Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
PRESENTATION
OUTLINE
(A) (B) (C)
Identify and explain any misstatements in DKs accounts.
ASSUMPTIONS
No
taxes
CKs (parents) entries are all correct Consolida?on Schedule given by client
Consolidated from Trial Balance Because items not posted to RE yet Possibly more informa?ve data Prots not closed to Retained Earnings yet
Cr Cash (
Which Account to Credit depends on what the subsidiary has done: If subsidiary allocated expense to external expense, Cr Ext. Expense If subsidiary omiWed the entry, Cr Cash
CK Dr Revenue Cost of sale management fee expenses -external receivable payable inventory non-current asset bank investment in DK share capital retained earning loss on acquisition
Cr
Dr
1,000,000
DK
Cr
2,000,000
400,000
200,000
200,000
300,000
400,000
100,000
200,000
200,000
500,000
200,000
300,000
2,000,000
2,000,000
2,600,000
2,500,000
No adjustment to Cash: assume 100k reported is derived from actual year end balance (ascertained from bank confirmation response & bank statements/reconciliation)
CK Dr Revenue Cost of sale management fee expenses -external receivable payable inventory non-current asset bank investment in DK share capital retained earning loss on acquisition
Cr
Dr
1,000,000
DK
Cr
2,000,000
400,000
300,000
200,000
300,000
400,000
100,000
200,000
200,000
500,000
200,000
300,000
2,000,000
2,000,000
2,600,000
2,600,000
No adjustments to inventory: assume 500k reported is derived from actual year end balance (ascertained from stock count/ inventory system)
2. No Goodwill stated in consolidated account Dr Goodwill (BS) Cr Loss on GW (P&L) 200k 200k
CK Dr Revenue Cost of sale management fee expenses -external receivable payable inventory non-current asset bank investment in DK share capital retained earning Goodwill
Cr
Dr
1,000,000
DK
Cr
2,000,000
Conso. Dr 300,000
Adjust Cr Dr
Group
Cr
2,700,000
400,000
100,000
1,000,000
300,000
100,000
200,000
300,000
500,000
100,000
200,000
100,000
200,000
200,000
2,600,000
900,000
300,000
700,000
600,000
400,000
500,000
900,000
400,000
300,000
200,000
300,000
200,000
500,000
200,000
300,000
200,000
2,000,000
900,000
2,000,000
2,600,000
3,900,000
3,900,000
CK Dr Revenue Cost of sale management fee expenses -external receivable payable inventory non-current asset bank investment in DK share capital retained earning Goodwill
Cr
Dr
1,000,000
DK
Cr
2,000,000
Conso. Dr
Adjust Cr Dr
Group
Cr
3,000,000
400,000
-
100,000
1,000,000
100,000
300,000
200,000
300,000
300,000
300,000
500,000 600,000
400,000
400,000
500,000
900,000
400,000
300,000
100,000
200,000
100,000
200,000
200,000
2,600,000
900,000
200,000
300,000
200,000
500,000
200,000
300,000
200,000
2,000,000
900,000
2,000,000
2,600,000
3,900,000
3,900,000
CK Dr Revenue Cost of sale management fee expenses -external receivable payable inventory non-current asset bank investment in DK share capital retained earning Goodwill
Cr
Dr
1,000,000
DK
Cr
2,000,000
Conso. Dr 300,000
Adjust Cr Dr
Group
Cr
2,700,000
400,000
150,000
100,000
850,000
300,000
100,000
200,000
300,000
500,000
300,000
300,000
400,000
600,000
400,000
150,000
750,000
400,000
300,000
500,000
100,000
200,000
100,000
200,000
200,000
2,600,000
1,200,000
200,000
300,000
200,000
500,000
200,000
300,000
2,000,000
1,200,000
2,000,000
2,600,000
200,000 3,600,000
3,600,000
Cr
Dr
1,000,000
DK
Cr
2,000,000
Conso. Dr 300,000
Adjust Cr Dr
Group
Cr
2,700,000
400,000
150,000
100,000
850,000
300,000
100,000
200,000
300,000
500,000
300,000
300,000
400,000
600,000
400,000
150,000
750,000
400,000
300,000
500,000
100,000
200,000
100,000
200,000
200,000
2,600,000
1,200,000
200,000
300,000
200,000
500,000
200,000
300,000
2,000,000
1,200,000
2,000,000
2,600,000
200,000 3,600,000
3,600,000
(C)
Qns: Consider the matters that planned acquisition of EK might have an impact on your audit of the CK Group for the year ending 31 August 2011. These matters should be organized as questions you would like to raise with the management of CK. Be prepared to explain to CK management the rationale of these questions.
AUDITOR
Rationale Impact on Audit
MANAGEMENT
Managements Response
(1)
Auditor (Us) needs to determine: If investment of subsidiary account is accurately stated The design of audit procedures for the audit of the acquisi?on transac?on Complexity involved in the audit Do we need nancial/ valua?on exper?se? Need to assess management es?mates/ inputs?
