in pay provides an incentive to commit fraud.  

  • Opportunity: the quick shift to work-at-home set-ups for employees opened up new opportunities for employees to commit fraud.  Many companies did not have the chance to evaluate the work-at-home scenarios to ensure internal controls were in place and operating to protect electronic data.  Many manual processes and procedures shifted quickly to being performed online, opening up the opportunity for weaknesses to be manipulated.

  • Rationalization: employees may rationalize committing a fraudulent act to protect their employers, all employees working for the employer, as well as protecting themselves.  Often an employee will rationalize the fraud as it is seen as a temporary solution that will be ‘corrected’ in the future.

ACCOUNTING ESTIMATES

Another area that may require additional evaluation and review by the audit team is accounting estimates.  Estimates are always considered an area of heightened risk and the implications of COVID-19 make the risk even greater.  Auditors may need the assistance of an expert in these areas for determining the correct estimate, compared to prior year’s usage of historical data for evaluating the estimate.  Some estimates that are susceptible to fraud and require evaluation:

  • Revenue recognition and the implementation of ASC Topic 606

  • Allowance for doubtful accounts

  • Goodwill and intangible assets and the need to consider impairment of the assets

STIMULUS PROGRAM FUNDING

A third area for auditors to apply extra scrutiny is the receipt of new and unique sources of funding recorded by a client during the year.  Several federal stimulus programs have been offered in 2020 to assist companies during COVID-19.  These stimulus programs are complex and have detailed requirements that must be met to maintain the funding received.  There is a risk for inadvertent error on the part of the person completing the detailed paperwork to comply with the stimulus program.  Intentional manipulation of the paperwork is also a risk as companies want to receive stimulus funds, even if they have not properly qualified for the program.