This spring, the transition to a remote audit was very smooth for the Ernst & Young LLP (EY) team working with an e-commerce platform company, which, as a tech company, had already readily embraced the EY digital audit, including the electronic delivery of audit evidence. As a global company, it was accustomed to virtual communications with the EY team.
Instead, the challenges posed by the pandemic were much more fundamental: What happens to financial reporting and, by extension, the independent audit when the historical data offers so little insight into the present moment?
Giving investors informed judgments in uncertain times
The COVID-19 shutdown had a drastic impact on sales across many sectors, affecting many of the metrics ordinarily used in the audit process.
The audit team examined both short-term and long-term revenue and other factors, using their professional judgment to design a risk-based audit under these challenging conditions. It made an informed decision, considering information both specific to the client and known in the marketplace to arrive at a reasonable approach to determining materiality.
Providing perspectives when the past is no guide
The client faced similar challenges in its own accounting. As a long-time public company, it had strong procedures and controls surrounding, for example, establishing revenue reserves. But determining the right reserves during a pandemic, when historical trends were not necessarily reflective of current circumstances, was extremely difficult.
The EY team communicated the following leading practices to the client team members:
- Make the best possible judgment based on the information available to them internally and check that judgment against external information
- Document the basis for their assumptions
- Be extremely transparent in their reporting to help their stakeholders understand how they arrived at their conclusions
Using context for high-quality audits
Given the difficulty of predicting outcomes during a once-in-a-century pandemic, decision-making of all kinds needs to be guided by as much context as possible. For EY auditors, that means focusing on understanding how clients are making their estimates and what evidence they used in making them, then assessing those assumptions based on a range of information in the public realm.
“We tried to be thoughtful, to document our considerations and emphasize transparency in financial reporting,” said an EY Assurance Services partner. “That’s the best anyone can do in this situation, and that’s what we emphasize to our clients.”