GROUP AUDITS Flashcards
Groups basics
-parent
-subsidary
50% or more voting rights
# of ppl on board
ability to influence decision making
required accounting: consolidate results of sub / acquisition accounting
100% assets and liabilities, sales and costs are brought together
if there’s NCI, we reflect that in FS
joint venture
joint decision making and joint control with another party
equity accounting
our share of results
associate - significant influence but not control 20-49%, no consolidation, we do equity accounting
goodwill
when we r paying more to acquire the share
more than FV of net assets
the premium
commonly tested
typical issues in exam
-incorrect classification (sub vs. associate)
-consolidation errors (diff reporting dates/ FR framework)
-RP transactions (disclosures)
-goodwill impairment
-component auditorsc
component auditors
-reputation / experience
-competence / qualifications
-objectivity / independence
-regulatory environment (diff country)
-ability to review the work of component auditor, is it logistically possible
-get confirmation of cooperation from them
-make them aware of ethical requirements
-determine their competence and capabilities
group auditor work required when assessing work of component auditor
1- assess component auditor (can we work w them)
2-send them instructions on how we expect them to perform audit and report to us:
- ethical requirements
-materiality requirments set by group auditor
-significant risk of MM
-list of RP
-reporting format, expectation of results
3- review the reporting received from component auditor
significant component identification
-financial metric 15% or more (revenue, profit, total assets)
-non financial factors (strategic significance)
extra care cuz: big part - over reliance - group opniion will be impacted
if significant:
1- review audit files of component auditor
2- assess if evidence is sufficient to support conclusions
3- gather further evidence if needed
KISS
K-keep
It
Simple
Short
tips
revise sbr
questions stow rider magnolia theo and co
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matters to consider before accepting a group audit
auditor must determine if they can obtain SAE in relation to the consolidation process, like financial info of any component of the group, to form the group audit opinion.
there may be a component auditor so must check if they can be worked with
how to decide which components require audit work
-nature of events or conditions that may give rise to ROMM at assertion level of group FS that are linked with component, eg:
newly formed or acquired entity
entities with significant changes
significant transactions to RP
significant transactions outside normal course of business
Abnormal fluctuations identified by analytical procedures
any MS identified in prior audits or any control deficiencies
Matters to learn
assessment of group and component materiality
the impact of non-coterminous year ends within a group
changes in group structure or a complex group structure.
communication with component auditors
specific areas of contact are specified:
-communication of financial info on which component auditor has done the work
-whether component auditor has done the work requested by group auditor
-compliance with relevant ethical requirements
-info of any non compliance with laws or regulations
-correction of any misstatements identified by group auditor
-indicators of management bias
-any deficiencies in internal control
-any suspected fraud of component management
-any significant matters communicated to TCWG
-Any other relevant matters
-overall findings and conclusions
consolidation process
Candidates might be expected to identify specific weaknesses or risks arising in the consolidation process. For example:
-Differences in reporting dates which may cause a risk of inappropriate figures being included in the consolidation for a component
-A client producing group accounts for the first time may have increased inherent and control risk arising from a lack of experience.
learn these standards
IFRS® 3 Business Combinations, IAS® 28 Investments in Associates and Joint Ventures,
IFRS 9 Financial Instruments,
IAS 32 Financial Instruments: Presentation
group audit procedures
describe audit procedures of the following problems:
-a business combination, including the classification of investments
-the determination of goodwill and its impairment
-group accounting policies
-intra-group trading
-equity accounting for associates and joint ventures
-changes in group structure, including acquisitions and disposals
-accounting for a foreign subsidiary.
types of audit procedures that may be performed
-Evaluating the classifications of the components of the group – for example, whether the components have been correctly identified and treated as subsidiaries, associates or joint ventures.
-Confirming that figures taken into the consolidation have been accurately extracted from the financial statements of the components and that all components are included.
-Reviewing the disclosures necessary in the group financial statements, such as related party transactions and minority interests.
