It will come as no surprise after the year we’ve had: the growing risk of fraud in the 2020 year-end audit is real.
A number of audit clients have been struggling to survive the COVID-19 pandemic. This means that going concern assessments are more critical this year than ever. It also means that fraud risk is increasing. This year more than ever, auditors will have to be conscious of the possibility and adjust their audit procedures and fraud inquiries accordingly.
The risk is of course higher in industries that have been hardest hit by the pandemic and its economic consequences (think about restaurants, their suppliers, and the hospitality industry in general, for example). The period in which revenue is recorded, for instance, is something auditors will have to pay special attention. High levels of returns shortly after cutoff will also have to be scrutinized in audit procedures this year. In a year when revenues may have plummeted, the temptation may be there to extend revenues as much as possible.
Tom Hood, CPA, CITP, CGMA, president and CEO of the Maryland Association of CPAs and the Business Learning Institute, agrees. “Fraud risk goes up a lot. Auditors will have to know their clients really well, and the industry so that they can actually stay up on those growing risks.” A good knowledge of the clients is really the only way an auditor can exercise professional skepticism efficiently.
According to Tom Hood, it doesn’t help that audits went virtual because the dynamic of the audits has changed. Inventory observation, for example, are trickier in a virtual environment. All of this results in a heightened risk of fraud for the 2020 year-end audits.
In any given year, fraud inquiries are typically performed in person. This allows the auditor to ask follow-up questions, pick up on body language, hesitations, and so on. Phone interviews do not provide the same level of comfort. Video calls may be the next best thing, and many auditors are adjusting to the new normal, but many of them would rather be able to perform these sensitive inquiries in person if given the choice. Tom Hood recommends recording some of the fraud interviews. Technology can help too. There is software analyzing body language, that could help reduce the risk in a remote environment. While this has not made its way into audit procedures just yet, it is not a reach to imagine that use of such software in audits is just around the corner, said Tom Hood.
It is undeniable that audit risks went up this year, but adoption of technology in audits was also greatly accelerated. Auditors who embraced technology trend can manage their risks more efficiently. Coupled with a good knowledge and understanding of audit clients, these heightened audit risks are manageable.
Is your firm ready for the 2020 audit season? And are you embracing challenges in a way that will prepare you for the future?
Join Thomson Reuter’s Anne-Lise Dorry, CPA, Senior Director Editorial, and her guest Tom Hood, CPA, CITP, CGMA, president and CEO of the Maryland Association of CPAs and the Business Learning Institute, as they discuss how the profession can get ready for 2021, and how COVID-19 has accelerated transformation trends. From working remotely to embracing new technologies, 2020 has truly been a catalyst for change. Are you ready?