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InFocus

By Deniz Appelbaum, Shaun Budnik, and Miklos Vasarhelyi

JUNE 2020 / THE CPA JOURNAL14

T
he onset of the coronavirus (COVID-19) glob-
al pandemic has resulted in enormous pressure
on auditors and accountants to find alternative
ways to collect audit evidence and complete the
engagement. Depending upon the assessed risk of

material misstatement (RMM) and the materiality of a given
account balance, auditors rely upon physical in-person evidence
collection procedures, such as inventory observations, inventory
verification, document collection, property, plant, and equipment
(PPE) assessment, interviews, discussions, and observations.
With the confinement brought on by COVID-19, is it possible
to be an effective and efficient auditor?

This article will discuss remote virtual auditing—first-person
view (FPV) cameras and drones, video feeds, artificial intelli-
gence (AI) video assessment tools, and other technologies that
can assist in conducting a remote audit examination. These
methods offer several benefits, but they also present issues that
must be addressed. In addition, audit risk assessment evaluations
should be revisited in the current environment, where businesses
and commerce in many industries have come to a halt and the
unemployment rate rivals that of the Great Depression.

Audit Evidence Collection Procedures
Audit evidence is defined by U.S. GAAS as: “all of the

information used by the auditor in arriving at the conclu-
sions on which the audit opinion is based” (SAS 106; AS
15). This information consists of the accounting records
themselves and all other information obtained during audit
procedures performed during the engagement, in addition
to records from previous audits and the firm’s own quality
control procedures (AU-00326.02).

Generally, audit evidence is more reliable if it is obtained
from sources external to the entity, if it is in documentary
form, or if it is obtained directly from the auditor. The reli-
ability and quality (appropriateness) of this evidence forms
the basis for determining the sufficiency or quantity of evi-
dence that must be collected. The reliability and sufficiency
of audit evidence needs to be considered when assessing
risks and designing audit procedures (AU-00326.06). SAS
106.20–.42 describes the types of procedures that an auditor
may undergo to obtain audit evidence; these are illustrated
in Exhibit 1.

Although many continuous evidence collection pro-
cesses are now feasible due to widespread adoption of
enabling technologies, the tasks of observation, PPE
assessment, interviews, document collection, and inquiry
may still be conducted physically. These audit evidence
collection processes, even if enhanced by technologies
such as radio frequency identification (RFID) tags and
process flows, often require a physical presence to ver-
ify the relevant assertions of existence, occurrence, and
valuation (SAS 106.08). These are the areas of evidence
collection that are particularly challenging in today’s
environment of social distancing and quarantines. What
follows is a review of evidence collection procedures
that are more physical in nature and how audit staff can
comply with AICPA and PCAOB requirements while
working remotely.

Auditing and Accounting
During and After the

COVID-19 Crisis

Public health measures taken to mitigate the
spread of the coronavirus (COVID-19) pandemic
have upended business operations and process-
es. Auditing is no exception; traditional methods
of collecting audit evidence rely upon in-person
procedures that are impossible or impractical
now and for the near future. Technology pro-
vides a number of possibilities for remote virtual
auditing; the authors describe several options,
including remote inventory observation, docu-
ment collection, and risk assessment.

IN BRIEF

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JUNE 2020 / THE CPA JOURNAL 15

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Inventories during COVID-19
AU section 331 (AICPA, 1972) pro-

vides guidelines regarding inventory pro-
cedures, whether sample inventory count
observations or a complete count. When
inventories are conducted manually by
the client, the auditor should be physi-
cally present to observe, test, and inquire.
If the entity has kept frequent perpetual
inventory checks, the auditor’s observa-
tions may occur either during or after the
audit. Verification of automated inventory
systems with RFID tracking follows
this guidance. For automated inventory
systems, often the auditor may observe

a sample of the inventory count (D.
Appelbaum and R.A. Nehmer, “Using
drones in internal and external audits:
An exploratory framework,” Journal of
Emerging Technologies in Accounting,
vol. 14, no. 1, pp. 99–113, 2017).