-Investigating the treatment of any components which have a different financial year end or accounting policies from those of the rest of the group.
-gathering evidence of the specific consolodation adjustments related to financial reporting for eg:
goodwill calculation and impairment review
cancellation of intra group transactions
provision for URP due to within group transactions
FV adjustments related to assets and liabillities
retranslation of FS for foreign currency components
evaluating work of component auditor
-enhanced documentation requirements and application material
group auditor must review documentation of component
component definition
an entity or business activity for which the group or component management prepares fiancial info which should be included in group FS
Component auditor
works on financial info related to a component for the group audit
as requested by group auditor
component materialty
materiality level for component determined by group auditor
responsibilities of group auditor
-sole responsibility for group FS opinion
-comp auditors are source of evidence only, not referred to within group auditor report
-group auditor must decide how much reliance they will place on comp auditor work
if group auditor thinks a component company is significant in size or poses a significant risk of material misstatements
group auditor may demand that:
-further audit procedures must be carried out
-the extent that the component auditor is involved at all
group auditor may not be able to access all info about components and component auditors
the effect on audit opinion depends on the significance of the component.
if comp not significant, then it may be sufficient to just keep comp FS, comp auditor report and info kept by group management
if comp is significant, then it may be possible not being able to obtain SAE, in which case qualified or disclaimer opinion is issued
significant component
a component identified by group auditor that:
-is of individual significance to group
or
-due to specific nature or circumstances, is likely to include significant risks of MMS to group FS
how can significant component be identified
by using a benchmark
if comp A,L,CF,Profit or revenue (whichever is most appt) exceed 15% of the groups, then auditor may judge it as significant
if a component is financially significant to the group FS
group auditor or component auditor will perform a full audit based on the component materiality level
group auditor involvement in risk assessment
shud be involved in risk assessment of significant components
if significant due to nature or circumstances then do 1 of the following:
-specific audit procedures related to identified significant risks
-audit of specific account balances related to identified significant risks
-full audit using component materiality
components that are not significant components
do analytical procedures at a group level- full audit is not required
ISA requires group auditor to obtain an understanding of component auditor - how to do this
assess the following:
-independence and ethical requirements
-professional competence
-involvement of group auditor in the work of comp auditor to what extent?
-whether the component auditor operates in a regulatory environment that oversees auditors
involvement of group auditor at planning stage depends on
significance of component
risk of material misstatements at group level
extent of our understanding of component auditor
basic rule: if component is significant, group auditor will be involved at planning stage
things that shud be considered by component auditor
any restricitons to share info like confidentiality or data privacy laws
generally, comp auditor is not obliged to copoerate with group auditor (unless local jurisdiction requires it)
in practice this means same firm will be appointed for group and components
reviewing work of component auditor
must be done by group auditor
normally done by reviewing a questionnare or report filled by them highlighting major issues identified by them like uncorrected misstatements and any areas where there has been an inability to obtain SAE.
