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ABS > Mod 22: Group consolidations > Flashcards

Mod 22: Group consolidations Flashcards

1
Q

What is a group?

A

Group is a parent company and all its subsidiaries

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2
Q

What is a subsidiary?

A

Is an entity that is controlled by another entity (the parent company)

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3
Q

What is a set of consolidated financial accounts?

A

Consolidated group accounts/financial accounts = financial statements of the group presented as a single entity
Required by CA 2006 and IFRS 10

  • group accounts only show the transactions and balances external to the group
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4
Q

Group instructions include:

A

Everything noted on pg 929 and:

  • stocktaking instructions
  • exchange rates to be use and taxation issues
  • accounting contacts
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5
Q

Consolidation process phases

A
  1. Collection of data
  2. Amalgamation of data
  3. Posting consolidation adjustments
  4. Reporting

Link to module 9, identify weaknesses, risk/implication and control activity improvements

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6
Q

Specific accounting issues relating to the consolidation. Must be identified and responded to

A
  • different accounting policies
  • non-coterminous accounting periods
  • foreign subsidiaries
  • fair values and goodwill
  • group taxation
  • acquisitions made during the accounting period
  • related parties
  • subsidiaries not wholly owned
  • disclosure (consol = higher level of disclosure)
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7
Q

Rights of a group auditor

A

Parent and component auditor are entitled to same basic rights as auditor of an individual company (CA 2006.

As well as:

  • require from a UK-incorporated subsidiary and its auditors ALL INFORMATION AND EXPLANATIONS AS THEY MAY REASONABLY REQUIRE (CA 2006)
  • if sub NOT incorporated in the UK => auditor requires a PARENT COMP to take ALL REASONABLE STEPS TO OBTAIN INFORMATION AND EXPLANATIONS (CA 2006)
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8
Q

Group audit stages

A
  1. Acceptance and continuance
  2. Planning
  3. Testing group wide controls over the consolidation
  4. Testing the consolidation
  5. Completion and reporting
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9
Q

Acceptance and continuance procedures: BAILMAN

A 
Basis for performance
Auditors previous 
ID Checks - client identification 
Legal and financial stability 
Management integrity 
Ability to audit - both practically and ethically
Nature and users
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10
Q

Significant component

A
  • of individual significance, or
  • likely to lead to significant risk of material misstatement

BIG OR RISKY

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11
Q

Component materiality

A

In addition to page 935 in Tolley

Component materiality can be based on ROMM and relevant size in relation to the group

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12
Q

Exam tip: Audit risks can arise from three different areas of the group

A
  • risks within EACH COMPONENT
  • risk arising from GROUP STRUCTURE or changes in group structure
  • DEFICIENCIES of GROUP-WIDE CONTROLS that impact on consolidation process
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13
Q

Group audit strategy memorandum

A

BSSMART plus additional considerations:

  • confirmation of the ETHICAL requirements to be adhered to by the group and component teams
  • group STRUCTURE
  • list of RP
  • GROUP MATERIALITY, including component materiality levels
  • REPORTING instructions
  • details of GROUP ENGAGEMENT TEAM and component team MEMBERS
  • REPORTING DOCS to be completed by the component auditors and returned to group team
  • audit BUDGET and fee allocation
  • group reporting DEADLINES
  • scope of the components, including WORK to be performed including level of group involvement
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14
Q

Testing group-wide controls: examples of tests

A
  • inspect consolidation JOURNALS for authorisation, back-up and correctness
  • testing ACCESS CONTROLS and journals for robustness and validity (restricting access)
  • reading BOARD MINUTES and INTERNAL AUDIT REPORTS to ensure no component is ignored (consol boundary)
  • enquire of the group finance team regarding thei EXPERIENCE and QUALIFICATIONS
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15
Q

Testing the consolidation

A

Perform substantive tests on the consolidation itself
Analytical procedures: Three separate aspects may be identified
1. review of KEY FIGURES (more complex figures => use analytics to determine reasonableness)
- group tax
- opening and closing reserves
- minority interest
- interco balances and transactions
- associates
- goodwill

  1. Reviews of FS of SUBS
    - applies whether or not the sub is audited by the group auditor, with the level of work determined
    - subs should be reviewed individually so that group trends are not hidden when all components are added together
  2. Review of consolidated FS (analytical review of the CONSOLIDATED RESULT compared to PY and expectation => evidence that consolidation of subs is CORRECT and MAKES SENSE)
    - review to ensure all material exceptional items and PY adjs are treated consistently and correctly
    - examination of material events and key items in subsidiaries’ accounts
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16
Q

Other substantive procedures over the consolidation

A

Consolidated accounts and consolidation worksheet should be substantively tested

17
Q

Completion and reporting

A

Once consolidation has been FULLY AUDITED and group accounts DRAWN UP => completion procedures as discussed in mod 20
Group auditor must consider the EVIDENCE collected by any component auditor and any SUBSEQUENT EVENTS before group auditors’ report can be drafted

18
Q

Completion considerations - additional time must be built in to the audit process due to consolidated accounts containing results of components NOT AUDITED BY THE GROUP AUDITOR

A
  • REVIEW the WORK of the component auditors and the group team
  • review any REPORTING DOCUMENTATION from component auditors
  • obtain MGMT REPRESENTATION letters (for group and components)
  • DISCUSS all salient ISSUES with the component auditors
  • evaluate the effect of UNCORRECTED MISSTATEMENTS
19
Q

GC and subsequent events

A

GC assessment and subsequent events review must be carried out over the group as a whole

20
Q

Group Audit Highlights Memorandum

A

records the OUTCOME of the audit work
discussion of any contentious areas and any matters the group engagement partner must resolve
include discussion of the work done on any components not audited by the group auditor

21
Q

Group Mgmt Letter

A

Group will report significant internal control deficiencies identified in group-wide controls as well as those in each component to TCWG

22
Q

Auditor’s report

A

Group auditor has SOLE RESPONSIBILITY for the opinion on the consolidated accounts.
NO MENTION OF COMPONENT AUDITORS should be MADE

Group auditor should carefully consider the nature and significance of any modification in the component auditors’ reports. It may be that some, all, or none of these will need to be reflected in the group auditors’ report on the consolidated FS

23
Q

Financial support: Letter of support

A

agreement made between a parent company and its subsidiary under which one company agrees to provide support in the form of funding to enable the other company to meet its debt and liabilities as and when they fall due

e.g. may be required from the holding company where a subsidiary is not a GC

24
Q

Letter of support details

A

AMOUNT AND NATURE OF THE SUPPORT PROMISED should be ADEQUATE to ensure the recipient CONTINUES AS A GC.
Holding company or subsidiary providing the support should be FINANCIALLY ABLE TO GIVE THE SUPPORT FOR THE PERIOD PROMISED. Letter of support is no use if this can’t be demonstrated

The auditor needs to determine whether the holding company has the POWER to provide a letter of support. The following should be obtained:

  • WRITTEN CONFIRMATION from the company’s solicitors confirming it is permitted by company’s constitutions
  • if transaction is not permitted by company’s constitutions, a certified copy of the SPECIAL RESOLN amending it to give company necessary capacity to give letter of support
  • copy of the MOST RECENT FS - to ensure it is financially able to give the support

ABS (14 decks)

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