Impact of COVID 19

over Going Concerns

and Expected Credit
Loss
By Marco Fernando L. Ng
 Marco Fernando L. Ng CPA, CIA, CFE, CGMA
Managing Partner
M. Ng & T. Lopez Partnership Firm
Angeles City, Pampanga
Background
• Marco is the Managing Partner of M. Ng & T. Lopez Partnership Firm, one of
the dynamic accounting and assurance firm in Angeles City. He is also the 2017
Young Achiever awardee for Public Practice given by PICPA.
• Marco is one of founders of the Firm which started on November 2013. Prior to
this, he started his career with one of the big 4 firms in the Philippines where he
spent 4 years conducting external audit engagement with Public and Private
companies. Then he joined the biggest auditing firm in the Philippines where he
spent 3 years doing Fraud Investigation and Dispute services for large
multinational companies and state auditors of the Philippines. And finally he
spent 3 years conducting external and internal audit work in New York and
Los Angeles California for one Hedge Funds and Private Equity Funds with
one of the largest US firm.
Skills and affiliation
• Marco is Certified Fraud Examiner (CFE), Certified Internal Auditor (CIA),
Certified Public Accountant (CPA) Both in the Philippines and in the US, and a
Chartered Global Management Accountant.
• Marco has maintained his membership with the Association of Certified Fraud
Examiner (ACFE), Institute of Internal Auditors (IIA), American Institute of
Accountants (AICPA), Chartered Institute of Management Accountants
(CIMA), and Philippines Institute Certified Public Accountants (PICPA).
Direct Tel: 0922-856-0648
Tel Landline: 045-322-8033
Email: mtpf.marcong@gmail.com
Skills and affiliation
Marco has performed various audit services and fraud investigation namely to the following
industry:
Importer/Distributor – Managed the forensic audit of a partnership, engage in importing and
distribution of animal and pet products, relating to allegation of misappropriation of cash
collections and diversion of partnership funds by the managing partner and employees. The
project entailed performing procedures to establish the amount involved in the said employee
fraud.
Multinational Company – Managed the independent review of costing methodology and
analysis of costing data of a multinational company based in the Philippines, with export
business to other countries. The review was made to support a dispute in another country
involving the multinational company. The project entailed procedures in documenting cost
allocation process and gathering information regarding the computation of gross margin and
earnings before taxes
Government sector –supervised the development and preparation of a fraud audit manual to
be integrated in the regular audit of Government agencies. These project required review of
the current state of fraud auditing within the audit institution, developing and preparing the
fraud audit manual, developing of training materials, and conducting of training programs of
selected state auditors.
Health Service - Supervised and helped assist the forensic audit of a private hospital relating
to allegation of improper of cash collections made by the company’s procurement manager
from external sales agents.
 Objective
This webinar is intended to provide guidance to auditors, carrying out audit engagements that
may be affected by Covid-19. It is driven by two factors:

1. In order to be able to give an audit opinion that is not subject to a disclaimer or

qualification due to a scope limitation, the auditor must always obtain sufficient,
appropriate audit evidence;
2. Even in challenging times, CPAs in public practice may still be able to complete the
compliance under Quality Assurance Review.

The following is a non-exhaustive list of factors auditors should be considering when carrying
out audit engagements in the current circumstances, along with guidance on how they might be
addressed. This guidance is intended to help auditors deal with the emerging situation and
should not be considered to be enduring or long-term solutions that will apply when normal
circumstances resume.
 The World’s Current Situation Amid the
CoViD-19 Pandemic
Started in Wuhan,
China in December
2019.
Shifted to “New Normal” –
the work-from-home, online
meetings, and online classes.

Built a significant
constraint in
people’s actions,
including CPAs
 It is believed that the effects of the COVID-19 pandemic would be the toughest
challenge for auditors and their clients since the 2007–2008 global financial crisis.
Specifically, the COVID-19 social distancing can largely affect audit fees, going concern
assessment, audit human capital, audit procedures, audit personnel salaries and audit effort,
which ultimately can pose a severe impact on audit quality.

