Advanced Auditing CA Final CA.

Dilip Gupta

CHAPTER 5 AUDIT OF CONSOLIDATED FINANCIAL STATMENTS Consolidated financial statements are the financial statements of a group, presented
as those of a single entity. CFS is presented for a group of entities under the control of a parent. A group comprises a parent and its subsidiaries. AS 21 is applicable to a parent that presents consolidated financial statements. CFS normally includes consolidated B/S, consolidated P&L, consolidated cash flow statement, notes, and explanatory material. Question: Write a short note on CFS? [N00: 4M] RESPONSIBILITY OF PARENT [N12: 4M]: Parent is Responsible for Preparation and presentation of CFS, which includes: (i)Identifying components, and the financial information of the components to be included in the CFS, (ii)Identifying reportable segments for segmental reporting, (iii) Identifying related parties and transactions for reporting, (iv) Obtaining accurate and complete financial information from components and (v)Making appropriate consolidation adjustments. RESPONSIBILITY OF THE AUDITOR OF THE CONSOLIDATED FINANCIAL STATEMENTS (i)To ensure that CFS have been prepared in accordance AS 21, AS 23, AS 27 and as per SFS of parent and subsidiary, (ii)To follow below mentioned Audit procedure and give Additional Consideration in Audit of CFS, (iii) To express an opinion on the True and Fair view presented by the CFS. AUDIT PROCEDURE OF CONSOLIDATION (i) Plan his work for following, to conduct audit in an efficient & timely manner - Understanding of accounting policies of the parent, subsidiaries, associates and joint ventures,

AUDITING FOR CA FINAL & IPCC BY CA. DILIP GUPTA

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CA. D I L I Agrawal P GUP T A [A A CA , MVihar .CO M ] Near Jain ENT Hospital, Page 1Kothi [M] Teaching centers: Classes, -49, Satya Colony, Lal 6/175, MALVIYA NAGAR [M] 9828571667

Audit of CFS CA. Dilip Gupta - Determining the extent of use of other auditor's work in the audit, - Determining and programming the NTE of the audit procedures to be performed and - Coordinating the work to be performed. (ii) Obtain a list of Subsidiaries, Associates and Joint Ventures included in the CFS and ensure that all Subsidiaries, Associates and Joint Ventures have been included in the CFS unless it is specifically excluded due to some reasons. To Ensure that all of than included in CFS he should - Review his working papers for the prior years, - Review the parent's procedures for identification of subsidiaries, associates, - Review the investments to determine the shareholding in other entities, - Review the statutory records maintained by the parent. Note 1: Auditor has to use his professional judgment to determine whether any entity is subsidiary or not. Note 2: Examine the reasons for exclusion of J.V., Associate etc. from CFS. There could be two Reasons- First is that the relationship of parent with the subsidiary, associate is temporary or - The subsidiary, associate operates under several long-term restrictions which significantly impair its ability to transfer funds to the parent. Auditor should check that reason should be one of them and has disclosed in CFS. (iii) Check Investment in entities other then J.V., subsidiaries etc. has shown as per AS-13. (iv) If any subsidiary, associate etc has ceased to be a subsidiary, associate or subsidiary have become an associate then such changes have been appropriately accounted for in the CFS. (v) Verify that the adjustment warranted by the relevant accounting standards have been made wherever required and have been properly authorized by the management of the parent. (vi) Apart from normal Audit procedure such as Compliance Procedure and Substantive Procedure, and Reporting Procedure should be followed. ADDITIONAL AUDIT CONSIDERATIONS IN AUDIT OF CFS

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Teaching centers: Agrawal Classes, A -49, Satya Vihar Colony, Near Jain ENT Hospital, Lal Kothi [M] 9828571667

