What internal controls are important to consider when auditing an entity’s accounting for PPP transactions? (10:30)
It is important that auditors focus on internal controls over the accuracy and completeness of PPP transactions. Ultimately, the accounting for those transactions, and their record-keeping, will become the very basis for the application for forgiveness. Controls such as segregation of duties and evidence of approval are essential.
Another aspect of internal controls, particularly when auditing those accounting methods where an entity is recognizing revenue before forgiveness is granted, is knowing there is a great deal of management judgment and estimation involved to determine the probability of loan forgiveness. Auditors should understand management’s process to assess those probabilities, the methodologies management used, and what management looked at in the way of estimates and projections. Further, internal controls over the accuracy and completeness of the underlying data used in those estimations and judgments are paramount.
Auditors should also consider internal controls over journal entries. In an environment with elevated fraud risk, management override of journal entries is a vehicle for perpetrating fraud, so be ultrasensitive to the internal controls around journal entries.
What do the entity and the auditor need to be aware of with respect to tax implications related to PPP transactions? (15:00)
The fundamental thing auditors need to be aware of is that the tax treatment being afforded to PPP transactions will likely create book and tax differences, resulting in deferred tax balances and disclosures in the financial statements.
Additionally, receipt of the funding is meant to be nontaxable, so expenses paid by PPP funding currently cannot be expensed for tax purposes. Further, the CARES Act opened opportunities for NOL carrybacks among other tax changes entities will want to consult with their tax experts on.
Are there principles embedded in the new AICPA standards on audit evidence or management estimates that an entity’s management and its auditor should consider with respect to the PPP or other forms of federal and state pandemic stimulus? (18:30)
There are principles in the new audit evidence (SAS 142 – log in or request a demo for access) and management estimates (SAS 143 – log in or request a demo for access) standards that are highly relevant in today’s environment.
For example, the audit evidence standard’s focus on the sufficiency and appropriateness of audit evidence. The framework auditors use to determine sufficiency and appropriateness of evidence consists of attributes such as accuracy, completeness, authenticity of information, and the risk of bias. Although maybe not directly related to PPP transactions, another example where the audit evidence standard can be useful is with remote audit procedures. The pandemic necessitated use of remote audit procedures and this will likely continue. The new evidence standard incorporates concepts around remote audit tools and techniques auditors may find relevant in today’s environment.
In relation to management estimates, particularly for the accounting models where revenue can be recognized before loan forgiveness, estimates and judgments are at their core. SAS 143 is helpful because it requires separate assessments of the inherent and control risk associated with an estimate and thereby results in more precise assessments of the risks of material misstatement.
While the new audit evidence and estimates standards are not required to be used or effective yet, they are available for early implementation.