Auditing is the on-site verification activity, such as inspection or examination, of a

process or quality system, to ensure compliance to requirements. In a normal actual audit
setting, auditors personally visit the auditee’s site in order to ensure that the information he
acquired are factual, realistic, and actually exists. With the current situation, with lockdowns
and, at the very lenient, strict security implementation of every city or municipality, and the
work-from-home setting, on-site audit has become the least possible choice.
 The current process now revolves around trust and technology. The auditor and the
auditee merely sent to each other the required documents, the former clinging to the honesty
of the latter that the information being provided are accurate.

Be that as it may, the work of the auditors is to be skeptic – not to raise a suspicion
or doubt, but to question every data being presented to them, in order to provide a proper,
appropriate, and accurate opinion on the reliability of the financial statement.

The greatest query auditors are facing now is, “how to ensure compliance in times of
pandemic, considering the questions posed above?”.
PFRS 9: Key Requirements
The impairment requirements are based on an
expected credit loss (ECL) model that replaces the
PAS 39 incurred loss model.
 Expected Credit Loss
• Move away from the present “incurred loss model”
• Expected credit losses recognised from start (yield then
includes a return to cover those losses)
• Lifetime expected credit losses (LECL) recognised when credit
quality is worse than at start
• Trade receivables and lease receivables must use LECL
method throughout
Impairment model
 Expected Credit Loss
• At start, recognise credit losses expected in next 12 months
(interest revenue calculated on gross asset)
• When credit quality deteriorates significantly to below
investment grade (or payments are 30+ days overdue),
recognise lifetime expected credit losses (interest revenue still
on gross asset)
• When credit loss occurs, start calculating interest revenue on
net carrying amount (amortised cost)
 Expected Credit Loss

• LECL is a DCF measure of weighted average of probabilities of

default
• 12-month expected credit losses are amount of the LECL
associated with probability of default in next 12 months
 Exposure at Default
• Exposure at Default (EAD) is the predicted amount of loss a
bank may face in the event of, and at the time of, the borrower’s
default. The loss is dependent upon the amount to which the bank
was exposed to the borrower at the time of default, as the default
occurs at an unknown future date. It is obtained by adding the
risk already drawn on the operation to a percentage of
undrawn risk.

• EAD is like the nominal amount of exposure for on-balance

sheet transactions. Under certain conditions, the on-balance sheet
netting of loans and deposits of a bank to a corporate
counterparty is allowed to reduce the estimate of Exposure at
Default.
 Exposure at Default
• Banks usually employs the Internal EAD approach, the bank itself determines how the
appropriate EAD is to be applied to each exposure and streamlines its capital requirements
by isolating the specific risk factors that are most serious and downplaying others. A
bank using internal EAD estimates for capital purposes might be able to differentiate EAD
values based on a wider set of transaction characteristics and borrower
characteristics.

• The values (as with PD and LGD estimates) would be expected to represent a
conservative view of long-term averages, though banks would be free to use more
conservative estimates.

• A bank wanting to use its own estimates of EAD will need to demonstrate to its
supervisor that it can meet additional minimum requirements pertaining to the reliability and
integrity of the estimates. All estimates of EAD should be computed net of any specific
provisions a bank might have raised against an exposure.
 Loan Defaults

• When a debtor defaults on a loan, one of two things can happen:

• The debtor recovers on its own, with no intervention by the bank; or
• The assets of the company need to be sold in order to recover the money.

1. Full recovery
• When a company defaults, they are given 90 days to recover from their
financial situation and pay back the loan. Sometimes, the companies can
recover with no intervention by the bank.
 Loan Defaults

2. Sale of assets
• Such a scenario does not occur unless the company is facing bankruptcy and is left
with no choice but to sell their assets to settle the loan. It is done after the overdue
period of 90 days is complete. Two types of assets can be sold to recover the loan
amount. They include collateral assets and unpledged assets.
• Collateral assets refer to assets that the company previously pledged to the bank
when the money was initially borrowed. Banks ask the customer for collateral as the
assets or securities can be sold in the event that the company (borrower) defaults on
their loan. The assets pledged can be sold to recover the money lent by the bank.
• Unpledged assets are assets that the company owns but did not put up as collateral
to the bank when taking out the loan. The proceeds from the sale of such assets will be
given to creditors in order of how long the payment remained outstanding.
Sample Calculation
LGD
John wants to buy a piece of land worth CU 1.9 million. To finance the purchase, he
borrows CU 1 million from a local bank. He uses a parcel of land as collateral for the
loan. Before lending the money to John, the bank looks at his credit history and
performs due diligence before approving the loan. They make sure that John has
not defaulted on prior loans and earns a sufficient income to repay the loan.