Advanced Auditing CA Final CA. Dilip Gupta (i)Auditor of the CFS may or may not be the Auditor of SFS of Parent or its component. Hence he may have to use the work of other auditors (Auditor of subsidiary, J.V. etc) in Audit of CFS, if he is not the auditor of the other components of the group. However for such other auditor it would be a separate assignment apart from conducting statutory audit of that subsidiary or J.V. At the same time Auditor of CFS should comply with provision of SA-200 and SA600 (AAS-10) "using the work of other Auditor. (ii)CFS are prepared using the SFS of parent, subsidiaries, associates and joint venture and also other financial information, which might not be covered by the SFS of these entities. Such other financial information will include -Disclosures to be made in the CFS about the subsidiaries, associates and joint ventures, -Proportion of items included in the CFS to which different accounting policies have been applied, -Adjustments made for the effects of significant transactions or other events occur between the FS of subsidiaries, associates or joint ventures and the parent as the case may be, etc. (iii) CFS have been prepared using uniform accounting policies, (iv) Calculation of minoritys interest has been correctly done. (v) CFS Should be presented, to the extent possible, in the same format as that adopted by the parent for its SFS. (vi) Notes which are necessary for presenting a true and fair view have been included in the CFS as an integral part. (vii) Additional statutory information disclosed in SFS of the subsidiary having bearing on the true and fair view of the CFS has been disclosed in the CFS. (viii) Normal accounting rules i.e. GAAP shall be followed by entity in preparation of CFS. SPECIAL CONSIDERATION (1) Permanent Consolidation Adjustments [N08: 4M] : are those adjustments that are made only on the first occasion of the preparation and presentation of CFS. These are as follows - Determination of excess or deficit of cost to parent of its investment in subsidiary over the parents portion of equity of the subsidiary, at the date on which investment is made in subsidiary,

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Audit of CFS CA. Dilip Gupta - Determination of the amount of equity attributable to minorities, - Determination of goodwill or capital reserve arising on application of equity method to account for investments in associates in consolidated financial statements. Verify determination of pre-acquisition reserves of the subsidiary and associates and ensure that pre-acquisition reserves have been allocated appropriately between the parent and the minorities of the subsidiary. Verify the changes in permanent adjustments due to subsequent acquisition or disposal of the subsidiary/associate.

(2) Current Period Consolidation Adjustments [M09(new): 8M, N09: 4M] : are those adjustments that are made in the accounting period for which the consolidation of financial statements is done. These are primarily related to elimination of intra-group transactions and account balances such as - Elimination of intra group indebtedness, - Elimination of intra group transaction relating to interest and management fee, - Elimination of Unrealised intra-group profits on assets acquired - Adjustment for impairment loss that might exist for goodwill, - Adjustments related to harmonizing the different accounting policies - Adjustments of significant transactions or other events that occur between the date of the financial statements of the parent and subsidiary or J.V. if date of F.S. of Parent and Subsidiary is different, - Determination of movement in equity attributable to the minorities since the date of acquisition of subsidiary, - Treatment of minorities interests share of the losses, if such losses exceed the minorities interests share in the equity MANAGEMENT REPRESENTATION: Obtain a M.R. from management about its responsibility for a true and fair presentation of the consolidated financial statements in accordance with the financial reporting framework applicable to the parent and for all other matter as suggested in SA-580 (AAS-11). REPORTING: Reporting requirement shall be same as per SA-700 (AAS-28). However following shall be considered.

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Teaching centers: Agrawal Classes, A -49, Satya Vihar Colony, Near Jain ENT Hospital, Lal Kothi [M] 9828571667

Advanced Auditing CA Final CA. Dilip Gupta When the parent's Auditor is also the Auditor of its Subsidiaries : (i) Report whether requirement of various AS relevant to preparation and presentation of CFS has followed or not and any deviation from them along with reasons, (ii) Report whether followings give True & Fair - Consolidated B/S, - Consolidated P&L, - Consolidated Cash Flow Statement When the parent's Auditor is not the Auditor of its Subsidiary (ies) (i) All reporting requirements as discussed in case when Auditor of Parent and subsidiary is common, (ii) In such case the Auditor of Parent co. can take the help of Auditor of Subsidiary etc. and can give the reference of Audit done by such other Auditor in relation to that component, in his audit report of CFS. It is an indication that responsibility has divided between Auditor of Parent and Subsidiary co. (iii) In such case he should also consider the requirement of SA 600 (AAS 10) Using the Work of Other Auditor.

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Teaching centers: Agrawal Classes, A -49, Satya Vihar Colony, Near Jain ENT Hospital, Lal Kothi [M] 9828571667