The Institute of Chartered

Accountants of India

Joint Initiative of
Accounting Standards Board &
Auditing and Assurance Standards Board

ICAI ACCOUNTING &

AUDITING ADVISORY
March 2020
Impact of Corona Virus on
Financial Reporting and the
Auditors Consideration
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OUNTIN
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 CONTENT
TOPIC PAGE
1. Impact of Corona Virus on 1-20
Financial Reporting

2. Impact of Corona Virus on 22-45

Audit of Financial Statements
Impact of Corona Virus
on Financial Reporting
 Coronavirus (COVID-19) Impact on Financial Reporting –
Accounting Year Ending March 31, 2020
ICAI is concerned about the impact of Coronavirus disease (known as COVID-2019
or COVID-19) on the health of people worldwide as well as on the state of
economy and commerce of the world in general and on India specifically. COVID-
19 was first reported to the World Health Organisa on (WHO) in December 2019
and it has rapidly spread to many other countries. Very recently, WHO has
declared it as global pandemic. COVID-19 has not only affected the health of
people across the globe and it has also caused severe disturbances in the global
economic environment which has consequen al impact on financial statements
and repor ng.
Indian Accoun ng Standards (Ind AS) and Accoun ng Standards (AS) Areas to
be considered
Part I
1. Inventory Measurement
2. Impairment of Non-Financial Assets
3. Financial Instruments
• Impairment Losses
• Fair Value Measurement
• Hedge Accoun ng
4. Leases
5. Revenue
6. Provisions, Con ngent Liabili es and Con ngent Assets
7. Modifica ons or termina on of Contracts or Arrangements
8. Going Concern Assessment
9. Income Taxes
10. Consolidated Financial Statements
11. Property, Plant and Equipment
12. Presenta on of Financial Statements
13. Borrowing Costs

Part II
14. Post Balance Events
1 15. Interim Financial Repor ng
Coronavirus (COVID-19) Impact on Financial Reporting –
Accounting Year Ending March 31, 2020
Background
ICAI is concerned about the impact of Coronavirus disease (known as COVID-2019
or COVID-19) on the health of people worldwide as well as on the state of
economy and commerce of the world in general and on India specifically. ICAI is
guided by the assessments given by the Government and public health
authori es, domes c and interna onal.

Latest media reports indicate the possible severe impact of this pandemic that
the World Health Organisa on (WHO), has been closely monitoring and
considering its global impact. On March 11, 2020, WHO has assessed its risk and
characterized it as global pandemic in view of the alarming levels of spread and
severity, and of the alarming levels of infec on.

The adverse impact of this global pandemic can vary from na on to na on,
industry to industry and above all en ty to en ty. The effect depends upon the
nature and extent of business connec vity of the individual en es with the
na ons more seriously affected by this pandemic. Apart from the health and
safety of mankind, COVID-19 has unfavourably affected the economic
environment which in turn has consequen al impact on the results in the
financial statements and repor ng.

While we are empathe c to the global concerns of health and safety of people,
there is also a need to advise the preparers of financial statements to ensure that
the poten al impact of COVID-19 is suitably considered in preparing and
repor ng their financial statements for the year ended March 31, 2020. Specific
requirements of a few accoun ng standards that may need special a en on are
indicated in this Accoun ng Advisory. It may be noted that we are only drawing
the a en on of preparers to some of the important requirements of Indian
Accoun ng Standards (Ind AS) and Accoun ng Standards (AS), and this is not
meant to be exhaus ve and may differ based on specific facts, circumstances and
business of respec ve preparers.
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 Note: The advisory has been prepared for:
1. En es to whom Ind AS is applicable and
2. En es to whom AS is applicable, viz,
a. Companies to whom Companies, Accoun ng Standards Rules, 2006 is
applicable and
b. Non-corporate en es to whom AS issued by ICAI is applicable.

Part I
1. Inventory Measurement (Ind AS 2 and AS 2)
(a) In accordance with Ind AS 2, Inventories, and AS 2, Valua on of Inventories,
it might be necessary to write down inventories to net realisable value due to
reduced movement in inventory, decline in selling prices, or inventory
obsolescence due to lower than expected sales.
Net realisable value is the es mated selling price in the ordinary course of
business less the es mated costs of comple on and the es mated costs
necessary to make the sale. Net realisable value refers to the net amount that an
en ty expects to realise from the sale of inventory in the ordinary course of
business. The management may consider wri en down of inventories to net
realisable value item by item.
Ind AS 2 and AS 2 also provide that the alloca on of fixed produc on overheads to
the costs of conversion is based on the normal produc on capacity. The amount
of fixed overhead allocated to each unit of produc on is not increased as a
consequence of low produc on or idle plant. Unallocated overheads are
recognised as an expense in the period in which they are incurred.
En es should assess the significance of any write-downs and whether they
require disclosure in accordance with Ind AS 2/AS 2 as well as paragraph 98 (a) of
Ind AS 1, Presenta on of Financial Statements, and paragraph 14(a) of AS 5, Net
Profit or Loss for the Period, Prior Period Items and Changes in Accoun ng
Policies. It is unlikely that the normal produc on capacity is to be reviewed for
alloca ng fixed produc on overheads for the year 2019-2020, because of
adverse impact on the u lisa on of the produc on capacity due to the impact of
coronavirus on the overall economy or the segment (s) in which the en ty is
opera ng.
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2. Impairment of Non-Financial Assets (Ind AS 36 and AS 28)
(a) Ind AS 36, Impairment of Assets, and AS 28, Impairment of Assets, require an
en ty to assess, at the end of each repor ng period, whether there is any
indica on that non-financial assets may be impaired. The impairment test
only has to be carried out if there are such indica ons. If any such indica on
exists, the en ty shall es mate the recoverable amount of the asset.

Ind AS 36 relies on an 'economic' criterion for the recogni on of an impairment

loss. An 'economic' criterion is the best criterion to give informa on which is
useful to users in assessing future cash flows to be generated as a whole. In
es ma ng the me value of money and the risks specific to an asset in
determining whether the asset is impaired, factors, such as the probability or
permanence of the impairment loss, are subsumed in the measurement.

Due to COVID 19, there might be temporary ceasing of opera ons or an

immediate decline in demand or prices resul ng in lowering of revenues and
profitability and reduced economic ac vity. These are the factors that the
management may consider as the indicators that may require impairment tes ng
for the purpose of Ind AS 36 and AS 28.

(b) For indefinite useful life intangible asset or an intangible asset not yet
available for use and goodwill, Ind AS 36 requires an annual impairment
tes ng. There could be an indicator that impairment tes ng of goodwill and
indefinite useful life intangible assets are tested as of repor ng date even if
the en ty follows other annual tes ng
cycle as per Ind AS 36.

(c) A n e n t y n e e d s t o e s m a t e t h e
recoverable amount of the asset for
impairment tes ng. Recoverable amount
is the higher of the fair value less costs of
disposal and the value in use. In cases
where the recoverable amount is es mated based on value in use, the
considera ons on accoun ng es mates apply.
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 Critical Factors to Consider
The management needs to consider whether:
• contrac on in economic ac vity due to the outbreak of COVID 19 is
considered to be an impairment indicator at the repor ng date, which results
in an impairment assessment;
• assump ons used for impairment tes ng and to determine the recoverable
amounts before the outbreak of COVID 19 requires any change;
• the assump ons used to determine discount rate to measure the
recoverable amount require any adjustments;
• the forecasts or budgets for future cash flows prepared by management
should be updated to reflect the impact of COVID 19;
• market assump ons used to determine fair value for recoverable amounts
needs reconsidera on;
• reasonable assump ons are taken in es ma ng the value-in-use and fair
value less costs of disposal and ensure that the impairment loss, if any, is
es mated reliably.