AU-C section 501, “Audit Evidence—
Specific Considerations for Selected
Items,” expands on the process of
inventory observation that was summa-
rized in AU-C section 331. The auditor
should evaluate the inventory proce-
dures, observe and inspect the inventory,
and perform test counts. If the physical
inventory is conducted at a date other
than that of the financial statements, the
auditor should perform the observation
on another date and then perform back-
tracking or forwarding audit procedures
to calculate the inventory count. A similar
process should occur if the count occurs
at a time that the auditor cannot be phys-
ically present. If the inventory is held

by a third party, the auditor should seek
confirmations if a physical inspection is
not possible.

How can an auditor satisfy the physical
requirements of inventory observation
and validation at this time when author-
ities have discouraged or even forbidden
large gatherings and unnecessary travel?
With some creativity, this situation is
not impossible to resolve, and we pro-
vide ideas that may satisfy AICPA and
PCAOB requirements. As suggested by
AICPA Chief Auditor Bob Dohrer, roll
forward and roll back procedures may be
possible if earlier observations were made

and there is reasonable certainty that
restrictions might lift in the near future
(https://bit.ly/3gNhPPE). Furthermore,
the PCAOB (AS2510.10) states that if
the client has demonstrated and verified
reliable and complete perpetual inven-
tory records in the past, the auditor’s
observation could occur at some time
other than period or year end. For these
audit clients, this may be the most viable
immediate solution. For engagements
where inventory is material to the finan-
cial statements and where the auditor is
compelled to rely on physical observa-
tions and inspections, and the audit client
is a nonpublic company, AU-C sections
501.11 and .14 apply, wherein an audi-
tor might not need to attend inventory
counting if it is “impracticable.” Roll
forward and roll back would still apply,
but due to the risk of auditor safety, the
auditor could claim that physical pres-
ence is impracticable.

With devices that can provide live
video streams or video recordings, audi-
tors may still be able to conduct a “first
person view” (FPV) or “auditor first
view” (AFV) inventory observation. The
assumption is that the audit client would
have at least one employee or more con-
ducting an inventory count. This employ-
ee could strap on a GoPro camera, or
wear a Google Glass headset, which
could be in constant communication with
the audit team via smartphone, and honor
their requests while providing live video
streams of the inventory process. The
audit team could simultaneously record
these video feeds, thereby providing
strong nontraditional audit evidence of
an inventory verification.

Presenting videos as audit evidence
may be a novel, and possibly controver-
sial, approach. These are extraordinary
times, however, and perhaps some flex-
ibility and ingenuity are desirable. There
is minimal guidance from the PCAOB
and the AICPA regarding the reliability
of videos as audit evidence specifically;
one must infer from the current, general
standards. Videos recorded by a third
party or by the audit client provide a
weak source of audit evidence, but this
might be appropriate when the subject
matter is not material.

Recordings of live video streams which
were monitored and verified in real-time
by the auditor are another matter altogeth-
er. There ostensibly would be little differ-
ence between this situation and an auditor
being physically present at an invento-
ry count. If the auditor is “present” and
recording the video streams as they occur
on her own secure computer, how is this
not equivalent or better than being there
physically? These video files could always
be examined to establish their validity and
provenance (T. Gloe, A. Fischer, and M.
Kirchner, “Forensic Analysis of Video File
Formats,” Digital Investigation, vol. 11,
pp. S68–S76, 2014). In some cases this
evidence might be much better than what
is observable, as the auditor can review the
videos and pictures at a magnified scale
and as often as desired.

InFocus

16 JUNE 2020 / THE CPA JOURNAL

Presenting videos as audit evidence may
be a novel, and possibly controversial,

approach. These are extraordinary times,
however, and perhaps some flexibility

and ingenuity are desirable.

