Audit implications of the War in Ukraine
The war in Ukraine has affected everything from global supply chains to worldwide inflation and has imposed an energy crisis. While clients may not have direct connections with Ukraine or Russia, their supply chain, operations, and customer base may be negatively impacted which will affect companies from a view of going concern. The question that has to be asked is, are the implications of the War in Ukraine so large and raise so much doubt that the company may not be able to meet the liabilities as they fall due for the foreseeable future?
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Entities should consider how the war will impact them both directly and indirectly and should prepare budgets based on the financial information available to them at the time of preparing the company’s financial statements and use their professional judgement. This process might be complicated as the outlook may be unclear regarding the extent of the financial effect of the war or its long-term implications. The extent to which the war in Ukraine will impact going concern assessments will depend on entity-specific circumstances, including existing financial health and the degree to which the business is exposed to operational and financial risks relating to the sanctions imposed, supply chain, and the broader impact on the global economy.
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In the absence of clarity, the entity will be required to apply professional judgement, document this judgement, update budgets, cashflows, and other relevant financial projections when facts and circumstances change, and ensure that there is adequate disclosure of this in the financial statements that comply with the financial reporting framework used.
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Management should also consider whether there is material uncertainty related to events or conditions that cast significant doubt upon the entity’s ability to continue as a going concern. If an entity believes that it is not a going concern, then it should not prepare its financial statements on a going concern basis. The auditor's risk assessment for the client will need to consider the impact of this while conducting the audit.
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The requirements of accounting standards relating to going concern have not changed due to the war in Ukraine. Management and the auditor’s responsibilities remain the same. However, the economic impact and uncertainty caused by the war will mean that going concern considerations are likely to be more topical for both preparers and auditors.
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For any company with a reporting period before February 24, 2022, the war in Ukraine will be considered a non-adjusting event. This event, however, will necessitate adjustment for any company with a fiscal year end after this date. Appropriate disclosures need to be made about material non-adjusting events, and an estimate of the financial effect must be appropriately disclosed in the notes to the financial statements by the management, and the auditors need to ensure that these are appropriate.
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In addition, countries have put up sanctions against Russia, and before accepting or starting the audit for a new financial year, updated due diligence needs to be performed, and accountants are required to re-screen their clients when considering working for clients with any Russian connections.
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Apart from the direct impact of the war in Ukraine, the ripple effect of COVID-19, combined with the rise in energy prices, increased inflation, and the global economy heading towards recession, it is likely that most companies will be impacted up to an extent.