Goodwill impairment
The standard requires that goodwill being tested
for impairment at a level that reflects the way an
en ty manages its opera ons and with which the
goodwill would naturally be associated. Due to
COVID-19, there might be significant changes with
an adverse effect in opera ons of a cash genera ng unit to which goodwill is
allocated and therefore requiring addi onal focus and a en on while tes ng of
impairment of goodwill as at March 31, 2020.
The disclosure requirements in Ind AS 36 and AS 28 are extensive. Depending on
specific facts and circumstances, en es need to consider providing detailed
disclosures on the assump ons and sensi vi es considered for effects of the
COVID-19.
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3. Financial Instruments
Impairment Losses
En es to whom Ind AS is applicable
Ind AS 109, Financial Instruments
Financial Instruments within the scope of Ind AS 109 such as Loans, Trade
Receivables, Other Receivables, Investment in Debt instruments, Financial
Guarantees and Loan Commitments not measured at fair value through profit or
loss, Contract Assets and Lease Receivables are subject to impairment loss
recogni on and measurement based on an approach called Expected Credit Loss
(ECL). This approach was introduced in the a ermath of the global financial crisis
of 2008 to strengthen the accoun ng recogni on of loan-loss provisions by
incorpora ng a broader range of credit informa on. ECL approach is expected to
consider forward looking informa on and it is measured based on probability
weighted amount that is determined by evalua ng a range of possible outcomes.
The widespread contrac on in economic
ac vity across the globe due to the rapid
spread of COVID-19 is likely to have an
impact on the quan fica on of ECL and
classifica on of financial assets into 3
buckets for recogni on and measurement
of impairment losses. In this context,
following are important factors to be
considered by the preparers.

Critical Factors to Consider

• Recogni on of 12 months ECL versus Life me ECL is based on segrega on of
credit exposures into 3 buckets viz. Stage 1- those with no significant increase
in credit risk, Stage -2 those with significant increase in credit risk and Stage 3-
Credit impaired. In case of certain financial assets such as Trade Receivables
where the simplified approach is applicable, this segrega on of credit
exposures into 3 buckets is not required.
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 • Measurement of ECL- Adverse impact on the business of borrowers or
debtors may impact the following credit risk parameters:
• Risk of default (probability of default) i.e. the likelihood of default by the
borrower may have increased significantly due to reduced economic
ac vity;
• Es mated amount of the loss itself in the event of default (loss given
default). Contrac on in economic ac vity and its impact on consumers
may have affected value of collaterals and business cash flows adversely
affec ng the expected amount of loss;
• In this period of substan al business disloca on, borrowers may tend to
fully u lise undrawn limits and loan commitments, which in turn would
impact another credit risk parameter i.e. exposure at default.
• ECL requirement of Ind AS 109, the measurement of ECL is expected to
consider current as well as forecasted macro-economic condi ons and more
than one scenario. En es may need to develop one or more scenarios
considering the poten al impact of COVID-19.
• Ind AS 109 – Appendix A states that a financial asset is credit-impaired when
one or more events that have a detrimental impact on the es mated future
cash flow of the financial asset have occurred. Evidence that a financial asset
is credit-impaired include observable data about various events, for example,
the lender(s) of the borrower, for economic or contractual reasons rela ng to
the borrower’s financial difficulty, having granted to the borrower a
concession(s) that the lender(s) would not otherwise consider.
• En es may also need to consider the impact of any Pruden al Regulatory
ac ons to sustain the economy such as loan repayment holidays, reduc on in
interest rates etc.
• In respect of Ind AS 107, Financial Instruments Disclosures, en es may need
to disclose the impact of COVID-19 on various credit related aspects such as
methods, assump ons and informa on used in es ma ng ECL, policies and
procedures for valuing collaterals etc.
• If the en ty is unable to assess the impact of COVID-19 in es ma ng the
impairment loss due to the inadequacy of informa on, the same should be
disclosed appropriately.
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Non-Banking Financial Companies (NBFCs) and Asset Reconstruc on Companies
(ARCs) should also carefully consider the recent guidance provided by Reserve
Bank of India (RBI) on implementa on of Ind AS (RBI/2019-20/170 DOR
(NBFC).[Link].109/22.10.106/2019-20 - Implementa on of Indian
Accoun ng Standards).
En es to whom AS is applicable
• In case of financial assets such as Loans, Trade Receivables etc., en es shall
be guided by the requirements of AS 4, Con ngencies and Events Occurring
A er the Balance Sheet Date.
• In respect of financial assets within the scope of AS 13, Accoun ng for
Investments, en es may have to carefully consider the requirements of
making provisions for decline in the value of investments, which is other than
temporary.
• In respect of Banks and Insurance En es, preparers need to consider impact
of COVID-19 on classifica on of Loans and Advances into Standard, Sub-
standard, Doub ul and Loss categories in addi on to the Pruden al
Regulatory requirements of RBI and The Insurance Regulatory and
Development Authority of India (IRDAI).

Fair Value Measurement

En es to whom Ind AS is applicable
Ind AS 113 Fair Value Measurement
Individual Ind ASs such as Ind AS 109, Ind AS 16, etc. prescribe when to measure
an asset or liability at fair value and how to recognise the resultant fair value gains
and losses i.e. in profit or loss sec on or other comprehensive income sec on of
Statement of Profit and Loss. Equally, important is Ind AS 113, Fair Value
Measurement, which lays down certain fundamental principles in respect of Fair
value, its defini on and how to determine it? In this context, the following are the
cri cal factors to be considered in determining fair value both for measurement
or disclosure requirements by the preparers.
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 Critical Factors to Consider
• Ind AS 113 recognises the fact that there are different ways in which fair value
is determined i.e. it can be based on observable market price (quoted price
in an ac ve market – Level 1) or applica on of valua on techniques (Level 2
and Level 3) as of the repor ng date.
• The current financial and capital market environment across the globe has
got affected by the rapid spread of COVID-19 and may have developed the
following features.
• Significant vola lity or indica ons of the significant decline in market
prices of financial instruments like equity, bonds and deriva ves.
• Significant decrease in volume or level of ac vity.
• The above features may need adequate management considera on and
professional judgment to determine whether the quoted prices are based on
transac ons in an orderly market.
It may not be always appropriate to
conclude that all transac ons in
such a market are not orderly.
Preparers should be guided by the
applica on guidance in Ind AS 113
that indicates circumstances in
which the transac on is not
considered an orderly transac on.
• Preparers using valua on
techniques may have to consider
the impact of COVID-19 on various assump ons including discount rates,
credit-spread/counter-party credit risk etc.

En es to whom AS is applicable
AS 13 Accoun ng for Investments
• In respect of financial assets within the scope of AS 13, en es have to
carefully consider the impact of COVID-19 on determina on of fair value for
valua on of investments classified as Current Investments.
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Hedge Accounting
En es to whom Ind AS is applicable
Ind AS 109, Financial Instruments

Ind AS 109 has elaborate requirements on the applica on of hedge accoun ng,
which is an accoun ng choice for the en es. The requirements, among others,
include the qualifying criteria for hedge accoun ng, how to assess hedge
effec veness and accoun ng for its impact in the financial statements.

Critical Factors to Consider

• The standard permits a highly probable forecast transac on to be a
qualifying hedged item. If en es have adopted cash-flow hedge accoun ng
for certain forecasted transac ons, they should assess whether the
transac on s ll qualifies as a highly probable forecast transac on
considering their business environment.
• En es will need to assess any hedge ineffec veness and record the impact
of that in profit and loss.
• Es mate the fair value of deriva ves, including paying special a en on to
underlying assump ons of deriva ves, e.g., forward curve of interest rate,
foreign currency, commodity etc.

En es to whom AS is applicable
ICAI Guidance Note on Accoun ng for Deriva ve Contracts (Issued 2015)

• In respect of recogni on and measurement of

deriva ves within the scope ICAI Guidance Note
on Deriva ves, en es may need to consider
the impact on key inputs/assump ons such as
foreign currency rate, interest rate, etc. used in
their valua on techniques, including the
poten al impact on hedge accoun ng.

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 4. Leases
En es to whom Ind AS is applicable
Ind AS 116, Leases
• Due to COVID-19, there may be changes in the terms of lease arrangements
or lessor may give some concession to the lessee with respect to lease
payments, rent free holidays etc. Such revised terms or concessions shall be
considered while accoun ng for leases, which may lead to the applica on of
accoun ng rela ng to the modifica on of leases. However, an cipated
revisions should not be taken into account.

• Variable lease payments may be significantly impacted, especially those

linked to revenues from the use of underlying asses due to contracted
business ac vity.

• Discount rate used to determine the present value of new lease liabili es
may need to incorporate any risk associated with COVID-19.

• If any compensa on is given/declared by the Government to the lessor for

providing concession to the lessee, it should be considered whether the
same needs to be accounted for as lease modifica on as per Ind AS 116 or
whether assistance received from Government is to be accounted as
government grants under Ind AS 20.

• En es will need to determine whether as a

result of COVID -19, any lease arrangement
has become onerous.

En es to whom AS is applicable
Leases (AS 19, AS 29)

• Due to COVID-19 there can be changes in the

terms of lease arrangements or lessor may
give some concession to the lessee with regard to lease payments. Such
revised terms or concessions shall be considered while accoun ng for leases.
However, an cipated revision should not be taken into account.
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• Discount rate used to determine present value of minimum lease payments
of new leases may need to incorporate any risk associated with COVID-19.