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JUNE 2020 / THE CPA JOURNAL 17

Ideally, employees and auditors should
be technically savvy and able to quickly
learn these technologies. There could
be issues as to who exactly should be
providing the AFV video stream—a
member of the accounting firm who lives
nearby? An internal auditor, accountant,
or other client? An external third party?
Remember that during this time, it is
crucial to limit unnecessary travel and
potential exposure to COVID-19; the
video feed process might not be feasible
if no one is there to manage the cam-
era. Finally, it may be difficult to detect
details in the video feeds, such
as identifying damaged/dusty
goods or items that do not smell
right (foodstuffs, chemicals,
other organic compounds), thus
lessening the auditor’s comfort
with using a video app. Some
drones, however, may be fit-
ted with an “electronic nose”
or sensor which detects certain
chemical compounds in odors
that indicate decay.

During the process of invento-
ry observation, an auditor might
request that a picture be taken
of certain inventory views. It is
quite possible that these invento-
ry items could be quickly count-
ed in either a snapshot or video
view using image recognition
software such as CountThings
(https://countthings.com/). With this soft-
ware, items such as boxes, pills, lum-
ber, trees, cars, semi-trailers, and raw
diamonds that have been captured with
either still pictures or videos may be eas-
ily counted using pre-learned templates
specific to these items. The AI software
can also “learn” new items to count. An
auditor would still review the counts for
accuracy, but the task of counting objects
in a picture or video has been assisted
by the initial application of an AI picture
recognition software. Exhibit 1 shows a
small sample of items available to count
at CountThings.

One consideration for any auditor
using a new technology is that it should

be verified. The pre-programmed compo-
nent of these tools should be evaluated.
This typically requires the identification
of relevant testing scenarios and inputs
and then an evaluation of the tool’s out-
put (through manual recalculation or
comparison to another tested tool with
comparable capabilities).

PPE Evaluation during COVID-19
For Inspection of Tangible Assets, SAS

106.29 states that this process consists of
physical examination of physical assets
to verify their existence and assist in the

determination of valuation by providing
information about the assets’ condition.
This inspection, if involving actual inven-
tory counts, requires observation or inqui-
ry accompanying this activity. Auditors
typically open boxes or conduct other
measurements to verify the amount of
goods or condition of assets. Other tasks
might include verifying the general con-
dition of a building, equipment, or land
to corroborate its stated financial value.

During the COVID-19 crisis, some of
these tasks that occur during inventories,
such as verifying the contents of a box,
may be conducted through an AFV audit
process. The AFV process could also be
undertaken for evaluating the physical

condition of PPE in substantiation of
claimed financial value. For example,
an auditor could participate in the exam-
ination of a building roof as a real-time
video-streamed participant. In fact, the
audit team may want to continue this
practice post-COVID-19, for examina-
tions where outside experts are hired for
an evaluation process. The recording of
live video streams of the examination
process provides invaluable evidence
for the engagement. Additionally, using
a drone for AFV observation can be
quite feasible (Appelbaum and Nehmer,

2017), since many drones can be out-
fitted with a FPV camera that may be
reconfigured to include the auditor in
this first-person view.

Document Collection during
COVID-19

Most of the documentation required by
auditors should be electronically avail-
able. It is possible, for example, that
receiving reports are signed and stored
at the recipient’s warehouse dock, or
that the confirmations provided by banks,
vendors, customers, and attorneys are
paper documents. To provide electronic
versions of paper receiving documents,
client staff could provide dated pictures

Exhibit 1
Audit Evidence Collection Procedures

Procedure Method

Inspection of Records or Documents Pull samples of records and trace/verify/match

Inspection of Tangible Assets Physical inventory, walk through, open boxes

Observation Sit with workers and observe

Inquiry Written or oral interviews

Verify account balances

Recalculation

Re-performance Re-perform procedures to verify

Analytical Procedures Scanning and statistics

(Adapted from Appellbaum and Nehmer 2017)

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of the requested signed reports; these
pictures should be forensically examined
to establish authenticity and provenance.
Communications with banks, clients,
vendors, and attorneys regarding confir-
mations could begin with a secure e-mail
from the client directed to the auditor.