However, five months after the bank lends John the money, he loses his job and is
unable to repay the loan as there is no income stream. As a result, he must default
on the loan. As stated in the loan agreement, the bank takes ownership of John’s
land and attempts to sell it to recover the amount of the loan.
Sample Calculation
LGD
Afterward, due to property restrictions and a lack of infrastructure in the area, the
property’s value goes below the market value. The bank is unable to sell the land
for the total amount of the loan, and the land is sold for CU 800,000 only. The loss
given default is the total amount of loss the bank incurs as a result of John’s default
on the loan. It is calculated as:

Total Loss = 1,000,000 – 800,000 = CU 200,000

Loss Given Default = (200,000 / 1,000,000) * 100 = 20%

 Loan Defaults
3. In-between scenarios
• In most cases, the bank will identify the credit risk of the company before it
defaults on a loan. At this time, the bank will contact the company to make
arrangements and ensure that the amount outstanding on the loan is paid. If it
is not possible, the bank will consider other alternatives, such as exempting
the company from interest payments or restructuring the existing loan
agreement so that the company pays lower interest rates.

• Alternatively, the bank can sell the loan to another entity. This in-between
scenario occurs when the bank believes that the company can recover from
its current financial position. The scenario is usually implemented along with
the sale of the company’s assets. A portion of the loan is repaid through the
sale of assets, while the other portion is repaid with the restructuring of the
loan agreement.
 Probability of Default

• The probability of default (PD) is the probability of a borrower or debtor

defaulting on loan repayments. A PD is assigned to a specific risk measure and
represents the likelihood of default as a percentage. It is usually measured by
assessing past-due loans and is calculated by running a migration analysis of
similarly rated loans. The calculation pertains to a specific time horizon and
measures the percentage of loans that default.

• Within the bank’s internal assessment, a loan receivable probability of default

is the probability that the asset yields no return to its holder over its lifetime and
the loan receivable goes to zero.
Disclosure Requirements
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure

Sample Disclosure On the

Notes to the Financial
Statement
 PFRS 9: Sample Disclosure

Sample Disclosure On the

Notes to the Financial
Statement
 PFRS 9: Sample Disclosure
Sample Disclosure On the Notes to the Financial Statement
 PFRS 9: Sample Disclosure

Sample Disclosure On the Notes to

the Financial Statement
 Going Concern
The going concern assessment made by management is a fundamental part of
the audit that may be significantly affected by the current circumstances. The FRC issued a
revised PSA 570 in September 2019, which is effective for periods commencing on or after
15 December 2019. It requires a more structured and rigorous auditor risk assessment,
greater work effort and expanded reporting. When performing an audit for which the revised
standard is not yet effective, auditors may consider using some or all of the requirements in
the revised standard to help them to carry out their risk assessment and to undertake their
work in this area to the necessary high standard. The requirements over going concern
reporting in paragraphs 19-22 of the standard may be particularly helpful.
 Going Concern
more companies and auditors may need to consider reporting on
material uncertainties
Where they do so, this should draw on the available facts
and circumstances. Auditors should not generically report
on material uncertainties.

Availability of business supports from government

Governments globally have announced the availability of business support packages for affected
entities, which to date have focused on providing liquidity to affected entities, with some measures
to also cover business costs (e.g. salary costs for furloughed staff) in certain circumstances. Many
entities have also imposed measures to control costs and conserve available cash.
 Going Concern
It will be important in making any assessment of going concern to ensure that
companies and their auditors evaluate whether the entity both has access to sufficient
liquidity and can remain solvent through the period of public health restrictions and beyond.
Companies and their auditors will need to take into account the terms of their financing
facilities, the terms of any liquidity or other support accessed and whether any such
support taken on gives rise to future obligations. Deferral of payments now, or the receipt
of grants to offset costs may alleviate liquidity challenges but may affect the entity’s
solvency if the liquidity support does not continue long enough for the entity to recoup
those losses from future profits.
 Going Concern
Liquidity and solvency risks faced by the entity may be inter-related and either or both
may affect its going concern status and whether it faces material uncertainties
related to going concern. Auditors will need to ensure that their assessment of going
concern and the evidence that they need to gather in support of that explicitly
considers both liquidity and solvency factors which may affect the ability of the
directors to assert that the entity is a going concern and to identify and related
material uncertainties.