• If any compensa on is given/declared by the Government to the lessor for

providing concession to the lessee, it should be considered whether the
same needs to be accounted for appropriately as per AS 19. Whether any
assistance received from government are government grants under AS 12.

• En es will need to determine whether as a result of COVID -19, any lease

arrangement has become onerous. The same should be accounted for as per
AS 29.

5. Revenue
Due to COVID-19, there could be likely increase in sales returns, decrease in
volume discounts, higher price discounts etc. Under Ind AS 115, these factors
need to be considered in es ma ng the amount of revenue to recognised, i.e.,
measurement of variable considera on.

Ind AS 115 also requires disclosure of informa on that allows users to understand
the nature, amount, ming and uncertainty of cash flows arising from revenue.
Therefore, en es may have to consider disclosure about the impact of COVID-19
on en es revenue.

En es to whom AS is applicable, may have postponed recogni on of revenue

due to significant uncertainty of collec on in view of the impact of COVID-19. AS
9, Revenue Recogni on requires en es to disclose the circumstances in which
revenue recogni on has been postponed pending the resolu on of significant
uncertain es.

6. Provisions, Contingent Liabilities and Contingent Assets

En es to whom Ind AS is applicable
Ind AS 37, Provisions, Con ngent Liabili es and Con ngent Assets

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 (I) Onerous contracts are those contracts for which the unavoidable costs of
mee ng the obliga ons under the contract exceed the economic benefits
expected to be received under it. Unavoidable costs under a contract are the least
net cost of exi ng from the contract, which is the lower of the cost of fulfilling it
and any compensa on or penal es arising from failure to fulfil it. As a result of
COVID -19, some contracts may become onerous for reasons such as increase in
cost of material/labour, etc. Management should consider whether any of its
contracts have become onerous. The same should be accounted for as per Ind AS
37. Ind AS 37 also requires assets dedicated to a contract to be tested for
impairment before a liability for an onerous contract is recognised.

Addi onally, there could be losses from imposi on of penalty due to delay in
supply of goods, which may need to be considered under the guidance of Ind AS
115, Revenue from Contracts with Customers.

If the management is unable to assess whether some of the executory contracts

are onerous due to inadequacy of informa on, the same should be disclosed.
Management should disclose that it has assessed whether executory contracts
are onerous due to the adverse impact of COVID -19. If, the management is
unable to assess whether some of the executory contracts have become onerous
due to inadequacy of informa on, the same should be disclosed.

(ii) Restructuring costs - The Standard provides that a provision for restructuring
costs is recognised only when the general recogni on criteria for provisions are
met and when there is a detailed formal plan for the restructuring and there is
evidence that the en ty has started to implement a restructuring plan, for
example, by dismantling plant or selling assets or by the public announcement of
the main features of the plan.

(iii) Insurance claims - En es may have insurance policies that cover loss of
profits due to business disrup ons due to events like COVID-19. En es claims on
insurance companies can be recognised in accordance with Ind AS 37 only if the
recovery is virtually certain i.e. the insurance en es have accepted the claims
and the insurance en ty will meet its obliga ons.
13
Iv) Ind AS 37 requires a provision to be recognised only

• where an en ty has a present obliga on

• it is probable that an ou low of resources is required to se le the
obliga on; and
• a reliable es mate can be made.

Due to COVID-19, there is a need for exercising judgement in making provisions

for losses and claims. A provision may be accounted for only to the extent that
there is a present obliga on for which the ou low of economic benefits is
probable and can be reliably es mated.

Ind AS 37 does not permit provisions for future opera ng costs or future business
recovery costs. However, Ind AS 37 requires that
an en ty should disclose the nature of the
obliga on and the expected ming of the
ou low of economic benefits.

En es to whom AS is applicable
AS 29 Provisions, Con ngent Liabili es and
Con ngent Assets

Onerous contracts are those contracts for which

the unavoidable costs of mee ng the obliga ons under the contract exceed the
economic benefits expected to be received under it. Unavoidable costs under a
contract are the least net cost of exi ng from the contract, which is the lower of
the cost of fulfilling it and any compensa on or penal es arising from failure to
fulfil it. As a result of COVID -19, some contracts may become onerous for reasons
such as the imposi on of penalty due to delay in supply of goods or increase in
cost of material, labour, etc. Management should consider whether any of its
contracts have become onerous. The same should be accounted for as per AS 29.
Management should disclose that it has assessed whether executory contracts
are onerous due to adverse impact of COVID -19. If, the management is unable to
assess whether some of the executory contracts have become onerous due to the
inadequacy of informa on, the same should be disclosed.
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 7. Modifications or Termination of Contracts or Arrangements
It may also be noted that the en es may modify or terminate certain contracts
which may be within the scope of other Ind ASs or ASs or Guidance notes
highlighted below. En es are advised to consider the specific requirements of
these standards and guidance note to account for these modifica ons or
termina ons.

Entities to Whom Ind AS is applicable Entities to Whom AS is applicable

Ind AS 19, Employee Benefits AS 15 Employee benefits (revised 2005)

Ind AS 102, Share-based Payments Guidance Note on Accoun ng for Employee
Share Based Payments
Ind AS 109, Financial Instruments and Ind AS Guidance Note on Accoun ng for Deriva ve
32, Financial Instruments - Presenta on Contracts (Issued 2015)
Ind AS 104, Insurance Contracts For insurance __
companies this is rou ne; events like
earthquake, huge floods, war situa ons, etc.
Ind AS 115, Revenue from Contracts with AS 7 Construc on Contracts (revised 2002) AS
Customers 9 Revenue Recogni on) Guidance Note on
Accoun ng for Real Estate Transac ons
(revised 2012)

8. Going Concern Assessment

En es to whom Ind AS is applicable
Ind AS 1, Presenta on of Financial Statements
Ind AS 10, Events a er the Repor ng Period

The Financial statements are normally prepared on the assump on that an en ty

is a going concern and will con nue in opera on for the foreseeable future. In
assessing whether the going concern assump on is appropriate, management
considers all available informa on about the future, which is at least, but is not
limited to, twelve months from the end of the repor ng period.

Management of the en ty should assess the impact of COVID-19 and the

measures taken on its ability to con nue as a going concern. The impact of COVID-
19 a er the repor ng date should also be considered and if, management a er
the repor ng date either intends to liquidate the en ty or to cease trading, or has
15
No realis c alterna ve but to do so, the financial statements should not be
prepared on going concern basis. Necessary disclosures as per Ind AS 1 shall also
be made, such as material uncertain es that might cast significant doubt upon an
en ty's ability to con nue as a going concern.

En es to whom AS is applicable
AS 1 Disclosure of Accoun ng Policies
AS 4 Con ngencies and Events Occurring A er the Balance Sheet Date
(revised 2016)

The Financial statements are normally prepared on the assump on that an en ty

is a going concern and will con nue in opera on for the foreseeable future.
Management of the en ty should assess the impact of COVID-19 and the
measures taken on its ability to con nue as a going concern. The impact of COVID-
19 a er the balance sheet date should also be considered in assessing whether
going concern assump on is appropriate or not. Events occurring a er the
balance sheet date may indicate that the enterprise ceases be a going concern. It
may be necessary for the management to evaluate whether it is proper to use the
fundamental accoun ng assump on of going concern in the prepara on of the
financial statements.

9. Income Taxes
En es to whom Ind AS is applicable
Ind AS 12, Income Taxes
COVID-19 could affect future profits and/or may also reduce the amount of
deferred tax liabili es and/or create addi onal deduc ble temporary differences
due to various factors (e.g., asset impairment). En es with deferred tax assets
should reassess forecasted profits and the recoverability of deferred tax assets in
accordance with Ind AS 12, Income Taxes, considering the addi onal uncertainty
arising from the COVID-19 and the steps being taken by the management to
control it.
Management might also consider whether the impact of the COVID-19 affects its
plans to distribute profits from subsidiaries and whether it needs to reconsider
the recogni on of any deferred tax liability in connec on with undistributed
profits. 16
 Management should disclose any significant judgements and es mates made in
assessing the recoverability of deferred tax assets, in accordance with Ind AS 1.

