Checklist: 7 Key War-Related Issues for Businesses to Monitor
Guidelines for Assessing Business Impacts, Preparing Financial Statements, and Key Financial Statement Assertions
Objective
These Checklists had been prepared to assist the management, accounting function and auditors in performing a preliminary evaluation of whether the entity had been affected by war or geopolitical conflicts. If such impacts existed, it should identify which items in the financial statements that might be affected, as well as which the financial statement assertions that were at risk of material misstatement.
Tick (✔) that applied to your business to perform the level of proactive risk assessment:
Explanation “Assertion” (Assertions made by management in the financial statements)
| Assertion | Meaning |
| Occurrence / Existence | Transactions and events had occurred, and the related assets and liabilities existed at the reporting date. |
| Rights and Obligations | Entity held the rights to assets and had the obligations for liabilities. |
| Completeness | All transactions, liabilities, and relevant disclosures had been completely recorded. |
| Accuracy | Transactions and amounts have been recorded at the correct amounts in accordance with applicable accounting standards. |
| Valuation and Allocation | Assets, liabilities, and shareholders’ equity had been appropriately valued and allocated. |
| Classification | Transactions and events had been appropriately classified in accordance with economic substance. |
| Presentation and Disclosure | Financial statements were appropriately presented, and disclosures in the notes to the financial statements were complete and adequate. |
| Cut-off | Transactions had been recorded in the correct accounting period in which they are incurred. |
1. Risks in Energy and Production Costs
| Assessed items | Yes | No |
| Entity had energy costs (Petrol, Electric, Gas) as significant component of total cost | □ | □ |
| Significant increase in energy cost | □ | □ |
| Entity unable to fully pass on increased costs to customers | □ | □ |
| Significant decrease in gross profit compared to the previous year | □ | □ |
| Key Assets (such as machinery, equipment, or right-of-use assets (ROU)) might Lose Efficiency | □ | □ |
Items in Financial Statements that should be assessed
| Items in Financial Statements | Existence | Rights & Obligations | Completeness | Accuracy | Valuation & Allocation | Classification | Presentation & Disclosure |
| Property, plant and Equipment | □ | □ | |||||
| Right-of-use assets | □ | □ | |||||
| Intangible assets | □ | ||||||
| Goodwill | □ | ||||||
| Disclosure related to uncertainty of provisions | □ |
Impacts on the Business and the Financial Statements
Conflict in the Middle East might lead to higher crude oil and energy prices, resulting in increased production costs, transportation costs and operating expenses.
If the entity was unable to increase costs through higher selling prices, the profitability and cash flows might decline significantly. It might constitute an impairment indicator that an impairment test should be performed for property, plant and equipment, right-of-use assets, or goodwill todetermine whether the impairment losses should be recognized and the obligations or liabilities arising from changes in the planned use of those assets had been completely and appropriately recognized.
Management and Accounting Function’s Role: Management should promptly reassess cash-generating units (CGUs). The account is responsible for performing impairment tests on machinery, cash-generating units (CGUs), and goodwill, and recognizing impairment losses. In addition, disclose the significant estimation uncertainties and key assumptions underlying in the notes to the financial statements.
Auditor’s Role: The auditor should review the assumptions used in management’s impairment assessment and evaluate the reasonableness of the projected future cash flows, including key assumptions such as the growth rate and discount rate. The auditor should also verify that the identification of impairment indicators, the recognition of impairment losses, and the related disclosures in the financial statements are appropriate, complete according to the accounting standards.
2. Risks in supply chain
| Assessed items | Yes | No |
| Import main raw materials | □ | □ |
| Seller or producer in impacted areas or problem from disrupted production | □ | □ |
| Longer period to delivery goods to delay production process | □ | □ |
| Entity had to change supplier during the year with higher cost to maintain production line | □ | □ |
Items in Financial Statements that should be assessed
| Items in Financial Statements | Existence | Completeness | Accuracy | Cut-off | Valuation & Allocation | Presentation & Disclosure |
| Inventories | □ | |||||
| Allowance for declining in value of inventories | □ | □ | ||||
| Work in progress | □ | □ | ||||
| Cost of goods sold | □ | □ | ||||
| Revenues | □ | □ |
Impacts on the Business and the Financial Statements
Disruptions to international shipping routes might delay the delivery of raw materials and finished goods, resulting in supply shortages and increased procurement costs. International transportation disruptions might also interrupt production, resulting in production delays, excess inventory, or lost sales due to the entity’s inability to deliver goods on time.
Management and Accounting Function’s Role: Management should implement supply chain risk mitigation strategies, including identifying alternative suppliers and securing backup sources of raw materials. The account is responsible for reviewing project costs, assessing whether the closing inventory balance was overstated or contains obsolete or slow-moving inventory, and ensuring that revenue and cost of sales were recognized in the appropriate accounting period through rigorous cut-off procedures.
