FREQUENTLY ASKED QUESTIONS (FAQ)

The war in Ukraine and the restrictive measures imposed on Russia and Belarus by the European Union inevitably disrupt the normal functioning of economic and financial activities, with a direct impact on financial mechanisms, which may lead to difficulties in managing risks and in ensuring/maintaining normal operating conditions for entities/companies in many sectors.

In this situation, both those charged with governance and statutory auditors or audit firms must give increased attention to analysing exposure to going concern risk and the implications for the annual financial statements and, consequently, for the audit report.

The following matters should therefore be considered:

1. The impact of these events on market conditions may affect the financial statements for the financial year ended 31 December 2021, particularly as regards the application of the going concern basis. For reporting entities whose financial year differs from the calendar year, it must be analysed in particular whether the events occurred during the reporting year and whether adjustments to the amounts reported in the financial statements are needed (e.g. impairment of assets, fair value estimates, impairment adjustments, etc.).

2. Given the increased risk of cyber attacks, statutory auditors/audit firms should communicate with management and those charged with governance about any changes in the entity’s assessment of this risk, including in relation to financial reporting, and understand whether they intend to change the processes, structures and safeguards put in place to mitigate the risks identified. This understanding may be particularly important for entities that, by the nature of their activity, can significantly affect a jurisdiction’s infrastructure and may therefore be at greater risk of such an attack (e.g. entities in banking/financial services, defence, aerospace and commercial airlines, energy and transport).

Where a cyber incident is found to have occurred, statutory auditors/audit firms should:

‒ Involve IT audit specialists in the engagement team, if not already involved;

‒ Notify the management of the audited entity and, where a significant breach or exposure is identified, communicate with those charged with governance;

‒ Obtain an understanding of the incident and assess its effect on the audit approach;

‒ Evaluate management’s analysis of the incident’s effect on the amounts and disclosures in the financial statements (e.g. related contingent liabilities and receivables arising from the actual incident), the effects of potential non-compliance with laws and regulations, the impact on cash flows and projected future cash flows (which may trigger impairment) and the adequacy of the disclosures in the financial statements.

3. Other information (ISA 720 (Revised)) accompanying the financial statements (e.g. the directors’ report) may include a description of the risks arising from the conflict in Ukraine and/or the current economic outlook in general.

When reading the directors’ report, the statutory auditor/audit firm considers whether there is a material inconsistency between this other information and the financial statements or the auditor’s knowledge obtained in the audit. This includes checking the consistency of the information in the directors’ report with the financial statements, including additional disclosures, and with the underlying assumptions and judgements (e.g. whether the information in the directors’ report on the effect of the conflict in Ukraine on the entity is consistent with the disclosure of subsequent events and with the assumptions used by management in its updated going concern assessment).

According to a report by S&P (Standard & Poor’s Global Ratings), the economic implications of Russia’s invasion of Ukraine include:

1. Energy supply disruptions or significant price fluctuations, particularly in Europe.
2. Europe’s ability to quickly find alternatives to Russian gas.
3. Inflationary pressures in economies through rising energy, food and metal prices.
4. Escalating cyber attacks and counter-attacks between Russia and its known or potential adversaries.
5. Risk repricing leading to higher borrowing costs or restricted access to funding for weaker borrowers.
6. Lower profits for energy-intensive sectors or those reliant on discretionary consumer spending.

The S&P report can be accessed here: https://www.spglobal.com/_assets/documents/ratings/research/101248235.pdf.

These economic implications may affect the following financial statement items:

This context, on the one hand, increases the responsibility of those charged with corporate governance for as realistic an assessment as possible of the ability to continue as a going concern and of the implications for the information in the financial statements and, on the other, requires a review of audit risk and, where applicable, the inclusion of relevant information on this matter in the audit report.

Government authorities, market participants, investors and business partners need detailed, sector-specific information in order to make economic decisions.

In this situation, we must draw attention to the importance statutory auditors should attach to audit risk exposure, especially in view of the direct implications for the audited companies’ compliance with the going concern basis, with direct reference to the presentation of the financial statements at 31 December 2021.