En es to whom AS is applicable
AS 22, Accoun ng for Taxes on Income

COVID-19 could affect future profits and/or may also reduce the amount of
deferred tax liabili es and/or create addi onal ming differences due to various
factors. En es with deferred tax assets should reassess forecast profits and the
recoverability of deferred tax assets in accordance with AS 22, Accoun ng for
Taxes on Income, considering the addi onal uncertainty arising from the COVID-
19 and the steps being taken by the management to control it.

10. Consolidated Financial Statements

En es to whom Ind AS is applicable
Ind AS 110 Consolidated Financial Statements

Ind AS 110 prescribes that the financial statements of parent and subsidiaries
used in the prepara on of the consolidated financial statements are usually
drawn upto the same date. It may be noted that in any case, the difference
between the repor ng dates should not be more than three months.

En es to whom AS is applicable
AS 21 Consolidated Financial Statements (revised 2016)

AS 21 prescribes that the financial statements of parent and subsidiaries used in

prepara on of the consolidated financial statements are usually drawn upto the
same date. It may be noted that in any case, difference between the repor ng
dates should not be more than six months.

11. Property Plant and Equipment (PPE)

Ind AS 16 and AS 10 require that useful life and residual life of PPE needs revision
in annual basis. Due to COVID-19, PPE can remain under-u lised or not u lised
for a period of me. It may be noted that the standards require deprecia on
charge even if the PPE remains idle. Further, COVID-19 impact may have affected
the expected useful life and residual life of PPE.
17
The management may review the residual value and the useful life of an asset due
to COVID 19 and, if expecta ons differ from previous es mates, it is appropriate to
account for the change(s) as an accoun ng es mate in accordance with Ind AS 8,
Accoun ng Policies, Changes in Accoun ng Es mates and Errors and AS 5, Net
Profit or Loss for the Period, Prior Period Items and Changes in Accoun ng Policies.

12. Presentation of Financial Statements

Ind AS 1 Presentation of Financial Statements
(i) Breach of loan covenants (including classifica on of liabili es into current
and non-current)
Ind AS 1- Due to COVID-19 there may be instances of breach of loan
covenants which may trigger the liability becoming due for payment and
liability becoming current. However, as per paragraph 74 of Ind AS 1, such a
liability shall not be classified as current, if the lender agreed, a er the
repor ng period and before the approval of the financial statements for
issue, not to demand payment as a consequence of the breach.

(ii) Sources of es ma on uncertainty under Ind AS 1

Paragraph 125 of Ind AS 1, Presenta on of Financial Statements, requires an
en ty to disclose informa on about the assump ons it makes about the
future, and other major sources of es ma on of uncertainty at the end of the
repor ng period, that have a significant risk of resul ng in a material
adjustment to the carrying amounts of assets and liabili es within the next
financial year. COVID-19 may have created many uncertain es about the
likely future scenarios which may affect the es ma ons of amounts
recognised in the balance sheet as of repor ng date. En es shall be guided
by the prescrip ons in paragraphs 125 to 133 of Ind AS 1.

(iii) Compara ve informa on

Ind AS 1 requires presenta on of minimum compara ve informa on.
Framework for the prepara on and presenta on of financial statements
under Ind AS considers comparability as an important qualita ve
characteris c of financial statements. The Framework requires that users
must be able to compare the financial statements of an en ty through me in
order to iden fy trends in its financial posi on and performance and also
compare it with financial statements of other en es. COVID-19 may have 18
 Affected the financial performance and financial posi on of en es.
Therefore, preparers may consider making adequate disclosures and
explanatory notes regarding the impact of COVID-19 on its financial posi on,
performance and cash flows.

13. Borrowing Costs

Ind AS 23, Borrowing Costs, and AS 16 Borrowing Costs
Above standards require that the capitalisa on of interest is suspended when
development of an asset is suspended. The management may consider this
aspect while evalua ng the impact of COVID-19.

Part II
14. Post Balance Events (Ind AS 10 and AS 4)
COVID-19 outbreak incidence surfaced in December 2019 and the condi on has
con nued to evolve throughout a er 31 December 2019. According to Ind AS 10,
events occurring a er the repor ng period are categorised into two viz.
(i) Adjus ng events i.e. those require adjustments to the amounts recognised in
its financial statements for the repor ng period and (ii)Non-adjus ng events i.e.
those do not require adjustments to the amounts recognised in its financial
statements for the repor ng period. In certain cases, Management judgement
may be required to categorise the events into one of the above categories.

Similarly, in accordance with AS 4, Con ngencies and Events Occurring A er

Balance Sheet Date, adjustments to assets and liabili es are required to be made
for events occurring a er the balance sheet date that provide addi onal
informa on materially affec ng the determina on of the amounts rela ng to
condi ons exis ng at the balance sheet date.

However, adjustments to assets and liabili es are not appropriate for events
occurring a er the balance sheet date, if such events do not relate to condi ons
exis ng at the balance sheet date. Disclosure should be made in the report of the
approving authority of those events occurring a er the balance sheet date that
represent material changes and commitments affec ng the financial posi on of
the enterprise.
19
En es must disclose significant recogni on and measurement uncertain es
that might have been created by the outbreak of the COVID -19 in measuring
various assets and liabili es. They should also disclose how they have dealt with
the impact of COVID -19 on the financial posi on and financial performance of
the en ty.

15. Interim Financial Reporting (Ind AS 34 and AS 25)

(Currently, this section may be applicable to a limited set of entities)
The recogni on and measurement guidance applicable to annual financial
statements equally applies to interim financial statements. There are typically no
recogni on or measurement excep ons for interim repor ng, although
management might have to consider whether the impact of the COVID-19 is a
discrete event for the purposes of calcula ng the expected effec ve tax rate.

Ind AS 34, Interim Financial Repor ng, states that there might be greater use of
es mates in interim financial statements, but it requires that the informa on is
reliable and that all relevant informa on is [Link] AS 34/AS 25 Interim
financial informa on usually updates the informa on in the annual financial
statements. However, Ind AS 34/AS 25 requires that an en ty shall include in its
interim financial report an explana on of events and transac ons that are
significant to an understanding of the changes in financial posi on and
performance of the en ty since the end of the last annual repor ng period. This
implies that addi onal disclosure should be given to reflect the financial impact of
the COVID-19 and the measures taken to contain it. This disclosure should be
en ty specific and should reflect each en ty's circumstances. Where significant,
the disclosures required by paragraph 15B in Ind AS 34 should be included.

Further, the preparers may consider making suitable disclosures in the

Management Discussion and Analysis sec on of the Annual Report about the
effect of Coronavirus (COVID-19) on the overall risks to the businesses in which
the en ty is engaged.

20
Impact of Corona Virus
on Audit of Financial
Statements
 Impact of Novel Corona Virus (COVID-19) on Audit of Financial
Statements for the Financial Year ending March 31, 2020
Background
The global pandemic COVID-19 has already had a significant impact on global
trade and economy with consequen al impact on global and Indian financial
markets. This may also have accoun ng, disclosure, internal control and audi ng
implica ons for many en es. There is a great deal of uncertainty as to how the
COVID-19 situa on will con nue to evolve and the scenario is rapidly changing.
The uncertainty arises primarily from interrup ons in produc on, supply chain
disrup ons, unavailability of personnel, closure of facili es / offices due to the
rapid outbreak of COVID-19, decline in demand, liquidity, business con nuity
issues, etc. The resultant outbreak though started outside of India impacts
en es in India as well.

Given there are increasing restric ons on travel, mee ngs and access to client
loca ons, auditors would be
facing prac cal difficul es in
carrying out audits. These
underlying situa ons, however,
must not undermine the
delivery of high quality audits.
Audits should con nue to be
planned and performed in
compliance with the audi ng
s t a n d a r d s . To e n a b l e t h e
auditors to perform audits
addi onal me may be required and alternate audit procedures may need to be
performed in order to obtain sufficient appropriate audit evidence.

