Group Transnational Audit M S M FAREEN MBA
Group & Transnational Audit M. S. M FAREEN MBA (Reading) UOC, BSc FAREEN Management (Special) Hons. Advanced Audit & Assur
Overview Advanced Audit & Assur
Group audit considerations The principles of auditing a group are the same as the audit of a single company and all of the auditing standards are still relevant to a group audit. There are, however, some specific considerations relevant to the audit of a group. • Group financial statements require numerous and potentially complicated consolidation adjustments. [INTRA GROUP TRANSACTION, INTER COMPANY, URP, MID YEAR ACQUISITIONS] • Specific accounting standards relating to group financial statements must be complied with. [IFRS 10, IAS 28, IFRS 12, IFRS 03, IAS 30] • The components of the group (i. e. the subsidiaries) may be audited by firms other than the group auditor. [DIFFERENT FIRM AND DIFFERENT PROCEDURES] • The organisation and planning of a group audit may be significantly more complex than for a single company. [LINE BY LINE ADDITION] • The group auditor is responsible for the audit of the parent company financial statements and the consolidated financial statements. [GROUP AUDITOR – LEADER] • The component auditor is responsible for the audit of the subsidiary financial statements. [EXCEPT SIGNIFICANT COMPONENT] Advanced Audit & Assur
Acceptance as group auditor The group auditor will consider the following before accepting appointment: • Whether sufficient appropriate audit evidence can reasonably be expected to be obtained in relation to the consolidation process and the financial information of the components of the group. • Where component auditors are involved, the engagement partner shall evaluate whether the group engagement team will be able to be involved in the work of the component auditors. • Whether reliance can be placed on the component auditor's work. [COMPETENCE, RESOURCES, SKILLS] • The materiality of the portion of the group not audited by them. • Understanding of the group, the components and their environments. [KOB] • Any other risks identified which affect the group and its financial statements. [GROUP AUDIT RISK] Advanced Audit & Assur
Acceptance as component auditor The component auditor will consider the following before accepting appointment: • Whether they are independent of the parent and component companies and can comply with ethical requirements applying to the group audit. • Whether they possess any special skills necessary to perform the audit of the component and are competent to perform the work. • Whether they have an understanding of the auditing standards relevant to group audits and can comply with them. • Whether they have an understanding of the relevant financial reporting framework applicable to the group. • Whether they can comply with the group audit team instructions including the deadlines. • Whether they are willing to have the group auditor involved in their work and evaluate it before relying on it for group audit purposes. Advanced Audit & Assur
Planning and risk assessment Understanding the client The group auditor must: • Enhance its understanding of the group, its components and their environments including group-wide controls, obtained during the acceptance/continuance stage. • Obtain an understanding of the consolidation process, including instructions issued by group management to components. • Assess the risks of material misstatement. • Confirm or revise its initial identification of components that are likely to be significant. Advanced Audit & Assur
• Assess the risks of material misstatement? Why risk of material misstatement is high in group audit? Nature become more complex Group level controls 1. need to understand control systems – group level 2. control activities 3. control objectives 4. test of control – group level controls Risk of material misstatements Transaction become more complex due to complicated accounting standards & assertions 1. intra group transactions – completeness 2. IFRS 10 – IFRS 03 – IAS 27 – IAS 28 – IFRS 12 3. ESTIMATIONS – FAIR VALUE ADJUSTMENT, MIDD YEAR ACQUISITION Advanced Audit & Assur
Significant components – ISA 600 A significant component is identified by using an appropriate benchmark (such as assets, liabilities, cash flows, profit, revenue). The benchmark is a matter of auditor judgment. The examiner considers a component to be significant if it exceeds 15% of the group total. ISA 600 Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors) requires the auditor to perform a full audit of components which are classed as significant components. Analytical procedures (rather than a full audit) may be performed on components which are not significant. Advanced Audit & Assur
PARENT SUBSIDIARY 01 SUBSIDIARY 02 NOT A SIGNIFICANT COMPONENT 15% - EXCEEDING THRESHOLD CAN PERFORM ONLY ANALYTICAL REVIEW PROCEDURES FULL AUDIT NEED TO PERFORM BY GROUP AUDITOR INCLUDING COMPONENT AUDITOR’S WORK ISA 600 – SPECIAL CONSIDERATION Advanced Audit & Assur
