Do you know what elements need to be considered while auditing the consolidated financial statements? If no, then this article is for you.
Prior to the commencement of the audit of consolidated financial statements, the auditor should plan his work in such a way that he could conduct the audit effectively and efficiently.
The auditor should plan for the following:
- Understanding the structure of the group and group controls including assessment of Information technology (IT) systems and general and applications IT-related controls.
- Understanding the accounting policies of the holding company and the process of translation of financial statements of foreign components.
- Determining the use of other auditor’s work in audit (SA 600)
- Coordinating the work to be performed.
A parent/holding company that presents the consolidated financial statements is required to consolidate all the components in their consolidated financial statements other than those for which exceptions have been provided in the relevant accounting standards under the applicable financial reporting framework. The auditor should obtain the listing of all the components and review the information provided by the management.
In respect to ensure the completeness of the above components, the auditor shall:
- Make inquiries of the management on how such components are identified
- Review the investment/shareholding of the parent for the determination of such components
- Review joint ventures and joint arrangements as applicable
- Review other compromises/arrangements entered into by components of the parent and the parent itself
- Identify the variations in the shareholding that might have taken place during the period under audit
- The auditor may also review the board minutes to verify whether the company has obtained new control or whether there is liquidation of investment.
Further, the auditor should document the above procedures for assessing components to be consolidated. The auditor shall:
- Examine the reason of exclusion in case a component has been excluded from the consolidated financial statements (i.e. the relationship is temporary or there exist long-term restriction on the transfer of shares), and he should also verify the exclusion made by management falls within these two categories moreover whether they are being excluded in accordance with applicable financial reporting framework.
- Make sure that the reasons for exclusion are mentioned in the consolidated financial statements. Also, the auditor shall consider the effect of reasons for excluding a component while preparing consolidated financial statements on the report to be issued.
- Examine whether any subsidiary, associate or joint venture has ceased to be the subsidiary, associate or joint venture during the period under audit. There exist a possibility that the subsidiary might have become an associate or an associate might have become a subsidiary of the parent. • Verify the adjustments warranted by the relevant accounting standards have been made wherever required and have been duly authorised by the management of the parent.
- Further, The preparation of consolidated financial statements gives rise to Permanent and Current consolidation adjustments.
Summing up the above, audit of the consolidated financial statements assist the user of the consolidated financial statements to make an appropriate decision of investing in the company.
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