This document discusses key Advisory to auditors related to condi ons that may
arise as a result of COVID-19. Auditors must carefully evaluate unique
circumstances prevailing in their audits and assess risk accordingly when applying
the concepts in this Advisory in their audits.
22
Principles of Specific Standards on Auditing used in this Advisory
Areas which require special a en on of auditors in current scenario are cited below
along with reference of relevant Standards on Audi ng (SAs):
1. Iden fying and Assessing the Risk of Material Misstatements and Materiality in
Planning and Performing an Audit (SA 315, Iden fying and Assessing the Risks
of Material Misstatement Through Understanding the En ty and its
Environment & SA 320, Materiality in Planning and Performing an Audit)
2. Assessing Financial Impact and their Reasonable Es ma on (SA 540, Audi ng
Accoun ng Es mates, Including Fair Value Accoun ng Es mates, and Related
Disclosures)
3. Valua on of Inventory on a date other than date
of financial statements i.e. 31st March 2020 (SA
501, Audit Evidence - Specific Considera ons for
Selected Items)
4. Audit of Consolidated Financial Statements
where Components/component auditors are
located in severely affected places (SA 600,
Using the Work of Another Auditor)
5. Subsequent Events or Events a er Repor ng
date (SA 560, Subsequent Events)
6. Going Concern [SA 570(Revised), Going Concern]
7. Evalua on of Work of Management's Expert (SA 500, Audit Evidence)
8. Wri en Representa ons (SA 580, Wri en Representa ons)
9. Auditor's Opinion, [SA 700(Revised)], Forming an Opinion and Repor ng on
Financial Statements, SA 705(Revised), Modifica ons to the Opinion in the
Independent Auditor's Report, SA 706(Revised), Emphasis of Ma er
Paragraphs and Other Ma er Paragraphs in the Independent Auditor's Report
10. Repor ng on Key Audit Ma ers (SA 701, Communica ng Key Audit Ma ers in
the Independent Auditor's Report)
11. The Auditor's Responsibili es Rela ng to Other Informa on [SA 720(Revised)]
12. Internal Control Considera ons
13. External Confirma ons (SA 505, External Confirma ons)
14. Risk of Fraud (SA 240, The Auditor's Responsibili es Rela ng to Fraud in An
Audit of Financial Statements) 23
 1. Identifying and Assessing the Risk of Material Misstatements
and Materiality in Planning and Performing an Audit
The outbreak of COVID-19 can have a number of poten al issues for en es,
par cularly en es that operate in geographies that are significantly exposed to
the outbreak. In addi on there could also be impact on those en es whose
vendors/ bankers/ suppliers/ service providers are in geographies that are
exposed. There is already a broader economic impact of the outbreak on global
and Indian financial markets and the outbreak will also pose increasing risks and
poten ally have accoun ng implica ons for all en es with exposure to broader
economic downturn and decline in financial markets.
Due to the above condi ons, en es and auditors would have to evaluate
addi onal risks arising from the following areas:
a. Opera onal disrup on resul ng in any changes to the business model arising
from significant drop in demand, reduced customer base, disrup on in
supply chain, employee's absence or work from home, geographical
implica ons of group opera ons, public lock down etc.
b. Contractual non-compliance resul ng in contractual breaches, addi onal
security requirements or stressed asset valua ons.
c. Liquidity and working capital issues given the reduced/ impaired ability to
service debt or replenish working capital requirements due to possible lower
cash flows.
d. Asset valua ons – downward asset valua ons may trigger legal and
compliance issues or lead to liquidity challenge.
In applying SA 315 - Iden fying and Assessing the Risks of Material Misstatement
through Understanding the En ty and its
Environment, the auditor should consider the
implica ons of the above ma ers when
obtaining an understanding of the en ty and
its environment, in light of its objec ves,
strategies and other business risks.
24
The auditor should also discuss with TCWG and
management whether the impact of the COVID-19
has been incorporated into their risk assessment
processes and how they have iden fied and
assessed the significance of the emerging business
risks. The auditor should also consider if disclosures
are required in the financial statements about the
key assump ons made in reaching this conclusion.
If the auditor has revised the risk assessment as a result, audit materiality may
also need to be revised as the audit progresses. Reference may be made to SA 320
- Materiality in Planning and Performing an Audit. Paragraphs 12 and 13 of SA 320
are reproduced below:

“Revision as the Audit Progresses

12. The auditor shall revise materiality for the financial statements as a whole
(and, if applicable, the materiality level or levels for par cular classes of
transac ons, account balances or disclosures) in the event of becoming
aware of informa on during the audit that would have caused the auditor to
have determined a different amount (or amounts) ini ally. (Ref: Para. A13)
13. If the auditor concludes that a lower materiality for the financial statements
as a whole (and, if applicable, materiality level or levels for par cular classes
of transac ons, account balances or disclosures) than that ini ally
determined is appropriate, the auditor shall determine whether it is
necessary to revise performance materiality, and whether the nature, ming
and extent of the further audit procedures remain appropriate.”

25
 2. Assessing Financial Impact and their Reasonable Estimation
The financial statements have various items which would have been affected by
the outbreak of COVID-19, a detailed list of them has been men oned in the
Accoun ng Advisory.

In addi on to the detailed list of items of financial statements men oned in the
aforesaid Advisory, specific accoun ng issues could arise in the following areas:
a. Impairment of Goodwill, Property Plant and Equipment, Intangible Assets
and Valua on & impairment of receivables, loans and advances.
b. Valua on of defined benefit plans and obliga ons – due to significant
changes in employee strength or de-valua on of underlying plan assets.
c. Stock compensa on performance condi ons and
obliga ons.
d. Contractual penal es.
e. Employment termina on benefits.
f. Insurance recoveries related to business
interrup ons.
g. Onerous contract provisions.
h. Allowance for expected credit losses.

The above items are likely to have significant

accoun ng es mates to be made by the
management. Significant assump ons including
projected cash flows, used in these accoun ng
es mates may be affected by the impact of COVID-
19. Hence, the auditor should use procedures as
prescribed by SA 540, Audi ng Accoun ng Es mates,
Including Fair Value Accoun ng Es mates, and Related Disclosures to check
whether (a) the accoun ng es mates, including fair value accoun ng es mates,
in the financial statements, whether recognised or disclosed, are reasonable; and
(b) related disclosures in the financial statements are adequate.

The above procedures include how management has assessed the effect of
es ma on uncertainty or the risk assessment and audit evidence suppor ng
these accoun ng es mates and related disclosures that may be affected by the
impact of COVID-19 on the business of the en ty and the economic environment.
26
3. Valuation of Inventory on a date other than date of financial
statements i.e. 31st March 2020
Due to government-imposed shutdowns or due to unavailability of the client
personnel, it may not be prac cable for most of the business en es to conduct
physical verifica on of inventory as on the date of the financial statements i.e. 31st
March, 2020. The auditor must plan procedures depending on the underlying
circumstances wherein the inventory count date could be advanced prior to the
year- end or deferred to a date a er the year-end.
The auditor would need to comply with the procedures given in Paragraphs 5 and 7
read with Paragraphs A9 to A14 of SA 501 cited below:
“5. If physical inventory coun ng is conducted at a date other than the date of the
financial statements, the auditor shall, in addi on to the procedures required by
paragraph 4, perform audit procedures to obtain audit evidence about whether
changes in inventory between the count date and the date of the financial
statements are properly recorded. (Ref: Para. A9-A11)

Physical Inventory Counting Conducted Other than At the Date of

the Financial Statements (Ref: Para. 5)
A9. For prac cal reasons, the physical
inventory coun ng may be conducted at a
date, or dates, other than the date of the
financial statements. This may be done
irrespec ve of whether management
determines inventory quan es by an annual
physical inventory coun ng or maintains a
perpetual inventory system. In either case, the
effec veness of the design, implementa on and maintenance of controls over
changes in inventory determines whether the conduct of physical inventory
coun ng at a date, or dates, other than the date of the financial statements is
appropriate for audit purposes. SA 330 establishes requirements and provides
guidance on substan ve procedures performed at an interim date.
27
 A10. Where a perpetual inventory system is
maintained, management may perform
physical counts or other tests to ascertain the
reliability of inventory quan ty informa on
included in the en ty's perpetual inventory
records. In some cases, management or the
auditor may iden fy differences between the
perpetual inventory records and actual
physical inventory quan es on hand; this may
indicate that the controls over changes in inventory are not opera ng effec vely.
A11. Relevant ma ers for considera on when designing audit procedures to obtain
audit evidence about whether changes in inventory amounts between the count
date, or dates, and the final inventory records are properly recorded include:
• Whether the perpetual inventory records are properly adjusted.
• Reliability of the en ty's perpetual inventory records.
• Reasons for significant differences between the informa on obtained during
the physical count and the perpetual inventory records.
7. If a endance at physical inventory coun ng is imprac cable, the auditor shall
perform alterna ve audit procedures to obtain sufficient appropriate audit
evidence regarding the existence and condi on of inventory. If it is not possible
to do so, the auditor shall modify the opinion in the auditor's report in
accordance with SA 705(Revised). (Ref: Para. A12-A14)

Attendance at Physical Inventory Counting Is Impracticable

(Ref: Para. 7)
A12. In some cases, a endance at physical inventory coun ng may be imprac cable.
This may be due to factors such as the nature and loca on of the inventory, for
example, where inventory is held in a loca on that may pose threats to the safety of
the auditor. The ma er of general inconvenience to the auditor, however, is not
sufficient to support a decision by the auditor that a endance is imprac cable.
Further, as explained in SA 200, the ma er of difficulty, me, or cost involved is not in
itself a valid basis for the auditor to omit an audit procedure for which there is no
alterna ve or to be sa sfied with audit evidence that is less than persuasive.
28
A13. In some cases where a endance is imprac cable, alterna ve audit
procedures, for example inspec on of documenta on of the subsequent sale of
specific inventory items acquired or purchased prior to the physical inventory
coun ng, may provide
sufficient appropriate audit
evidence about the existence
and condi on of inventory.