Understand the component auditor The group auditor should obtain an understanding of: • Whether the component auditor understands and will comply with the code of ethics. • The professional competence of the component auditor. • Whether the group auditor will be able to be involved in the work of the component auditor. • Whether the component auditor operates in a regulatory environment that actively oversees auditors. If the group auditor has any doubts about the component auditor or their ability to do the work the group auditor should obtain the audit evidence in respect of the component directly. IF ABOVE MENTIONED FACTORS NEED TO BE UDERSTOOD BY BOTH PARTIES. [ GROUP AUDITOR] THIS WILL AVOID QUALITY ISSUES , DETECTION RISK Advanced Audit & Assur
Materiality The group auditor is responsible for establishing: • Materiality and performance materiality for the group financial statements as a whole. • Materiality for components where they are to be audited by other auditors. • GROUP AUDIT REPORT IS PRIMARILY BASED ON GROUP MATERIALITY LEVEL NOT BASED ON INDIVIDUAL MATERIALITY LEVEL • GROUP AUDITOR ONLY DECIDE GROUP MATERILIATY LEVL AND GROUP PERFORMANCE MATERIALITY • MATERIALITY FOR COMPONENT DECIDED BY COMPONENT AUDITOR UNDER THE DIRECTION OF GRAOUP AUDITOR. THEREFORE COMPONENT AUDIT MATERIALITY ALSO UNDER GROUP AUDITOR Advanced Audit & Assur
Audit risks Specific risks affect group financial statements such as: • • • Valuation of goodwill [IFRS 03] Translation of foreign subsidiaries in the consolidation process [IAS 21] Non-coterminous year-ends [DIFFERENT YR ENDS] Inconsistent accounting policies used across the group [ESTMATE POLICIES] Fair value adjustments [NET ASSETS] Calculation of non-controlling interests IFRS 03 Elimination of inter-company balances and trading Profit apportionment where there has been an acquisition or disposal Simple transposition or arithmetical errors in the consolidation process. [LINE BY LINE ADDITION METHOD] IFRS 03 – BUSINESS COMBINATIONS [REVISED] CONSIDERATION PAID NCI FV TOTAL CONSIDERATION XXX XXX - NET ASSETS OF SUBS. AT ACQ DATE GOOD WILL IMPAIRMENT GOOD WILL GOODWILL AFTER IMPAIRMENT (XXX) XXXX Advanced Audit & Assur
Auditing the consolidation schedule Audit procedures PROCEDURES TO BE PERFORMED OVER GROUP AUDIT Agree the figures from the component financial statements into the consolidation schedule to ensure accuracy. Recalculate the consolidation schedule to ensure arithmetical accuracy. Recalculate the translation of any foreign components to ensure accuracy. Recalculate any non-controlling interest balances to verify accuracy. Agree the date of any acquisitions or disposals and recalculate the time apportionment of the results for these components included in the consolidation. • Evaluate the classification of the component (i. e. subsidiary, associate, joint venture etc. ) to ensure this is still appropriate. • For investments in associates ensure that these are accounted for using the equity method of accounting and not consolidated. • • • Advanced Audit & Assur
• Review the financial statement disclosures for related party transactions. • Review the policies and year-ends applied by the components to ensure they are consistent across the group. • Reconcile inter-company balances and ensure they cancel out in the group financial statements. • Assess the reasonableness of the client's goodwill impairment review to ensure goodwill is not overstated. • Calculate any goodwill on acquisition arising in the year paying special attention to: – Consideration paid – agree to bank statements. – Acquisition related costs – ensure they have been expensed and not capitalised. – Contingent consideration – whether this has been valued at fair value taking into account the probability and timing of payment. – Deferred consideration – should be discounted to present value. Advanced Audit & Assur
Completion & reporting Review of the work of the component auditor The group auditor must: • Review the work of the component auditor to ensure it is sufficient and appropriate to rely on for the purpose of the group auditor's report. This may be achieved by the component auditor sending the group auditor a questionnaire or checklist which identifies the key aspects of the audit. • Discuss any significant matters that have arisen with the component auditor or group management, as appropriate. • Make an assessment as to whether any further work is needed. • Consider whether the aggregate effect of any uncorrected misstatements will have a material impact on the group financial statements. Advanced Audit & Assur
Letters of support If a subsidiary has going concern issues the parent company may offer financial support to enable it to continue trading for the foreseeable future. If this is the case the directors must give the component auditor a letter of support which confirms their intention to support the subsidiary. This is also known as a comfort letter. The component auditor should not take this at face value. They should consider the position of the parent and the group to help identify whether it has the resources to fulfil its promise of support before accepting the letter as sufficient appropriate evidence of the going concern basis for the subsidiary. The group auditor must consider the impact of the going concern issues for the group as a whole. The parent company must disclose this guarantee of assistance in their financial statements. Advanced Audit & Assur
