CPA Australia, with the assistance of PwC partner Valerie Clifford, has developed the following tips to assist members conducting audits of entities experiencing tough times when economic conditions are uncertain. The tips should assist auditors in dealing with the greater risks presented in such times.

The tips are not meant to be exhaustive and auditors should refer to the auditing standards applicable in their jurisdiction when conducting audits. For matters not covered by the tips, it is expected that auditors will use their professional judgement appropriate to the audit. The tips have general applicability to all audits of financial reports, including audits of self-managed superannuation funds.

Risk of material misstatement

The risks of material misstatement in financial reports are significantly higher for entities experiencing difficulties in times of uncertainty.

Communicating with clients

It is important to advise your client as soon as possible that the risks of material misstatement are higher than in previous years because of the economic conditions and the difficulties the client is experiencing. Therefore you may need to change aspects of the audit of the client’s financial report, including:

  • overall decisions regarding client continuance
  • staffing of the audit and the extent of supervision of employees
  • the nature, timing and extent of audit procedures.

You should also advise those charged with the governance of the client (see also ISA 260/ASA 260 Communication with those Charged with Governance) when you become aware of the following:

  • a material weakness in the design or implementation of internal controls which may give rise to a possible material misstatement in the financial report
  • fraud
  • you have doubts about your client's ability to continue as a going concern.


Planning the overall audit strategy is more important because of the increased risks. It is therefore important in planning the audit that you:

  • consult and plan early
  • think unconventionally to ensure that all possible issues are at least considered
  • thoroughly understand the client’s business and its viability
  • challenge the business model
  • consider the need to assign more experienced employees to the audit and to have greater partner involvement  
  • consider performing substantive procedures closer to, or at, period end - particularly in critical audit areas.

Training of your audit employees

Some audit employees may not have had sufficient experience of auditing a client in difficulty. Accordingly, they may need training in advance of an audit to show them the things that should now be done differently.

Knowledge sharing and subject matter experts

Given the increased risks, your audit team should discuss any potentially difficult or contentious matters among themselves and with other professionals or experts within or outside your firm.


When planning the audit, you should consider what would cause the financial report to be materially misstated. If your audit client is experiencing tough times, there may be circumstances that affect your determination of materiality, such as:

  • net income may be nominal during tough times or significantly different from previous periods
  • misstatements that may exist in balances representing opening equity may contribute to a material misstatement during tough times
  • the expectations of users of the financial report, including what they would consider to be material misstatement, may differ significantly from what they were in previous periods
  • your own assessment of the risks that may lead to material misstatements in the financial report.

Your overall assessment of materiality remains based on your professional judgement, but it should include qualitative and quantitative considerations. 

Risk areas

Areas of increased risk include:

  • management bias (with or without fraudulent intent):
    • there is a natural temptation to bias judgements and disclosures toward the most favourable end
    • management may use a difficult period as an opportunity to overestimate certain balances (for example write-down of assets)
  • fraud, which can occur because:
    • financial stability or profitability is threatened
    • there is excessive pressure on management
    • employee resources have been reduced in critical risk management areas
    • managers may seek to override controls
  • asset measurements and valuations. Evaluating the assumptions and data used by management should be a major focus of your response to the increased risk of material misstatement associated with fair value measurements and accounting estimates.

Given these and other risks, you may need to reassess:

  • the nature, extent and timing of risk assessment procedures
  • the effectiveness of the internal controls that are designed to prevent, or detect and correct material misstatements
  • those risks that require special audit consideration (estimates and disclosures)
  • whether further audit procedures, as well as those that are usually performed, are required. For example, do the present tests of controls and substantive procedures take account of  the higher risk of material misstatement?
  • your response to the possibility of fraud, such as maintain your professional scepticism; focus the engagement team's discussion  on the possibility of material misstatements due to fraud; and understand the business rationale for significant transactions.

Going concern

The critical issues that you need to consider in assessing "going concern" are:

  • the appropriateness of management's assumption that the firm is a going concern
  • the disclosure of any material uncertainties about the entity's ability to continue as a going concern
  • the appropriateness of management’s assumption that the entity is a going concern, even if the financial reporting framework used in the preparation of the financial report does not include an explicit requirement for management to make  that assumption
  • the actual period for which management is assessing the entity’s ability to continue as a going concern.    
  • entities that have not previously needed to prepare a detailed analysis in support of the going concern assumption may need to give the matter further consideration; both you and the entity should benefit from early discussions regarding the need to give this matter further consideration.

Pearls of wisdom

The following are some final pearls of wisdom for auditors to consider with client's experiencing difficulty:

  • think unconventionally
  • maintain your professional scepticism
  • reassess risks. Identify the most significant client exposures
  • consult early and regularly  with those charged with governance; and with management, audit committees and experts
  • raise awareness. Make sure that partners, employees and clients understand the potential ramifications of a client going through tough times. Formal training may be necessary
  • keep informed. Monitor the guidance issued by standard setters and regulators.

Further information