A14. In other cases, however,

it may not be possible to
obtain sufficient appropriate
audit evidence regarding the
existence and condi on of
inventory by performing
alterna ve audit procedures. In such cases, SA 705(Revised) requires the auditor
to modify the opinion in the auditor's report as a result of the scope limita on.”

4. Audit of Consolidated Financial Statements where Components/

Component auditors are located in severely affected places
As per theAccoun ng Advisory the following must be followed by the
management in prepara on of financial statements:

“En es to whom Ind AS is applicable

Ind AS 110 Consolidated Financial Statements

Ind AS 110 prescribes that the financial statements of parent and subsidiaries
used in prepara on of the consolidated financial statements are usually drawn
upto the same date. It may be noted that in any case, difference between the
repor ng dates should not be more than three months.

29
 En es to whom Ind AS is not applicable
AS 21 Consolidated Financial Statements (revised 2016)
AS 21 prescribes that the financial statements of parent and subsidiaries used in
prepara on of the consolidated financial statements are usually drawn upto the
same date. It may be noted that in any case, difference between the repor ng dates
should not be more than six months.”

In either of the above instances, if the financial informa on/ financial statements of
the components are unavailable, for the year ended March 31, 2020, the maximum
difference between the repor ng dates cannot exceed the above limits.

The Roles and Responsibilities of the Auditor with regards to

Consolidated Financial Statements are as follows:
(a) Paragraph 49 of Guidance Note on Audit of Consolidated Financial Statements,
issued by ICAI states as under:
“49. In a case where the parent's auditor is not the auditor of all the components
included in the consolidated financial statements, the auditor of the
consolidated financial statements should consider the requirements of SA 600."

(b) As per SA 600, Using the Work of Another Auditor the principal auditor should
perform procedures to obtain sufficient appropriate audit evidence, that the
work of the other auditor is adequate for the principal auditor's purposes, in the
context of the specific assignment and also should consider the significant
findings of the other auditor. While doing so, the principal auditor should
consider how the impact of COVID-19 including travel bans, temporary
suspension of business opera ons, government mandated leaves, etc., may
affect risk assessments, materiality and the ability to obtain sufficient
appropriate audit evidence in respect of components. If principal auditor is
unable to obtain adequate informa on or repor ng from the component
auditors, the principal auditor should express a qualified opinion or disclaimer
of opinion because there is a limita on on the scope of audit. (Refer Paragraph
22 of SA 600)
30
(c) In the current scenario, the alterna ve means or methods to obtain sufficient
appropriate audit evidence by the principal auditor from component auditor
are as follows:
• Can data be shared cross-border, to allow for principal auditor for review?
Could files be loaded into a cloud-based portal and a login provided to the
principal auditor? Local laws may restrict cross-border data sharing. If in
doubt, advice should be sought on any local legal restric ons.
• Can video calls and/or screen sharing so ware be used to discuss the work
with the component auditor?
• Can the component auditor be asked to complete a detailed ques onnaire or
clearance on the work they have performed?
• Consider the outcome of any prior visits, including visits during planning or at
an interim stage
• What work of component auditor was previously reviewed?
• Consider the past work of the component auditor – have there been
significant errors or issues, or has work been performed to a high standard?
• Can a more detailed memorandum be provided to the component auditor on
what work should be done for purpose of group repor ng?
• What work can be done centrally by the Principal auditor’s team?
If finance systems are integrated, data may be accessible for review by
Principal Auditor. Management may be able to provide informa on directly
to the Principal auditor to allow for tes ng.
Each individual engagement will need to be assessed on a case by case basis
to determine what may be appropriate.

31
 5. Subsequent Events or Events after Reporting date
As per the Accoun ng Advisory the following needs to be considered by the
management in the prepara on of financial statements:

“According to Ind AS 10, events occurring a er the repor ng period are

categorised into two viz. (i)Adjus ng events i.e. those require adjustments to the
amounts recognised in its financial statements for the repor ng period and
(ii)Non-adjus ng events i.e. those do not require adjustments to the amounts
recognised in its financial statements for the repor ng period. In certain cases,
Management judgement may be required to categorise the events into one of the
above categories.

Similarly, in accordance with AS 4, Con ngencies and Events Occurring A er

Balance Sheet Date, adjustments to assets and liabili es are required to be made
for events occurring a er the balance sheet date that provide addi onal
informa on materially affec ng the determina on of the amounts rela ng to
condi ons exis ng at the balance sheet date. However, adjustments to assets and
liabili es are not appropriate for events occurring a er the balance sheet date, if
such events do not relate to condi ons exis ng at the balance sheet date.
Disclosure should be made in the report of the approving authority of those
events occurring a er the balance sheet date that represent material changes
and commitments affec ng the financial posi on of the enterprise.

En es must disclose significant recogni on and measurement uncertain es

that might have been created by the outbreak of the COVID -19 in measuring
various assets and liabili es. They should also disclose how they have dealt with
the impact of COVID -19 on the financial posi on and financial performance of
the en ty.”

32
The Responsibilities of the auditor for the subsequent events i.e.
events between the date of financial statements and the date of
auditor's report as per SA 560 are as follows:
“Events Occurring Between the Date of the Financial Statements and the Date of
the Auditor's Report

6. The auditor shall perform audit procedures designed to obtain sufficient

appropriate audit evidence that all events occurring between the date of the
financial statements and the date of the auditor's report that require
adjustment of, or disclosure in, the financial statements have been iden fied.
The auditor is not, however, expected to perform addi onal audit procedures
on ma ers to which previously applied audit procedures have provided
sa sfactory conclusions. (Ref: Para. A6)

7. The auditor shall perform the procedures required

by paragraph 6 so that they cover the period from
the date of the financial statements to the date of
the auditor's report, or as near as prac cable
thereto. The auditor shall take into account the
auditor's risk assessment in determining the
nature and extent of such audit procedures, which shall include the following:
(Ref: Para. A7-A8)
a) Obtaining an understanding of any procedures management has
established to ensure that subsequent events are iden fied.
b) Inquiring of management and, where appropriate, those charged with
governance as to whether any subsequent events have occurred which
might affect the financial statements. (Ref: Para. A9)
c) Reading minutes, if any, of the mee ngs, of the en ty’s owners,
management and those charged with governance, that have been held
a er the date of the financial statements and inquiring about ma ers
discussed at any such mee ngs for which minutes are not yet available.
(Ref: Para. A10)
d) Reading the en ty’s latest subsequent interim financial statements, if any. 33
 8. When, as a result of the procedures performed as required by paragraphs 6
and 7, the auditor iden fies events that require adjustment of, or disclosure
in, the financial statements, the auditor shall determine whether each such
event is appropriately reflected in those financial statements.”

6. Going Concern
COVID-19 is resul ng in significant opera onal
disrup on and presents an existen al threat
for many businesses. En es and audit teams
need to consider the implica ons on the
assessment of going concern and viability in
the financial report and whether these
circumstances will result in prolonged
opera onal disrup on which will significantly erode the financial posi on of the
en ty or otherwise result in failure.

This is cri cally important for the going concern assessment. Auditors will need to
consider whether the threat to liquidity as a result of supply/demand disrup on
presents a material uncertainty to the going concern status for the 12 months
look forward period. SA 570(Revised) also requires auditors to consider events
that may cast significant doubt on the en ty's ability to con nue as a going
concern beyond the period of management's assessment.

Audit teams should robustly assess the going concern and viability risks rela ng
to COVID-19 threat in compliance with SA 570(Revised). This includes evalua ng
whether there is adequate support for the assump ons underlying
management's assessment and the consistency of these assump ons across the
en ty's business ac vi es.