Observations during COVID-19
SAS 106.30, Observation, consists of

looking at a process or procedure being
performed by others; for example, watch-
ing the process of inventory counting or
controls processing constitutes observa-
tion. The observation is only valid, how-

ever, for the point in time when it occurs
and is constrained by the fact that being
observed may affect how activities are
performed. Many audit clients may have
installed cameras throughout their facili-
ties, providing further sources of observa-
tion. Live video streams or pictures that
are verified by the auditor while being
created are preferable to those recorded
by another party. With the former, the
audit team can claim beginning-to-end
custody of the evidence.

Interviews during COVID-19
During this time of quarantine

and self-isolation, the audit team
may be required to conduct inter-
views and discussions with man-
agement. Whereas such interviews
and discussions generally occur in
person, such interactions will now
likely to happen via video-confer-
encing tool, such as Zoom, Skype,
or GoToMeeting. Auditors should be

aware of certain limitations to video
conferencing:

It might be difficult to pick up
nonverbal clues and gain an intuitive
understanding of the other individual
with video conferencing, although
reviewing video recordings later
can mitigate this weakness or even
improve upon the traditional process.

Eye-to-eye contact occurs more
easily in person and less often with
video. Both parties should familiar-
ize themselves with and follow best
practices (e.g., looking directly in
the camera).

Auditors should be familiar with
the tools to be used and should
h a v e a “ w a i t i n g r o o m ” o r p a s s –
words for meetings. Such controls
are absolutely critical, given that
some discussions could be sensitive
in nature and video meetings have
b e e n h a c k e d w h e r e s u c h r o b u s t
security and privacy controls were
not in place.

Audit Brainstorming during
COVID-19

Likewise, during a COVID-19 shut-
dow n , a u d i t b r a i n s t o r m i n g w i l l
need to occur via online meetings.
Ideally, the app used will allow
not only screen sharing but also
keyboard and mouse sharing among
audit team members. Because the
audit team is not in daily in-per-
son contact, daily online meetings
may be used to maintain continuity
regarding the engagement.

Audit Risk Assessments during
COVID-19

The timing of the COVID-19 pan-
demic and the subsequent broad-scale
shutdown of the economy will have a
major impact on audit risk assessments.
An auditor might already have a generic
risk consideration for the possibility of a
natural disaster or, even more remotely, a
pandemic. But how does the COVID-19
pandemic specifically affect each client’s
business plans, access to capital, liquidi-
ty, financial condition, and operations?
Has COVID-19 impacted demand for a
client’s products or services, directly or
indirectly? Have a client’s processes been
interrupted due to supply chain issues,
difficulty establishing remote access with
staff, or a reduction in the workforce
(whether caused by illness, closures,
or layoffs)? What other changes have
affected a client’s business? The inher-
ent general economic risk—such as the
nature and likelihood of a recession—
should also be re-examined in light
of COVID-19. These are but a few
considerations for risk assessments
during COVID-19 and its aftermath.

Auditors should be aware of the
ever-present issues of fair value, going
concern, and subsequent events (https://
bit.ly/2XSjMBn) and how these are being
affected by the COVID-19 crisis.

Fair value. The shutdown of the econ-
omy significantly impacted the secu-
rities markets and their pricing. Some
securities may be less liquid, with less
frequent observations and more frequent
price fluctuations. Auditors should be
cognizant of FASB guidance regarding
inactive markets, disorderly transactions,
and declining levels of valuation and
their degree of impact on your client.
Lastly, auditors should carefully review
any disclosures regarding valuations and
whether market volatility and lack of
liquidity is accounted for.

Going concern. With the broad shut-
down of the economy, an auditor should
pay additional attention to the going con-
cern evaluation. An auditor should look at

18 JUNE 2020 / THE CPA JOURNAL

InFocus

The timing of the COVID-19 pandemic and
the subsequent broad-scale shutdown of

the economy will have a major impact
on audit risk assessments.

