Group Auditing

The following are the legal frameworks for group audits:

1. ISA 600 (Audit of Group Financial Statements) 2. IAS 14 (Accounting for segments) 3. IAS 24 (Accounting for Related Parties) 4. IAS 25 (Accounting for Investments) 5. IAS 27 (Accounting for subsidiaries) 6. IAS 28 (Accounting for associated companies) 7. IAS 31 (Accounting for Joint Ventures) 8. IFRS 10 (Effective control)

There is no big difference between this type of audit and a simple audit where the auditor audits a single company, however in a group situation; the parent entity will have to prepare its own audited financial statements together with audited consolidated financial statements incorporating the results of all subsidiary entities. The group financial statements will be audited by the parent entity auditors, who are known as the Group Auditors/Primary Auditors.

INSTANCES WHERE A SUBSIDIARY WILL BE EXCLUDED FROM CONSOLIDATION ? If its activities are negligible ? If the activities of the parent and those of the subsidiary are significantly different ? If there is total disagreement in the accounting policies adopted by the subsidiary ? If inclusion of the subsidiary is harmful to the parent company ? If the inclusion will lead to unnecessary delay in presenting the group accounts ? If a subsidiary operates under a long term severe restrictions which makes control by the parent impossible

USING THE WORK OF ANOTHER AUDITOR ? The group auditors have sole responsibility for the opinion on the group financial statements. The auditors of the subsidiary entities (component auditors) are a source of evidence only. ? The group auditors must decide how much reliance they will place on the work performed by these component auditors. In order to do this they will consider the qualifications, experience and resources of the component auditors. ? Generally the group auditors should have the right to ask the component auditors for all reasonable information and explanations. In addition, the component auditors should inform the group auditors of any matter they discover during their audits that might be relevant to the audit of the group financial statements. ? Matters to discuss with the component auditors ? The component auditors must be informed of the use that is to be made of their work. They should also be advised of the standard and scope of work required, together with reporting deadlines. ? It is common practice to ask the component auditors to complete a checklist to confirm that they have applied the required audit procedures.

MATTERS THAT CAN ARISE WHEN A SUBSIDIARY IS LOCATED IN A FOREIGN COUNTRY When a subsidiary is located overseas a number of potential difficulties could arise: ? Different accounting policies might be used in the overseas country. The subsidiary financial statements must be brought into line with the accounting policies used by the parent entity in order to consolidate properly. The group auditors will use the checklist mentioned above to determine the accounting policies used. ? There may be cultural problems unique to the country in which the subsidiary operates. The group auditor will need to be sensitive to these during dealings with the other auditors. ? Language problems may arise. This problem can be easily overcome by using staff who can speak the relevant language or by using a translator. ? There may be issues in existence which are specific to the country in which the subsidiary operates. For example, in some countries in the continent of Africa, inflation runs at in excess of 100% per annum. Financial statements produced in these circumstances will need to be adjusted prior to consolidation with the parent entity. Factors such as these will need to be identified for each subsidiary and resolved as appropriate during the audit.

Matters to consider before accepting appointment as group auditor to a group The group auditor must participate sufficiently in the audit of the group to enable them to give an opinion on the group financial statements. Before accepting appointment as group auditor they should consider: 1. the materiality of the portion of the financial statements which they do not audit 2. the degree of their knowledge regarding the business of the subsidiaries 3. the nature of their relationship with the component auditors 4. their ability where necessary to perform additional procedures to enable them to act as group auditors; and 5. the risk of material misstatements in the financial statements of the subsidiaries audited by component auditors

THE CORRECT CLASSIFICATION OF INVESTMENTS ? An investment is treated as a subsidiary when the parent entity has dominant influence over that invested entity. Where significant influence is held the investment is treated as an associate in accordance with IAS 28. ? It is important that the degree of control exercised by the parent entity is tested by the auditors. ? The auditors need to consider how an investment fits into the activities of the group. They should review board minutes for evidence of the degree of influence exercised by the parent entity. They should also discuss the matter with the parent entity directors. ? The existence of other significant shareholders may indicate that the parent entity has little influence. ? The auditors should check the register of members to determine the level of shareholding and potential influence held by other shareholders. ? The auditors should also consider how easy it is to obtain information about the invested entity. This could also be an indicator of significant influence.

GROUP CONSOLIDATION - AUDIT PROCEDURES After receiving and reviewing the financial statements from all subsidiaries and associates, and any other member of the group, the group auditor must audit the group financial statements. The main procedures would be as follows: 1. Check the transcri ption of the audited financial statements of each invested entity to the consolidation schedule. 2. Check that the adjustments made on consolidation are appropriate and consistent with prior years. The adjustments could be permanent or current year adjustments. 3. The consolidation schedules should be checked for arithmetical accuracy. 4. An opinion should be formed on the truth and fairness of the group financial statements. 5. The group financial statements should be checked for compliance with international financial reporting standards. 6. Check on amortization of goodwill 7. Check of evidence of receipt of proceeds incase of disposal of a member of the group 8. Check on authorizations to acquire an investment 9. Recomputed the goodwill through the cost of control 10. Check on compliance with relevant standards

LETTERS OF SUPPORT This is an agreement made between a parent entity and its subsidiary or fellow subsidiary under which one entity agrees to provide support, in the form of funding, to the other entity in order that it may meet its debts and liabilities. A letter of support may be required from the parent entity where it appears that a subsidiary is not a going concern and will be unable to pay non-group creditors as they fall due.

Audit work The auditor needs to determine whether the parent entity has the power to provide a letter of support. The following should be obtained: written confirmation from the parent entity's lawyers to the effect that the giving of the support is permitted under the MOA, is not beyond the entity's powers, and that it is within the powers of the board of directors to give the support; or If the transaction is not permitted by the MOA, a certified copy of the special resolution amending the MOA to authorize the parent entity to give the letter of support.

IMPLICATIONS FOR THE AUDITORS' REPORT WHERE A SUBSIDIARY HAS BEEN QUALIFIED In a group situation, materiality and risk must be assessed in the context of the group as a whole. It is possible therefore for a qualification in a subsidiary to be wholly immaterial in the group financial statements. If this is the case, an unqualified opinion could be given on these financial statements. However a disclaimer of opinion in the subsidiary may become an 'except for opinion' in the group. Where the group auditors conclude that adequate evidence about the work of the component auditors cannot be obtained and they have been unable to perform sufficient additional procedures with respect to that subsidiary, they should consider the implications for the audit report: If the matter is material to the subsidiary and not to the group then no further action will be taken by the principal auditor If the matter is material to the subsidiary and also material to the group then the principal auditor will carry the qualification into the group audit report.

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