As per paragraph 5 of SA 570(Revised), Going Concern

The Management's assessment of the en ty's ability to con nue as a going

concern involves making a judgment, at a par cular point in me, about
inherently uncertain future outcomes of events or condi ons. The following
factors are relevant to that judgment:
34
• The degree of uncertainty
associated with the outcome of
an event or condi on increases
significantly the further into the
future an event or condi on or
the outcome occurs. For that
reason, most financial repor ng
frameworks that require an
explicit management assessment specify the period for which management
is required to take into account all available informa on.

• The size and complexity of the en ty, the nature and condi on of its business
and the degree to which it is affected by external factors affect the judgment
regarding the outcome of events or condi ons.

• Any judgment about the future is based on informa on available at the me

at which the judgment is made. Subsequent events may result in outcomes
that are inconsistent with judgments that were reasonable at the me they
were made.

The auditor's responsibili es rela ng to going concern are men oned in

Paragraphs 6 & 7 of SA 570(Revised), Going Concern which are cited below:

“Responsibilities of the Auditor

6. The auditor's responsibili es are to obtain sufficient appropriate audit
evidence regarding, and conclude on, the appropriateness of management's
use of the going concern basis of accoun ng in the prepara on of the
financial statements, and to conclude, based on the audit evidence obtained,
whether a material uncertainty exists about the en ty's ability to con nue as
a going concern. These responsibili es exist even if the financial repor ng
framework used in the prepara on of the financial statements does not
include an explicit requirement for management to make a specific
assessment of the en ty's ability to con nue as a going concern.
35
 6. However, as described in SA 200, the poten al effects of inherent limita ons
on the auditor's ability to detect material misstatements are greater for
future events or condi ons that may cause an en ty to cease to con nue as a
going concern. The auditor cannot predict such future events or condi ons.
Accordingly, the absence of any reference to a material uncertainty about the
en ty's ability to con nue as a going concern in an auditor's report cannot be
viewed as a guarantee as to the en ty's
ability to con nue as a going concern.”

There could be several situa ons arising from

the ongoing COVID-19 outbreak that could have
an impact on the assump on rela ng to going
concern. For some en es, the impact could be
severe and may leave management with no
realis c alterna ve but to liquidate or cease opera ons. There could also be
en es which may have to scale down their opera ons while impact may not be
significant for other en es.

It is the responsibility of management to make the assessment as to whether the

en ty is a going concern. In assessing whether the going concern assump on is
appropriate, management takes into account all available informa on about the
future, which is at least, but is not limited to, twelve months from the date when
the financial statements are authorised for issue. The assessment will be specific
to the en ty's circumstances.

In the current scenario, while making this assessment, management would

generally be expected to prepare detailed forecasts which, will require regular
upda on ll the financial statements are authorised for issue. These forecasts
should capture poten al scenarios and management's plans.

Management should consider the impact of COVID-19 on customers, suppliers

and employees. For example, could the en ty con nue to operate if employees
are not able to physically present, and how reduced cash flows impact its working
capital requirements. Management should also consider whether the insurance
policies taken by the en ty cover the losses arising from the COVID -19.
36
The auditor will only be able to form a
conclusion rela ng to going concern
once management has made its own
assessment. The auditor should inquire
of management and TCWG as to what
informa on is available about the
future, and determine whether this has
been appropriately considered as part
of management's assessment. The
auditor should apply similar considera ons to those of management, as
discussed above, in assessing the appropriateness of the going concern
assump on. This should, for example, include a detailed and robust review of up
to date forecasts, cash flows, sensi vity analyses and reviews of COVID-19
con ngency plans and impact assessments conducted by the management.
If events or condi ons have been iden fied that may cast significant doubt on
the en ty's ability to con nue as a going concern, the auditor shall obtain
sufficient appropriate audit evidence to determine whether or not a material
uncertainty exists.
Given the level of uncertainty and speed of increasing impact of COVID-19, audit
teams need to cri cally consider the current posi on at the point of sign off as
part of the subsequent events review right up to the point of signing the
auditor's report, and may need further evidence and informa on by
management, including upda ng financial models.
If the en ty is disclosing in their subsequent events disclosures that an es mate
of impact cannot be made due to the evolving situa on, this may result in a
material uncertainty on going concern within the audit report.

7. Evaluation of Work of Management's Expert

Since, lot of es ma on is involved regarding the impact on the financial
statements and assessment of going concern in the current circumstances,
management may take the assistance of a management's expert (an expert in
field other than accoun ng and audi ng) to make such es mates or
assessments. 37
 As per paragraph 8 of SA 500―Audit Evidence,

“When informa on to be used as

audit evidence has been prepared
using the work of a management's
expert, the auditor shall, to the
extent necessary, having regard to
the significance of that expert's
work for the auditor's purposes,:
(Ref: Para. A34- A36)
a) Evaluate the competence,
capabili es and objec vity of
that expert; (Ref: Para. A37-A43)
b) Obtain an understanding of the work of that expert; and (Ref: Para. A44- A47)
c) Evaluate the appropriateness of that expert's work as audit evidence for the
relevant asser on. (Ref: Para. A48)”

8. Written Representations
As per SA 580, the auditor should obtain wri en representa ons from the
management regarding the various es mates and assessments made by the
management. The wri en representa ons should be exhaus ve, containing the
occurrence, method of measurement, completeness of transac ons recorded
and the disclosure of financial impacts in the financial statements. Auditors need
to assess whether any specific representa ons may be required to be obtained
from the Management in rela on to Managements' assessment of impact from
the ongoing outbreak of COVID-19 on the financial statements for the year
ending March 31, 2020 as well as for the reasonable foreseeable future.

9. Auditor’s Opinion
The overall objec ves of an auditor as per SA 200―Overall Objec ves of the
Independent Auditor and the Conduct of an Audit in Accordance with Standards
on Audi ng, are as follows:
38
a) To obtain reasonable assurance about whether
the financial statements as a whole are free
from material misstatement, whether due to
fraud or error, thereby enabling the auditor to
express an opinion on whether the financial
statements are prepared, in all material
respects, in accordance with an applicable
financial repor ng framework; and

b) To report on the financial statements, and communicate as required by the

SAs, in accordance with the auditor’s findings.

Auditor should form an opinion on the financial statements considering the

principles enunciated in SA 700(Revised), SA 705(Revised), SA 706 (Revised). Since
in the current scenario there are high probabili es of going concern being
affected, existence of material uncertain es rela ng to going concern, the
principles enunciated in SA 570(Revised) also need to be considered par cularly
paragraphs 21 to 24 which prescribe manner of repor ng in different situa ons.
The auditor needs to carefully assess the situa on applying professional
judgement and professional skep cism and report accordingly.

Some illustrative Situations where the Auditor may need to

express a modified opinion due to COVID-19 are cited below:
i. The auditor is unable to obtain sufficient appropriate audit evidence rela ng
to material component audited by the other auditor as per SA 600 due to
COVID-19 pandemic.

ii. The financial impact arising out of the COVID-19 outbreak are not accounted
or reported or disclosed as per the prescribed Accoun ng Standards, in the
financial statements.

iii. If the auditor is unable to obtain sufficient appropriate audit evidence rela ng
to the impact of COVID-19 in the financial statements and is of opinion that
there are misstatements that are material to the financial statements. 39
 iv. The auditor has communicated misstatements to the management and
those charged with governance rela ng to COVID-19 as per SA 450,
Evalua on of Misstatements Iden fied During the Audit and the
management or TCWG refuses to correct such misstatements, that are
individually or in aggregate, material to the financial statements.

10. Reporting on Key Audit Matters

SA 701 – Communica ng Key Audit Ma ers in the Independent Auditor's Report
deals with the auditor's responsibility to communicate key audit ma ers in the
auditor's report. Key audit ma ers are those ma ers that, in the auditor's
professional judgement, were of most significance in the audit of the financial
statements of the current period. Key audit ma ers are selected from the
ma ers communicated with those charged with governance.
The auditor would need to comply with the procedures given in Paragraphs 9
(read with Paragraphs A18 to A26) of SA 701 cited below:
“9. The auditor shall determine, from the ma ers communicated with those
charged with governance, those ma ers that required significant auditor
a en on in performing the audit. In making this determina on, the auditor
shall take into account the following: (Ref: Para. A9–A18)
a) Areas of higher assessed risk of material misstatement, or significant risks
iden fied in accordance with SA 315. (Ref: Para. A19–A22)
b) Significant auditor judgments rela ng to areas in the financial statements
that involved significant management judgment, including accoun ng
es mates that have been iden fied as having high es ma on uncertainty.
(Ref: Para. A23–A24)
c) The effect on the audit of significant events or transac ons that occurred
during the period. (Ref: Para. A25–A26)”
The auditor should evaluate whether the impact of the disrup on caused
because of COVID-19 to the opera ons of the en ty, consequen al impact on
the financial statements would be a key audit ma er and if determined so, the
auditor would need to report the same alongwith how the ma er was
addressed in the audit.
40
11. The Auditor’s Responsibilities Relating to Other Information
(SA 720 (Revised))
This SA requires the auditor to read and
consider the other informa on because other
informa on that is materially inconsistent with
the financial statements or the auditor's
knowledge obtained in the audit may indicate
that there is a material misstatement of the
financial statements or that a material
misstatement of the other informa on exists,
either of which may undermine the credibility of the financial statements and
the auditor's report thereon. Such material misstatements may also
inappropriately influence the economic decisions of the users for whom the
auditor's report is prepared.