GA must determine if additional procedures are required like desigining and performing further audit procedures,
participating in closing and other key meetings bw comp auditor and comp management, and reviewing other relevant parts of comp audit documentation
communication with component auditor
requirements of comp auditor must be communicated on a timely basis
set out the work to be performed, use of that work and the form and content of the component auditor’s communication with the group engagement team
group engagement team must request comp auditor to communicate matters relevant to group audit opinion regarding the group audit
communication with group management and TCWG
-material deficiencies in design or operating effectiveness of group wide controls
-material deficiencies in internal controls in components that are significant to group (identified by both group auditor and component auditor)
-fraud identified by group auditor or comp auditor or any info indicating that fraud exists
non coterminous year end of parent and sub
not a problemm as long as it is 3 months within the parents year end
and no significant events in that time
overseas sub
the directors of the parent company have the responsibility to ensure group auditor receives all the co operation they require
immaterial components
for immaterial comps we will obtain FS and perform analytical review only
if review suggests any errors exist, more detailed work will be needed
changes in group structure
changes like acquisitions, disposals and even part disposals must be understood
check if going concern status is dependent on parents support, if so, a letter of support or comfort letter must be obtained by parent from client
major risks of group audits since they are extremely complex
-understanding group structure, pay close attention to the risk of hidden or shell companies
-consider group wide controls to ensure there are no inherent problems in audit
-group opinion is often based on work of others so significant audit risk
great care must be taken to decide whether to accept the work or not
matters to consider before accepting group auditor work
must obtain an understanding of the group including:
-materiality of proportion of FS that they are auditing and not auditing
-Group auditors degree of knowledge regarding the components business
-ROMM in the FS of components audited by component auditor
-the ability to perform additional procedures if required
-relationship with firm acting as comp auditors
also
-quality of work performed by comp auditors
-ability to get involved to obtain SAE
-availability on info on consolidation from client
if group auditor is concerned about above issues and is likely to give disclaimer opinion, then consider not accepting the engagement
issues arising when a component is located abroad
-diff accounting policies, must be aligned with parent’s policies
-language/culture problems
-issues specific to the company like hyperinflation
-education, technology, anti bribery issues
the different types of investments are
-subsidary: when there is control over the company
-associate: when there is significant influence
it is imp for group auditor to test degree of influence
this can be done by reviewing board minutes, and discussing with parent directors
existence of other significant shareholders means parent company has little influence
-check register of SH to determine potential influence
-how easy is it to obtain info about another company, this is also an indicator of significant influence
consolidation audit procedures
-confirm balances of FS of each component prior to their inclusion on the consol schedule
-review necessary disclosures for eg. RP
-gather evidence appt to the various consol adjustments
goodwill
-calculated in accordance with ifrs 3 business combinations (to provide transparency of the value of NCI)
-standard allows measurment at share of sub net assets or FV. The latter results in 100% of goodwill analysed between parent and NCII elements for consol
FV uses in consol
-FV of assets and liabilities need to be determined for calculating goodwill
-share price on acquisition is used for the FV of NCI
auditor approach for determining FV
-obtain understanding of entity’s process for determining FV
-identify assess risk of MMS at assertion level
-perform audit procedures on data used to develop FV
-evaluate whether FV measurements have been properly determined
implications for auditor’s report when comp auditor report is modified
-assess materiality and risk in the context of group as a whole
-consider the materiality of modification in relation to the whole group FS
comp modification situations
-material modification but no impact on group opinion
-pervasive modification, material impact on group FS
-ultimate opinion is matter of judgement
-if unable to obtain SAE of comp, consider implications for auditor report, maybe modification will be required due to lack of SAE
joint audit
when 2 or more auditors are resp for the engagement and jointly produce the auditor’s report
reasons for joint report
-new acquisitoon, P may want auditor to collab with sub auditor
-widely dispersed locations
-foreign subs, local laws, local auditors may collab w group auditors
-some companies may prefer to use local acccountants while also enjoying benefits of big firm
considering before accepting joint audit assignment
experience and standards of other firm
allocation of work needs to be agreed
agree if joint pr separate EL
both must sign auditor report and are resp for whole audit
jointly liable in case of litiigatoon
complex to manage and potentially expensive
transnational audits
audit of FS which are relied upon outside the entity’s home jurisdiction
eg for lending, investment, regulatory decision purpose.
includes all companies with listed debt/ equity
issues of transnational audits as per clients
-variations in audit approaches, diff types of audit quality
-incomplete nature of ISA adoption. variations in audit approach
-cultural differences, diff audit approaches
response to transnational audit issues
-FOF forum of firms created by big4 now 20+ firms
-IAASB setup trans auditors committee to provide guidance to FOF
responsibilities of TAC- transnational audit committee
-identify audit practice issues, and recommend to standard setting boards if changes in standards r required
-provide a forum to discuss best practices like quality, independence, training
-propose members to IFAC standard setting boards
-act as a line bw firms and regulators with respect to quality, transparency of international networks