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JUNE 2020 / THE CPA JOURNAL 19

the client’s debt level, the viability of its
source of alternative sources of revenue,
the diversity of its strategic plans, and
its cash flows prior to COVID-19. If
the broad outlook for COVID-19 is not
definitive during the audit examination
period, the auditor should be cautious
with her estimates.

Subsequent events. According ASC
Topic 855, there are two types of sub-
sequent events—those that provide
additional evidence about conditions
that existed at the date of the balance
sheet (type 1) or events that provide
information about events that did
not exist at the date of the balance
sheet but arose after that date (type
2). The main issue for consideration
is whether these type 2 events are
material to the financial statements,
and if so to what extent should these
events be disclosed. Given that these
disclosures could be speculative or
judgmental in nature, auditors should
act prudently.

The COVID-19 pandemic spread
during the audit examination period
for calendar-year public filers, with
significant changes in business and the
economy transpiring during the month
subsequent. The SEC has extended by
45 days the due date for any filings
from March 1 to July 1 (https://www.
sec.gov/rules/exorders/2020/34-88465.
pdf). To secure this extension, the fol-
lowing steps should be taken:

Registrants should provide a Form
8-K explaining how COVID-19 is
impacting the company and its ability
to file, and when it anticipates that it
should be able to file. The registrant
should also list company-specific risk
factors that have impacted its business
and operations.

If the delay results from an inability
for a third party (such as an audit firm,
outside experts, or law firm) to provide
a report, opinion, or certification, the
Form 8-K must also provide a signed
statement from the third party explaining
the nature of the delay.

The registrant’s delayed report should
be filed within 45 days of its original fil-
ing due date. The SEC also states that this
exemption may be reconsidered in light
of ongoing COVID-19 developments.

Requirements for manual signatures
are also being relaxed, due to the con-
cerns caused by COVID-19 (https://
www.sec.gov/corpfin/announcement/
staff-statement-regarding-rule-302b-
regulation-s-t-light-covid-19-concerns).

What Next?
The global COVID-19 pandemic has

resulted in enormous pressure on auditors
to find alternative means of collecting audit
evidence and completing engagements.
Mandatory closures of many businesses
have been extended beyond the grace peri-
od offered by the SEC. But somehow the
audit staff must continue with its engage-
ment tasks. With the confinement brought
on by the pandemic, is it possible to contin-
ue to be an effective and efficient auditor?

The answer is: yes. The discussion
above describes how to perform a remote
virtual audit utilizing FPV cameras and
drones, video feeds, AI video assessment
tools, and other technologies. Given
the nature of the current constraints,
regulators should afford auditors greater
leeway to deploy more innovative tech-
nologies for evidence collection. Now is
the appropriate time to expand the current
standards to include complimentary and

supplementary technologies that, when
needed, could suffice as direct physical
evidence collection methods.

These are not normal times. Lenience
by regulators, creativity by auditors, and
flexibility by clients are necessary. Some
of these steps described above, and some
additional technological and analytical
improvements, will arise due to need.
These may substantially facilitate the
ability of the audit profession and its
regulators to adapt to emerging technol-
ogies. Or, these evolutionary measures
may prove themselves to be superior
to traditional audit evidence collection
methods and be incorporated into audit
practice going forward.

Deniz A. Appelbaum, PhD, is an assis-
tant professor of accounting and finance
at Montclair State University, Montclair,
N.J. She is a member of The CPA Journal
Editorial Review Board. Shaun Budnik,
CPA, is a Deloitte LLP retired audit
partner and was the audit innovation
leader at KPMG. She is the creator
of Think Boldly, LLC, New York, N.Y.
Miklos A. Vasarhelyi, PhD, is the KPMG
Distinguished Professor of Accounting and
Information Systems and director of the
Rutgers Accounting Research Center and
Continuous Auditing and Reporting Lab
at Rutgers University, New Brunswick,
N.J. He is a member of The CPA Journal
Editorial Advisory Board.

Exhibit 2
Sample of Templates Available at CountThings

Source: https://countthings.com/; accessed 4/16/2020

01-06-2020 Infocus-Appellbaum.indd 19 6/28/20 5:13 PM

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