Auditor’s Role: The auditor should perform cut-off testing on revenue and cost of sales transactions immediately before and after the reporting date to verify that transactions had been recognized in the correct accounting period. The auditor should also assess whether the allowance for obsolete or impaired inventories has been recognized adequately and completely, and whether the inventory valuation was appropriate.
3. Risks in shipping cost and transportation
| Assessed items | Yes | No |
| Significant increase in shipping cost or sea insurance | □ | □ |
| Longer period in transportation | □ | □ |
| Change in transportation route to avoid risk areas | □ | □ |
| Slower sale of goods and affect selling price lower than cost | □ | □ |
| Entity had non-cancellable agreement for advance delivery and risk that generated loss | □ | □ |
Items in Financial Statements that should be assessed
| Items in Financial Statements | Completeness | Accuracy | Valuation & Allocation | Presentation & Disclosure |
| Inventories | □ | |||
| Allowance for obsolete goods | □ | □ | ||
| Cost of goods sold | □ | |||
| Provision for an onerous contract | □ | □ | □ | |
| Risks disclosure in supply chain | □ |
Impacts on the Business and the Financial Statements
The need to avoid shipping routes through high-risk areas such as the Red Sea or the Suez Canal might result in significantly longer transit times and substantially higher freight costs.
Entities that relied heavily on imports or exports might face increased operating costs and reduced competitiveness. Consequently, it should assess the value in certain inventories to decline or the inventory obsolescence to increase.
Management and Accounting Function’s Role: Management should carefully evaluate fixed-price contracts and other forward pricing arrangements to assess their financial implications. The account is responsible for comparing the cost of inventories with their net realizable value (NRV). If the cost exceeds the expected selling price, the inventory should be written down to NRV immediately. In addition, the accounting function should assess whether an onerous contract provision is required for contracts under which the entity is obligated to deliver goods or services at a loss.
Auditor’s Role: Review the calculation methodology and selling price information after the reporting date to evaluate the reasonableness of provisions recognized for losses arising from long-term contractual commitments.
4. Risks in trade receivables
| Assessed items | Yes | No |
| Major customer or export market situated in disputed area or indirect impact | □ | □ |
| Receivables delay payment and request for credit term | □ | □ |
| Increase in overdue receivables | □ | □ |
| Certain trade receivables started severe lack of liquidity or lack of communication | □ | □ |
Items in Financial Statements that should be assessed
| Items in Financial Statements | Existence | Rights & Obligations | Completeness | Accuracy | Occurrence | Valuation & Allocation |
| Trade receivables | □ | □ | □ | |||
| Allowance for Expected Credit Losses (ECL) | □ | □ | □ | |||
| Revenues | □ | □ |
Impacts on the Business and the Financial Statements
Customers affected by rising costs, declining sales or liquidity constraints might delay payments or fail to settle the obligations when due.
Management and Accounting Function’s Role: Management should establish prudent credit policies, actively monitor and expedite debt collection, and consider debt restructuring for customers experiencing financial difficulties. The account is responsible for updating the forward-looking information used in the Expected Credit Losses (ECL) model to reflect the economic conditions and uncertainties arising from the war, ensuring that the ECL estimates appropriately incorporate.
Auditor’s Role: The auditor should examine the aging report for trade receivables and review management’s methodology for assessing and measuring Expected Credit Losses (ECL), including the appropriateness of the assumptions, forward-looking information, and economic scenarios used.
5. Risks in financial markets and exchange rate
| Assessed items | Yes | No |
| Lots of investment in overseas securities, debt instrument or funds | □ | □ |
| Overseas currency revenue or cost structure without hedging | □ | □ |
| High fluctuation in currency or significant loss from currency exchange | □ | □ |
| Significant decrease in Fair Value of securities | □ | □ |
Items in Financial Statements that should be assessed
| Items in Financial Statements | Accuracy | Valuation & Allocation | Presentation & Disclosure |
| Investment Fund | □ | □ | |
| Financial assets | □ | □ | |
| Gain (loss) from exchange rate | □ | ||
| Financial risks disclosure | □ |
Impacts on the Business and the Financial Statements
War often led to significant volatility in global financial markets and the investors shifted the capital toward safe-haven assets and causing rapid fluctuations in foreign exchange rates.
Management and Accounting Function’s Role: Management should closely monitor developments in the financial markets and appropriately utilize risk management instruments, such as forward contracts, to mitigate foreign exchange risk. The account is responsible for reviewing and measuring the fair value of financial assets and investments at the reporting date based on current market information, recognizing foreign exchange gains or losses, assessing and recognizing any impairment losses on investments where appropriate, and providing transparent disclosures of the entity’s foreign exchange risk and liquidity risk.
