The Canadian federal and provincial governments have provided various forms of assistance to help businesses and individuals through the current pandemic. How do these affect your role, as an auditor, for clients who have applied for and/or received funds from these programs? What new risks and audit issues may arise in your engagements this year in relation to government assistance? Keep reading to find out more.
As you head into year-end audits this year, you will need to be aware of whether your clients have received or are expecting to receive government assistance, and if so, how this may impact your risk assessment and related audit response. While this blog’s focus is on audit engagements, you may perform review engagements for financial statements that include government assistance. The considerations discussed in this blog can be considered and tailored when designing and performing procedures for your review engagements as well.
Big picture reminders
The receipt of government monies such as subsidies, grants, and loans may result in a new class of transactions and possibly lead to new risks of material misstatement in the financial statements, either due to fraud or error. In many cases, the verification process by the government prior to granting funds may have been fast-tracked to speed up accessibility of funds by businesses impacted by the COVID-19 pandemic. While this rapid response has helped businesses from a cashflow perspective, it may also increase the risk of fraud or error in the financial statements. It is important to remember that even if your client has received funds, it does not mean they were eligible to receive them or that they have met the criteria. Simply reviewing a confirmation of payment receipt, for instance is not generally sufficient evidence to support that the conditions have been met by the entity. Financial reporting frameworks generally require that a liability to repay government assistance be accounted for when conditions exist that will cause government assistance to be repayable.
Government assistance may have a material impact on your clients’ financial position. Some considerations when undertaking audits of financial statements and related government assistance may include:
Risk assessment and audit planning:
- How does the receipt of government assistance impact your identification and assessment of risks of material misstatement (due to fraud or error)?
- Does the increased pressure on your clients to survive in the current environment, coupled with the opportunity to access government assistance, increase the likelihood of mis-representing their financial information to conform with program eligibility requirements?
- Does the complexity of the assistance program’s rules increase the likelihood of error in the financial statements?
- What were the entity’s processes and controls over the submission of information when applying for the government assistance?
- How might the receipt of government assistance impact your determination of materiality?
- How might the receipt of government assistance impact the composition of the engagement team; are individuals with specialized skills or knowledge about the programs needed?
Engagement execution and evidence collection:
- What are the eligibility requirements for the government assistance received, or pending receipt? What audit procedures may be carried out, and evidence obtained, to assess whether the eligibility requirements have been met?
- Audit evidence regarding compliance with the conditions of the programs will depend on the type of assistance received (e.g., subsidy versus loan) and the specific program rules. Using the Canada Emergency Wage Subsidy (CEWS) as one example assistance program, audit procedures may include eligibility testing based on revenue decline. This may include understanding how your client determined their eligibility, including the various elections that are available under the program, and ensuring that their process meets the eligibility requirements on a period by period basis, and testing monthly revenue figures used in their CEWS application by agreeing to their accounting system and performing monthly revenue cut-off procedures.
- If the entity has applied for multiple assistance programs, are the programs they have applied for mutually exclusive?
- If the entity is not eligible to receive the government assistance, how might other areas of the audit be impacted (e.g., the assessment of the entity’s ability to continue as a going concern)?
- How much has been received or is pending receipt? For grants/subsidies received, what audit procedures may be carried out, and evidence obtained, to assess the occurrence and accuracy of amounts recorded, and whether amounts have been recorded in the appropriate period? For loans, what audit procedures may be carried out, and evidence obtained, to assess the completeness and accuracy of amounts received/owing?
- What are the requirements for use of proceeds received, if any? What audit procedures may be carried out, and evidence obtained, to assess whether proceeds have been used in accordance with required terms set out by the program?
- For example, many government relief benefits provided in Canada to date are intended to cover expenses incurred, or to be incurred, by the entity, such as payroll expenses. This may elevate the risk of material misstatement and impact the auditor’s response to the classification, existence, accuracy, and cut-off assertions related to such expenses.
- Continuing with the CEWS example, in addition to recalculating CEWS and agreeing amounts to the GL and CRA assessment, procedures may include (among others) developing an understanding of how ‘eligible employees’ were determined, agreeing eligible payroll claimed for the period from CEWS worksheets to relevant payroll registers, and performing tests of details for existence and accuracy of eligible payroll for the year under audit.
- Has government assistance been recognized, measured, presented, and disclosed appropriately in the financial statements, in accordance with the financial reporting framework?
In the current environment, it is increasingly important for you to maintain an attitude of professional skepticism when performing the audit. If you identify a suspected fraudulent claim made and recorded by your client, or have obtained information that indicates a fraud may exist, you are required to communicate these matters, unless prohibited by law or regulation, on a timely basis with the appropriate level of entity management and to those charged with governance.
Given that the resulting government assistance is likely a new process for your clients, you may consider whether client staff involved in assessing eligibility and applying for government assistance possess sufficient knowledge to do so. You are reminded to maintain auditor independence and ensure you have the proper safeguards in place should your client ask for your help in the application process.
- For additional COVID-19-related audit resources, access our dedicated auditing resource hub, which is updated regularly.
- For additional COVID-19-related accounting resources, access our dedicated accounting resource hub, which includes the following related resources:
- For COVID-19 tax resources, access our dedicated tax updates hub, including the following related resource:
Keep the conversation going
How have government assistance programs impacted your audit and review engagements? Has the impact on your risk assessments resulted in increased work effort for you and your engagement teams? Would you benefit from more detailed guidance or specific program examples on the assurance implications of government assistance? What other non-governmental assistance or concessions received by your clients have impacted your audits in the current environment? Post a comment below or email me directly.
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The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.