Six Areas Auditors Focus on During a Digital Audit

By May 28, 2020COVID-19

We’re all navigating new territory during the COVID-19 pandemic, and that includes your auditors. Few anticipated that their nonprofit’s auditors would need to work remotely to review the 2019 accounts. Some auditors may even be reluctant to conduct audits from their home offices, citing misgivings about whether professional standards permit fieldwork performed remotely.

With no choice, most auditors will begin to perform their duties. As a leader of a nonprofit organization, what do you need to know about digital audits? Do they differ from an audit conducted at your office? And how will the pandemic affect the financial statements and disclosures?

Digital Audits: 6 Areas Your Auditor Will Examine

There are six areas that auditors are likely to focus on during a digital audit.

  1. Verifying hard copies: Auditors are used to fieldwork, that is, going to a client’s offices and looking at documents and other resources on site. They can easily ask employees questions about the materials under scrutiny. With the COVID-19 pandemic, that’s out of the question in many parts of the country where the outbreak continues to limit interactions with others. Instead, auditors may request that documents be sent to them. If they do need access to papers or hard-copy records, they may ask that a third party verifies the accuracy of them. This isn’t a slight aimed at your organization or an individual. It’s simple due diligence if they are forced to work from scans, photocopies, or materials delivered by a trackable, traceable courier or delivery service.
  2. Going concern: The financial strain from the pandemic may call into question whether or not a nonprofit will continue operations as a ‘going concern.’ The auditors will look at whether or not there are considerations that will impact if the nonprofit can continue as a going concern. In some hard-hit areas and industries, there may be substantial doubt that the organization can continue operating. “Substantial doubt” means that, in management’s opinion, the organization may not be able to remain open. Such doubts must be disclosed in the notes to the financial statement. Including such notes is required, even if management has a plan to rectify the situation.
  3. Emphasis of matter: Even if there isn’t substantial doubt, auditors may still request that a nonprofit adds an emphasis of matter paragraph to the financial statement. At a time when the future is uncertain and information changes rapidly, auditors may feel it is in the organization’s best interest to do so.
  4. Scope limitations: Remote audits may impose scope limitations on the audit. Key evidence and confirmations may not be returned. Auditors may be unable to evaluate the design and implementation of controls at the client’s location. These and other factors that are dependent upon being physically present at the client’s location may limit the audit scope.
  5. Subsequent events: Audits based on a calendar year-end of December 2019 may find that COVID-19 events are Type II events. Disclosure may be required even if the events do not have to be recognized in the financial statement. For 2020 events, COVID-19 related events may require adjustment to the financial statement. For example, investment income may fall as a consequence of the pandemic. These may fall into the Type I event category or events that provide evidence of conditions that existed at the financial statement’s date.
  6. Risks and uncertainties: Management must disclose risks and uncertainties. Right now, everything and anything might feel risky and uncertain. Auditors will focus on risks and uncertainties that arise from the nature of the entity’s operations, significant estimates, or current vulnerabilities due to certain concentrations. Your organization’s auditors will advise you if you need to disclose such risks and uncertainties. Things such as geographic areas in which you operate, travel restrictions, and the like will be considered as part of this evaluation.

Remote Audits the New Norm?

As the world hopes for a vaccine or an effective treatment against COVID-19, nonprofits should plan for a future where remote work continues to be the norm. The COVID-19 pandemic has exposed the need for many companies and organizations to invest in cloud software and remote-working technology that enables them to continue operations seamlessly, whether working from home or office. To that end, nonprofits should plan for a future in which auditors require access codes rather than physical hand-off of documents as part of their auditing duties. Remote audits are likely to become part of the “new normal” post-pandemic world.

Welter Consulting

Welter Consulting bridges people and technology together for effective solutions for nonprofit organizations. We offer software and services that can help you with your accounting needs. Please contact Welter Consulting at 206-605-3113 for more information.