Auditor’s report • Where one or more of the subsidiaries has a modified audit opinion (regardless of who audited the subsidiary) the group auditor must consider the impact of the issue on the group financial statements, according to group materiality levels. • If the matter is not material in a group context, an unmodified opinion will be issued. [TRUE AND FAIR VIEW] • If the matter is material to both the component and the group the auditor should consider whether the issue causing the modification can be resolved as a consolidation adjustment and aim to resolve the matter with the client. If so, an unmodified opinion can be issued. [TRUE AND FAIR] • If the matter cannot be resolved through the consolidation process, the modification should be carried through to the group audit opinion, (e. g. if the evidence is not available to support the balance). [MODIFY OPINION] • Note that a matter which is pervasive to the component may be material but not pervasive to the group. In which case, a disclaimer of opinion or adverse opinion in a subsidiary will be altered to a qualified opinion in the group auditor's report. Advanced Audit & Assur
Reporting to those charged with governance The following matters should be reported to those charged with governance of the group: • Overview of the work performed and involvement in the component auditor's work. • Areas of concern over the quality of the component auditor's work. • Difficulties obtaining sufficient appropriate evidence. • Fraud identified or suspected. Advanced Audit & Assur
Joint audits When two audit firms are appointed to provide an opinion on a set of financial statements. They will work together planning the audit, gathering evidence, reviewing the work and providing the opinion. Before accepting a joint audit, the firm must consider the level of risk associated with issuing a report alongside the other firm. The auditor's report will be signed by both firms and they will be jointly responsible if the report is wrong. The firm should consider the experience and quality of the other firm to ensure they are competent. If accepted, an engagement letter should be signed and the planning can commence which will involve agreeing an acceptable and fair division of the workload. Advanced Audit & Assur
Benefits • Retention of subsidiary auditor (and therefore their cumulative audit knowledge and experience) following acquisition. • Availability of a wider range of resources (particularly important across national boundaries). • Possible efficiency improvements. • An increase in audit quality as each firm will review the other’s work which should reduce the risk of misstatements going undetected. Two audit firms will be better able to stand up against management who are manipulating the financial statements. • An increase in auditor independence as the threats of intimidation and familiarity should be reduced. Advanced Audit & Assur
Disadvantages • Duplication of work will be required in some areas, particularly at the planning and completion stages, which will increase the cost of providing the audit. • It may be difficult to find an appropriate second firm with relevant experience and expertise with whom to share the audit. • Clients may need persuading about the benefits of adopting a new approach to the audit. • A joint audit arrangement will need to be planned in advance of existing audits coming up for tender. • The two firms may have different cultures leading to cultural clashes when trying to work together. • There may be difficulty setting a joint approach. One firm may feel the work has not been divided equitably. Advanced Audit & Assur
Transnational audits Transnational audit means an audit of financial statements which may be relied upon outside the audited entity's home jurisdiction. Reliance on these audits might be for purposes of significant lending, investment or regulatory decisions. The differences between an audit, conducted within the boundaries of one set of legal and regulatory requirements, and a transnational audit are largely due to variations in: • • Auditing standards Regulation and oversight of auditors Financial reporting standards Corporate governance requirements. Auditors must be aware of the different regimes that apply to the audit of a transnational entity because they will be bound by the varying laws and regulations. Given the globalisation of businesses and stock markets this is an increasingly significant concern for many firms of auditors. Advanced Audit & Assur
Thank You Advanced Audit & Assur
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