Module 22

Question 1

Parent company responsible for

Answer 1

Preparing individual accounts for the parent company and consolidated financial statements for the group as a whole

Question 2

Consolidation adjustments (2)

Answer 2

• Adjustments made as part of the process to ensure compliance with the relevant accounting standards and company law
• To ensure financial statements present financial information as a single economic entity

Question 3

Consolidation adjustment examples

Answer 3

• Elimination of investments in subsidiaries

- Where there have been intra-group transactions

Question 4

Consolidation accounting issues (9)

Answer 4

• 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

Question 5

Different accounting policies

Answer 5

IFRS 10 requires uniform accounting policies to be used throughout group when preparing consolidated financial statements

Question 6

Non-coterminous accounting periods

Answer 6

Components year end must be within three months of parent company’s year end date

Question 7

Foreign subsidiaries

Answer 7

Additional complexities eg group currency translations

Question 8

Fair values and goodwill

Answer 8

Can result in complexities eg impairment reviews/ changes in values of, or new, assets or liabilities

Question 9

Group taxation

Answer 9

Group VAT election/ consortium relief must be in line with relevant legislation

Question 10

Acquisitions made during the accounting period

Answer 10

Only include results of new subsid from date of acquisition, involves time apportionment and judgement > complexity

Question 11

Related Parties

Answer 11

RP transactions may be harder to identify due to increased complexity of organisational structure, transactions must be adequately disclosed

Question 12

Subsidiaries not wholly owned

Answer 12

Non controlling interests in group

Question 13

Disclosure

Answer 13

Consolidated financial statements require a higher level of disclosure than individual financial statements

Question 14

Objective of consolidation process

Answer 14

To fulfil statutory obligation to prepare a set of consolidated financial statements that present a true and fair view of the group’s economic performance and position within a required timeframe

Question 15

Example of consolidation process control activities

Answer 15

• Group instructions

Question 16

Consolidation > Phase 1

Answer 16

Data Collection

Question 17

Consolidation > Phase 2

Answer 17

Amalgamation of data

Question 18

Consolidation > Phase 3

Answer 18

Posting consolidation adjustments

Question 19

Consolidation > Phase 4

Answer 19

Reporting

Question 20

An audit team of the same firm still falls under definition of component auditor, however, NET of procedures will be lower as (2)

Answer 20

• There will be previous experience with the component auditor
• The group engagement team and component auditor are subject to common policies and procedures

Question 21

Assigned component materiality (by group) will be used by component audit team for

Answer 21

Purpose of group audit only. For opining on individual financial statements, component auditor will assess appropriate materiality in line with ISA 320

Question 22

Audit risks for a group engagement can arise from three different areas of the group

Answer 22

• Risks within each component
• Risks arising from group structure or changes in GS
• Deficiencies of group wide controls that impact consolidation process

Question 23

Level of work to be performed by component auditors depends on (4)

Answer 23

• Significance of the component
• Any identified RoMM that affects the group financial statements
• Assessment of group wide controls and whether they are deemed to operate effectively
• Group engagement’s understanding of the component auditor

Question 24

Scoping the group

Answer 24

Assessing whether each component is significant or non-significant

Question 25

Additional items to include in group ASM (7)

Answer 25

• Group structure
• Reporting instructions
• Details of group engagement team
• Reporting documents to be completed by component
• Audit budget and fee allocation
• Group reporting deadlines
• Confirmation of group financial reporting framework

Question 26

Testing of group wide controls (4)

Answer 26

• Inspect consolidation journals
• Testing access controls and journals
• Reading board minutes and internal audit reports
• Enquire of group finance team regarding experience and qualifications

Question 27

Substantive tests on consolidation itself (3)

Answer 27

• Review of key complex figures eg tax/ goodwill
• Review of financial statements of subsidiaries
• Analytical review of consolidated results compared to PY

Question 28

Additional time must be built into audit process to enable group auditor to (6)

Answer 28

• Review work of component auditors
• Review reporting documentation
• Obtain management representation letters
• Consider any modifications of subsids audit reports
• Discuss salient issues
• Evaluate effect of uncorrected misstatements

Question 29

Two assessments after audit work completed

Answer 29

• Going concern assessment

- Subsequent events review

Question 30

Group Management Letter

Answer 30

Group auditors report significant internal control deficiencies identified in group-wide controls (and in each component)

Question 31

Group auditor responsibility for opinion in group accounts

Answer 31

Group auditor has sole responsibility

Question 32

Component auditors mentioned in group auditor’s report

Answer 32

Component auditors should not be mentioned in the opinion on the consolidated accounts

Question 33

Auditor responsibilities > letter of support (3)

Answer 33

• Obtain written confirmation from company’s solicitors
• Certified copy of special resolution amending company’s constitution
• Copy of the most recent financial statements of company providing support, to ensure financially able to give support