We anticipate in the current circumstances that the auditor’s going concern work will
be more extensive, require more evidence, and will continue to be performed through
to the point of signing the auditor’s report. In view of this, more evidence may be
required from the entity and the auditor should set a clear expectation with the
audited entity of the additional time that will be needed to complete the audit in this
area to the high standard that users of the financial statements will expect.
 Going Concern

In addition, auditors should exercise

professional skepticism where management and
TCWG have determined that the current
circumstances are not reasonably expected to
have any material financial impact on the audited
entity and that no material uncertainties related to
going concern exist for the entity.
 Subsequent Events Reporting

Communication with TCWG

Given the potential magnitude of these events, auditors will need to carefully
consider what evidence they will require in support of the disclosure of such
events and any adjustments made as a result.
 Reporting – Key Audit Matters
(when ISA 701 applies)
Where the impact of Covid-19 is, in the auditor’s professional judgment one of the most significant
matters having an impact on the audit of the financial statements, including those which had the greatest effect
on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the
engagement team, then the auditor considers reporting this as a key audit matter.

In reporting a key audit matter, the auditor does not use boilerplate language, but reports in a way
that informs users of the auditor’s report and the financial statements in a way that will support effective
decision making by those users. That will require careful case-by-case consideration of the applicable facts and
circumstances. Reporting might also provide context for users about the circumstances in which the audit has
been carried out, and the impact of those circumstances on the way the auditor has concluded on significant
judgments.

A key audit matter paragraph can also be used to satisfy the requirements in ISA 706, where the
auditor might consider an emphasis of matter paragraph.
 Reporting
Scoping Modified Opinions

Auditors might consider it helpful to also

include more information in the scoping
paragraph of their auditor’s report reference
to the particular circumstances in which the
It may be likely that the current circumstances
audit was carried out and the impact that this
lead to more modified opinions in auditor’s
had on the overall audit approach. This
reports, than would typically be the case.
might provide further context useful to users.
Again, this should not use boilerplate text
and should reflect the facts and
circumstances on a case-by-case basis.
 Reporting
Modified Opinions

Scope limitation

Where an auditor cannot obtain sufficient

appropriate audit evidence, then the auditor is
required to modify their opinion in that
respect. Where the possible impact on the
financial statements could be both material and
pervasive, then the auditor is required to
disclaim their opinion or if it is material but
not pervasive, to express a qualified opinion.
 Reporting
Modified Opinions

Misstatements

When an auditor, having obtained sufficient

appropriate audit evidence, concludes that
misstatements are material, the auditor is also
required to modify their opinion in that
respect. When the effect of such misstatements
is both material and pervasive, the auditor is
required to express an adverse opinion.
 Reporting
Modified Opinions

Communication with TCWG

The auditor engages with TCWG to explain the implications

of their proposed report and consider whether there are other
procedures that could be undertaken, at a future point yet to
be determined which could mitigate any modification either
fully or in part. This guidance recognizes that auditors may
be innovative in determining how they plan and perform
their audit, and how they ensure that they have sufficient,
appropriate audit evidence. However, equally we recognize
that there may be occasions where the auditor cannot
overcome the limitations in the evidence available to support
their audit and recognizes that further delay would not
change this.
 Reporting
Modified Opinions

Communication with TCWG

Physical meetings of audit committees may now be

impossible - auditors will need to agree with audit
committees how to communicate with them through other
means, and how to ensure that sufficient time is set aside by
audit committees for comprehensive, complete and informed
communication with the auditor. This will need to take
account of the potential for extended communication to
explain any modified audit reports, or to report any higher
than expected deficiencies or misstatements, that may result
from the current circumstances.
 Reporting
Written Representations

Written representations will be

obtained by auditors to help confirm
positions reported by management. Whilst
this is a helpful supplement to the
available information, written
representations will never, alone,
constitute sufficient appropriate audit
evidence.
 End…
Impact of COVID 19 over Going Concerns and
Expected Credit Loss
By Marco Fernando L. Ng

mtpf.marcong@gmail.com

0922-856-0648 (Sun) /0917-599-2012 (Globe)

/ 045-322-8033 (Landline)

http://abandc.co/

https://www.facebook.com/#!/abandc.com.ph