We recommend that statutory auditors and audit firms carefully analyse the impact of going concern risk and its implications for the application of the going concern basis in preparing the financial statements under audit, whether or not the entities are public-interest entities.

Statutory auditors/audit firms must also properly document the work performed in assessing the threat to going concern, covering at least the following:

• The sufficiency of the measures taken by the management of the audited entity to reduce going concern risk, including those relating to reorganisation, cessation of activity or liquidation, if there is no realistic alternative.

In applying ISA 560 “Subsequent Events”, we recommend adequate documentation of the matters that may affect going concern.

Where there are uncertainties regarding the going concern basis and/or adjustments to the amounts and disclosures in the financial statements, these will be presented to the audited entity in the list of proposed adjustments, discussed in communications with it and included in the audit documentation.

ISA 560 “Subsequent Events” requires the inclusion in the annual financial statements at 31 December 2021 of directly affected entities of detailed disclosure notes on the impact of this situation on the company and on the application of the going concern basis in preparing the annual financial statements. In this way, users of the financial statements can assess the implications or become aware of the effects on the entity itself and on the economy in general.

Even where Key Audit Matters (KAM) must be included in the audit report, ISA 701 “Communicating Key Audit Matters in the Independent Auditor’s Report” provides that:

“A matter giving rise to a modified opinion in accordance with ISA 705 (Revised), or a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern in accordance with ISA 570 (Revised), is by its nature a key audit matter.

However, in such circumstances, these matters shall not be described in the “Key Audit Matters” section of the auditor’s report, and the requirements in paragraphs 13–14 do not apply.

Rather, the auditor shall:

(a) Report on this matter or these matters in accordance with the applicable ISA(s); and

(b) Include in the Key Audit Matters section a reference to the “Basis for Qualified (Adverse) Opinion” section or the “Material Uncertainty Related to Going Concern” section.”

Several situations may therefore arise; we give a selection of examples of how to approach them:

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[1] EXAMPLE – TEMPLATE

Material Uncertainty Related to Going Concern

(NOTE: only if applicable/to be adapted to the specific situation)

We draw attention to Note XX in the financial statements, which indicates that the Company estimates that the impact of the disruption in raw material supplies and of rising raw material and energy prices in the current year resulted in an operating loss of XXX, which significantly affected the Company’s equity and operating cash flows for the current year, reducing the predictability of budgets for the following period. As stated in Note XX, these events and the restrictions imposed in 2022, together with the other matters set out in Note XX, indicate that a material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going concern. The management of the Group/Company has taken steps to secure financing for the next 12 months and, according to management’s representation, going concern is ensured for this period. Our opinion is not modified in respect of this matter.

[1] EXAMPLE – TEMPLATE

Emphasis of Matter paragraph related to going concern

(NOTE: only if applicable/to be adapted to the specific situation)

We draw attention to Note XX in the financial statements, which indicates that the Company estimates that the impact of the disruption in raw material supplies and of rising raw material and energy prices in the current year resulted in an operating loss of XXX, which significantly affected the Company’s equity and the entity’s operating cash flows for the current year. According to management’s representation, the entity took the necessary measures in the current period by increasing sales prices and securing short-term financing to ensure operational continuity, so no significant difficulties affecting going concern are expected for at least 12 months from the date of the financial statements. Our opinion is not modified in respect of this matter.

[1] https://www.iasplus.com/en-ca/news/part-i-ifrs/january-2021/close-call-going-concern-assessments

Other possible implications for the audit report could be:

• the inclusion of a key audit matter (for example a “close-call”[3]);
• an Emphasis of Matter paragraph: for example, a significant subsequent event disclosed in the financial statements, or the significant risk arising from uncertainty over energy or commodity price movements for businesses highly exposed to this risk or potentially exposed to future sanctions.

In any of these situations, the statutory auditor/audit firm is advised to maintain professional scepticism, request additional information on the going concern risk assessment, analyse how the company assessed the risk and the considerations management took into account in its risk assessment, obtain a written representation from management to this effect, analyse all the information gathered during the audit engagement and assess, at the date of the audit report, on the basis of professional judgement and the information available, whether the use of the going concern basis in preparing the financial statements under audit is appropriate.

We wish you every success in your work!