Other informa on may include amounts or other items that are intended to be
the same as, to summarize, or to provide greater detail, about amounts or other
items in the financial statements, and other amounts or other items about
which the auditor has obtained knowledge in the audit. Other informa on may
also include other ma ers.

En es would need to provide addi onal disclosure as part of the financial

statements/ annual report w.r.t. the following areas:-
a. Risk assessment – En es may elaborate on exis ng reported risks w.r.t.
calami es or add new ones rela ng to COVID-19.
b. Management discussion and analysis – En es may include management’s
discussion and analysis of any material current and poten al future impact
on their opera ons, financial condi on and liquidity arising out of the
en ty’s exposure to COVID-19 risks.
c. Notes to the financial statements – Specific disclosures under the
subsequent events accoun ng standards and any other specific account
specific disclosures.
The auditor is required to read any other informa on disclosed in the annual
report and consider whether the same is consistent with the financial
statements and the auditor's knowledge obtained in the audit.
41
 12. Internal Control Considerations
In case of companies, where the auditors have to
issue a Report on the Internal Financial Controls
over Financial repor ng under Clause (i) of Sub-
sec on 3 of Sec on 143 of the Companies Act, 2013,
because of the impact of COVID-19, there could be
addi onal considera ons that need to be considered as below:
a. Companies may need to implement new internal controls or modify exis ng
internal controls over financial repor ng.
b. Evaluate whether any of the controls is not opera ng effec vely on account of
absence of concerned person due to illness/quaran ne/ working from
home/isola on/travel inaccessibility.
c. Iden fy alternate controls.
d. Company’s ability to close financial repor ng process in me.
e. Company’s ability to design and implement controls related to selec on and
applica on of Generally Accepted Accoun ng Principles (GAAP) for accoun ng
and disclosure issues arising from COVID-19.

13. External Confirmations

SA 330, The Auditor's Responses to Assessed Risks requires that the auditor obtain
more persuasive audit evidence the higher the auditor's assessment of risk. To do
this, the auditor may increase the quan ty of the evidence or obtain evidence that
is more relevant or reliable, or both. For example, the auditor may place more
emphasis on obtaining evidence directly from third par es or obtaining
corrobora ng evidence from a number of independent sources. SA 330 also
indicates that external confirma on procedures may assist the auditor in obtaining
audit evidence with the high level of reliability that the auditor requires to respond
to significant risks of material misstatement, whether due to fraud or error.

SA 240 indicates that the auditor may design confirma on requests to obtain
addi onal corrobora ve informa on as a response to address the assessed risks of
material misstatement, whether due to fraud at the asser on level.
42
SA 500 indicates that corrobora ng informa on obtained from a source
independent of the en ty, such as external confirma ons, may increase the
assurance the auditor obtains from evidence exis ng within the accoun ng
records or from the representa ons made by the management

SA 505, External Confirma ons provides guidance regarding the process of seeking
external confirma ons and evalua ng the results of the process. Due to the impact
of COVID-19 it is more likely that this key audit procedure which provides
significant independent audit evidence may be ineffec ve due to the inadequate
responses or non-responses to the confirma on request sent out.

Results of the External Confirmation Procedures

Reliability of Responses to Confirma on Requests
If the auditor iden fies factors that give rise to doubts about the reliability of the
response to a confirma on request, the auditor shall obtain further audit evidence
to resolve those doubts. (Ref: Paragraphs 11-12 of SA 505 reproduced below)
11. If the auditor determines that a response to a confirma on request is not
reliable, the auditor shall evaluate the implica ons on the assessment of the
relevant risks of material misstatement, including the
risk of fraud, and on the related nature, ming and
extent of other audit procedures. (Ref: Para A17)
Non-Responses
12. In the case of each non-response, the auditor shall
perform alterna ve audit procedures to obtain
relevant and reliable audit evidence. (Ref: Para A18-
A19 below)
A18. Examples of alterna ve audit procedures the auditor may perform include:
• For accounts receivable balances – examining specific subsequent cash
receipts, shipping documenta on, and sales near the period-end.
• For accounts payable balances – examining subsequent cash disbursements or
correspondence from third par es, and other records, such as goods received
notes. 43
 A19. The nature and extent of alterna ve audit procedures are affected by the
account and asser on in ques on. A non-response to a confirma on request
may indicate a previously uniden fied risk of material misstatement. In such
situa ons, the auditor may need to revise the assessed risk of material
misstatement at the asser on level, and modify planned audit procedures, in
accordance with SA 315. For example, fewer responses to confirma on requests
than an cipated, or a greater number of responses than an cipated, may
indicate a previously uniden fied fraud risk factor that requires evalua on in
accordance with SA 240.

14. Risk of Fraud

Paragraph 5 of SA 240 states that “An auditor
conduc ng an audit in accordance with SAs is
responsible for obtaining reasonable assurance
that the financial statements taken as a whole
are free from material misstatement, whether
caused by fraud or error. Owing to the inherent
limita ons of an audit, there is an unavoidable risk that some material
misstatements of the financial statements may not be detected, even though
the audit is properly planned and performed in accordance with the SAs.”

As stated in Paragraph 12 of SA 240 “the auditor shall maintain professional

skep cism throughout the audit, recognizing the possibility that a material
misstatement due to fraud could exist, notwithstanding the auditor's past
experience of the honesty and integrity of the en ty's management and those
charged with governance.

The impact of COVID-19 on businesses could be very significant and could put
pressures on management to meet performance targets or market
expecta ons. This raises the risk of the likelihood of fraud in the financial
statements to a higher level which requires the auditor to exercise a much higher
degree of skep cism and carry out extended audit procedures to eliminate the
possibility of fraud or material error in the financial statements.
44
In carrying out the audit for the financial year ending March 31, 2020 auditors
must be par cularly mindful of the heightened risk of fraud and comply with the
guidance provided by SA 240, “The Auditor's Responsibili es Rela ng to Fraud in
an Audit of Financial Statements”.

Conclusion
The impact of COVID-19 on the economy, financial markets and en es in
par cular con nues to evolve.

The role of auditors at mes like this is under increased scru ny as the auditors
have a public interest obliga on to complete the audit work in accordance with
professional standards and ethics requirements. Under the current
circumstances, auditors must recognise that the manner in which they conducted
the audits in the past may need significant modifica on to address the challenges
and uncertain es arising out of the impact of COVID-19. Auditors should exercise
a very high degree of skep cism and be prepared to call out where the Company’s
narra ve that the Board presents is not specific enough and does not “tell the
whole story” of the various scenarios and level of uncertainty specific to the
Company’s opera ons. Irrespec ve of the challenges and uncertain es, there
should not be any dilu on or non-compliance with the audi ng standards in
carrying out the audits.

WIN OVER CORONAVIRUS

! !
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WASH YOUR HANDS AVOID TOUCHING WEAR A FACE MASK OR AVOID TOUCHING CLEAN ALL “HIGH AVOID PUBLIC
FREQUENTLY AND EYES, NOSE AND COVER YOUR MOUTH “HIGH - TOUCH” TOUCH” SURFACES GATHERING
THOROUGHLY WITH MOUTH WHILE SNEEZING AND SURFACES DAILY
SOAP AND WATER FOR COUGHING
AT LEAST 20 SECONDS

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AVOID MAINTAIN 1 METRE AVOID SHARING AVOID EATING MONITOR YOUR SEEK MEDICAL ADVICE
UNNECESSARY
TRAVEL
(3 FEET) DISTANCE
BETWEEN YOURSELF
AND OTHERS
PERSONAL ITEMS
FOOD, UTENSILS ETC
OUTSIDE SYMPTOMS IF YOU EXPERIENCE
SYMPTOMS 45