In this author’s article in the May 2020 CPA Journal (“Financial Reporting and Auditing Implications of the COVID-19 Pandemic: Some Practical Guidance,” pp. 26-33,, many new or heightened considerations management and auditors must make when preparing or auditing financial statements covering periods that invariably have been affected by the ongoing coronavirus (COVID-19) pandemic were discussed. Details of the matters highlighted below and their related risks and measurement and disclosure requirements may be found in the earlier article.

The AICPA’s peer review staff has been issuing releases and presenting online training to peer reviewers, intending to ensure that the peer review process continues to serve the public interest satisfactorily during the pandemic. The objective of the training is to help peer reviewers evaluate the effectiveness of the approaches adopted by the reviewed firms to confront the new or enhanced challenges presented by these circumstances, while protecting their health and safety. This article is not intended to guide peer reviewers; rather, it is meant to identify those matters that will likely receive special attention from reviewers during the next round of peer reviews and beyond, and to help auditors prepare for them by similarly refocusing their internal quality control inspections of audit engagements appropriately.

For 2020, peer reviewers are being instructed, first, to refocus on the effectiveness of auditing applied to the adoption of the new revenue recognition or other accounting standards recently adopted by a client (where applicable); second, to pay special attention to reviewed firms’ COVID-19 risk assessments and audit scope responses in certain significant areas of engagements selected for review. Some of these considerations will apply to peer reviews and internal inspections of calendar-year 2019 audits performed in 2020. Accordingly, published or in-house checklists that were intended for use in internal quality control inspections conducted in 2019 are obsolete in these respects, and will most likely be updated or supplemented as necessary to cover these areas, and will apply to the next peer review even if it will not be conducted until after 2020. (Note that at the time of this writing, the AICPA peer review checklists have not yet been updated for 2020 reviews.)

Issues to Be Addressed in Inspection Checklists

Internal quality control inspection checklists used for calendar-year and later audit engagements should be updated to 1) direct inspectors effectively to determine whether, to the extent applicable, the auditors have adequately documented that they identified and addressed the issues listed below, and 2) ascertain that adequate consideration was given to such issues in the audit scope or the report to any increased risk of material misstatement, to afford reasonable assurance of compliance with all applicable auditing standards. The following list should not be considered all-inclusive.

Planning and Conducting a Remote Audit away from the Client’s Premises

  • Appropriate supervision of staff auditors working at home
  • The authenticity and reliability of copies or scans obtained of selected client records, related fraud risk, and the degree of professional skepticism exercised
  • The reliability of any alternative procedures employed when preferred audit evidence (such as direct confirmation) is not readily available due to business closures or staff reductions
  • The inability to observe the timely taking of physical inventories and directly observe slow-moving or obsolete items
  • The inability to observe (or test) key internal controls functioning in real time or the client’s failure to maintain such controls and failure to adjust the audit scope appropriately for all or part of audit period as a result of reductions in effectiveness or other changes in the client’s internal controls policies and procedures, such as staff reductions or reassignments of tasks, and the consequential inability to continue effective segregation of duties, management oversight, or other monitoring controls. For more on these issues, see “Auditing and Accounting during and after the COVID-19 Crisis,” by Deniz Appelbaum, Shaun Budnik, and Miklos Vasarhelyi, The CPA Journal, June 2020.

Disclosure, and Other COVID-19–related Issues

  • Whether there was adequate disclosure of pandemic-related risks and uncertainties, including increased vulnerability to concentrations (e.g., reduced volume of business conducted with a particular customer or group of customers, or an interruption in the supply chain) or increased exposure to short-term changes in estimates
  • Whether there was documented evidence of adequate consideration of conditions requiring adoption of liquidation basis reporting (ASC 205-30) apply, or uncertainties about the entity’s ability to continue as a going concern (ASC 205-40)
  • Whether there was documented evidence of adequate consideration of the effects of COVID-19–related post–balance-sheet developments on recorded estimates
  • Whether there was documented evidence of use of an appropriate level of professional skepticism in considering the need for asset impairment adjustments, and whether they were made in the proper period
  • Whether there was documented evidence of consideration of the adequacy of provisions made in the appropriate period for the effects of loss contingencies arising from the pandemic (ASC 450).
  • Whether there was documented evidence of whether coverage was verified and determined to be recoverable for any material accrual of business interruption insurance proceeds that was made or proposed by the client
  • Whether there was documented evidence of an adequate search for significant subsequent events made by the client (up to the reporting date) and whether any significant COVID-19–related findings were appropriately disclosed or recognized in the proper period
  • Whether there was documented evidence of adequate consideration of the relative precision and reliability of expectations used for substantive analytical procedures in light of COVID-19–related uncertainties
  • Whether there was documented evidence of adequate consideration of the effect of late reporting and other COVID-19–related matters on compliance with loan covenants
  • Whether there was documented evidence of adequate consideration of the effects of any COVID-19–related lease or other contract modifications
  • Whether there was documented evidence of adequate consideration of the effects of the Coronavirus Aid, Relief, and Security (CARES) Act and other COVID-19–related tax guidance on the recorded income tax provision, payroll tax credits, and related disclosures; accounting and disclosures related to forgivable SBA loans and related tests of eligibility and penalties for noncompliance
  • Whether there was documented evidence of adequate consideration of increased fraud risk resulting from any identifiable management incentive to over- or understate the effects of COVID-19–related matters on reported financial condition or operating performance.

Reporting Issues

  • Whether there was documented evidence of adequate consideration of an inability to satisfy any of the foregoing audit objectives or other issues that should have resulted in reporting a scope limitation
  • Whether there was documented evidence of adequate consideration of any other COVID-19–related matters, such as unmitigated substantial doubt about the entity’s ability to continue as a going concern, that should require a mandatory, or discretionary, emphasis-of-matter (EOM) paragraph.

Be Prepared

The COVID-19 pandemic has hit the whole planet like a runaway train―and the worlds of auditing and financial reporting have certainly not been exceptions. Despite the fact that the authorities at the AICPA have not yet caught up with it by revising their peer review checklists, it is certain that peer reviewers will be tuned in and focused on the foregoing issues for all reviews to be conducted during 2020, as well as an undetermined period thereafter. Smart audit professionals will adjust their internal quality control engagement inspection procedures beginning in 2020 to be prepared.

Howard B. Levy, CPA is an independent technical consultant. He is a member of The CPA Journal Editorial Advisory Board and the author of The Volunteer Treasurer’s Handbook: Financial Management Building Blocks for Not-for-Profit Organizations.