Pandemic Impact on Internal Controls
The global disruption caused by COVID-19 will extend to internal controls and financial reporting for most organisations due to the unprecedented impact on economic activity. As financial year end approaches, business as usual will not apply as audit preparation is affected by office closures, remote work requirements and employee absences. Various accounting estimates based on future forecasts may be affected including valuations, expected credit losses and cash flow hedging,
Management’s ability to complete the financial reporting process and prepare financial statements in a timely manner may be compromised. Delays in closing the financial records may increase the potential for error in the financial statements and require modified controls to offset the increased risk of potential financial statement error. Organisations will need to ensure appropriately designed and implemented controls in relation to the application of accounting standards for the accounting and disclosure issues arising from COVID-19. If organisations expect the impacts of evolving risks to be material, providing disclosures to address how management assesses the risks, what management is doing to mitigate and manage the risks, and the board’s role in risk oversight may be considered.
It is imperative that organisations consider the operating effectiveness of internal controls, including the assessment of breakdowns in review controls or the inability of individuals to perform control duties due to absences or remote working conditions. Consideration of how a lack of information may affect management’s ability to effectively operate controls is required and if an existing control cannot be performed, alternative appropriately designed controls are required to compensate for the lack of information.