Auditor’s Role: The auditor should review the appropriateness of the exchange rates applied at the reporting date and evaluate the reliability of the market price data and other valuation inputs used in determining the fair value of investments.
6. Onerous contract
| Assessed items | Yes | No |
| Long-term contract, construction contract or advance service contract | □ | □ |
| Forward selling price or specify fixed price | □ | □ |
| Significant increase in cost | □ | □ |
| Decrease profit in project or negative to certain loss | □ | □ |
Items in Financial Statements that should be assessed
| Items in Financial Statements | Completeness | Accuracy | Valuation & Allocation | Presentation & Disclosure |
| Onerous provision | □ | □ | ||
| Work in progress | □ | □ | ||
| Project cost | □ | □ | ||
| Disclosure risks from onerous contract | □ |
Impacts on the Business and the Financial Statements
Entities with long – term construction contracts, manufacturing contracts or supply agreements might face a rapid increase in costs resulting from higher energy prices, raw material costs, and transportation expenses.
If the costs of fulfilling a contract exceeded the economic benefits expected to be received, the entity might be required to recognize Onerous Contract Provision.
Management and Accounting Function’s Role: Management should seek to negotiate more flexible contractual terms or consider the legal implications arising from the contract. The account is responsible for carefully estimating the total cost to complete the project (Estimated Total Cost). If the project was expected to incur a loss, the accounting function should immediately recognize an onerous contract provision in the statement of profit or loss, rather than waiting until the project had been completed or the goods or services had been delivered.
Auditor’s Role: The auditor should review the assumptions and contractual details with the engineering team and/or management, evaluate the completeness and reasonableness of the estimated total cost to complete the project, and verify that any expected losses have been appropriately identified and that the onerous contract provision had been recognized accurately and appropriately.
7. Risks in liquidity and going concern
| Assessed items | Yes | No |
| Cash flow from negative operation | □ | □ |
| Consecutive period of losses or current liabilities might significantly exceed current assets | □ | □ |
| Entity unable to comply with debt covenant | □ | □ |
| Rely on short-term loan | □ | □ |
Items in Financial Statements that should be assessed
| Items in Financial Statements | Completeness | Classification | Presentation & Disclosure |
| Loan | □ | □ | |
| Current liabilities | □ | □ | |
| Going concern assessment | □ | ||
| Events after the reporting period | □ | □ | |
| Disclosure related to uncertainty in going concern | □ |
Impacts on the Business and the Financial Statements
In some entities, the effects of war might be so severe to adversely affect the entity’s ability to continue as a going concern such as a significant decline in sales, a rapid increase in operating costs or insufficient access to sources of financing.
Management and Accounting Function’s Role: Management is responsible for preparing a business recovery plan, developing cash flow forecasts covering at least the next 12 months, securing alternative sources of financing, negotiating waivers or amendments in the event of breaches of loan covenants, and implementing appropriate risk mitigation measures. The accounting function was responsible for presenting this information in the notes to the financial statements, including transparent disclosure of any material uncertainties that might cast significant doubt on the entity’s ability to continue as a going concern.
Auditor’s Role: The auditor should perform a thorough evaluation of management’s cash flow forecasts, assess the feasibility of management’s recovery plans and proposed actions, and determine whether the financial statements had been appropriately prepared on the going concern basis. The auditor should also assess whether the disclosures relating to material uncertainties associated with the going concern assumption are adequate and complete.
📌 Summary Assertion that had the highest risk in case of war
After considering all relevant factors collectively, the areas of financial statement risk that were subject to the greatest pressure and required the highest level of caution were as follows:
✓ Valuation and Allocation: The situation had affected the reasonableness of the assumptions used in accounting estimates, the valuation of assets, as well as the ability to meet debt obligations and the assessment of impairment.
✓ Presentation and Disclosure: Users of the financial statements needed transparent and clear information regarding the risks, the uncertainties surrounding the underlying assumptions and the entity’s plans for addressing those risks.
✓ Completeness: In particular, estimated liabilities or losses arising from onerous contracts should be recognized in a timely and complete manner.
✓ Accuracy: Particular attention should be paid to the calculation of accumulated costs and the effects of foreign currency translation resulting from exchange rate volatility.
✓ Classification: For example, long – term liabilities might need to be reclassified as current liabilities in the event of a default or a breach of loan covenant.
The effects of war primarily affected accounting estimates, asset valuations, recoverability of receivables, asset impairment and financial statement disclosures rather than the existence of items reported in the financial statements.