Management would most likely be unwilling to disclose considera?on amount ?ll aier acquisi?on Unlikely that share acquisi?on is used in this case Both acquirer & target are Pte Ltd companies
Diculty in obtaining fair value of acquirers shares Is Market value easy available? CK is a Private Company no available market price
ConMngent: On top of Contract terms & discount rates, Assess reasonableness of Management probability projec?ons (eg by projec?ng historical trends, uctua?ons analysis, scenario planning)
Ra?onale for asking ques?on: FRS requires disclosure of FV of INA FRS 103 para 10 (need for recogni?on): As of the acquisi?on date, the acquirer shall recognise, separately from goodwill, the iden?able assets acquired, the liabili?es assumed and any non-controlling interest in the acquiree para 18 (measurement principle): The acquirer shall measure the iden?able assets acquired and the liabili?es assumed at their acquisi?on-date fair values
Ques?on needed: assess extent of future audit work needed to sa?sfy accuracy asser?on net assets & goodwill from acquisi?on
Fair value hierarchy frs 107 para 27a: The fair value hierarchy shall have the following levels: (a) quoted prices (unadjusted) in ac?ve markets for iden?cal assets or
liabili?es (Level 1); (b) inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices) (Level 2); and (c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3).
Impact on Audit: External Opinion e.g use of Professional Valuer Auditor to evaluate Expert Report SSA 620 para 2 When using the work performed by an expert, the auditor should obtain sucient appropriate audit evidence that such work is adequate for the purposes of the audit If dependable, less audit work needs to be done in the subsequent year of audit Management Opinion: es?mates or market value Auditor has to assess and test for reasonableness
Acquisi?on in this case: likely to be subsidiary Is it fully owned? i) Auditor to assess disclosure of NCI Component FRS 27 Para 27: Minority interests shall be presented in the consolidated balance sheet within equity, separately from the parent shareholders equity. Minority interests in the prot or loss of the group shall also be separately disclosed
Much greater complexi?es involved in step acquisi?on More dicult to assign NCI, keep track of Investment in Subsidiary Account to be eliminated
(2)
Assess Compliance with FRS (correct period reported) Determining which period to audit for en?re group EK has to comply with Singapores Company Act Need for have same FYE for en??es within Group
Client needs to apply for waiver if they are unable to change FYE of subsidiary in China
CK EK
31st Aug X1
31st Oct X1
UNDER FRS 27
The nancial statements of the parent and its subsidiaries used in the prepara?on of the consolidated nancial statements shall be prepared as of the same date. When the end of the reporMng period of the parent is dierent from that of a subsidiary, the subsidiary prepares, for consolidaMon purposes, addiMonal nancial statements as of the same date as the nancial statements of the parent unless it is impracMcable to do so. CK EK
31st Aug X1
31st Oct X1
UNDER
FRS
27
FRS
27
Para
23
When,
in
accordance
with
paragraph
22,
the
nancial
statements
of
a
subsidiary
used
in
the
prepara?on
of
consolidated
nancial
statements
are
prepared
as
of
a
date
dierent
from
that
of
the
parents
nancial
statements,
adjustments
shall
be
made
for
the
eects
of
signicant
transacMons
or
events
that
occur
between
that
date
and
the
date
of
the
parents
nancial
statements.
In
any
case,
the
dierence
between
the
end
of
the
reporMng
period
of
the
subsidiary
and
that
of
the
parent
shall
be
no
more
than
three
months.
The
length
of
the
repor?ng
periods
and
any
dierence
between
the
ends
of
the
repor?ng
periods
shall
be
the
same
from
period
to
period.
CK EK
31st Aug X1
31st Oct X1
UNDER
FRS
27
CK
EK
31st Aug X1
31st Oct X1
EK has to apply to ACRA for a waiver & prepares 2 sets of books I. 1 September 20x0 to 31 August 20x1 (for Group Conso) II. 1 November 20x0 to 31 Oct 20x1 (Subsidiarys books) Note: Adjustments for 2 months of transac?ons Auditor: To audit the Group companies as at the relevant ?me periods shown
Q.
WILL
THE
SUBSIDIARY
FOLLOW
THE
PARENTS
PRESENTATION
&
FUNCTIONAL
CURRENCY?
Ra?onale
for
asking
ques?on:
Inherent risk of currencies being dierent in subsidiary and consolidated nancial statements Assess compliance with FRS 21 ( Foreign Exchange) Consolidated Group FS has must be presented in a common currency Presenta?on Currency If Subsidiary is adop?ng a dierent func?onal currency, addi?onal adjustments & disclosures have to be made in audit
UNDER
FRS
21
Poten?al
Management
Response:
In this case, likely for subsidiarys func?onal currency to dier from the Groups. Func?onal Currency the currency of the primary economic environment in which the en?ty operates IN6 According to IN8: en?ty does not have a free choice in func?onal currency FRS 21 Para 38: When a group contains individual en??es with dierent funcMonal currencies, the results and nancial posi?on of each en?ty are expressed in a common currency so that consolidated nancial statements may be presented.
The Group will have to present its consolidated FS in its presenta?on currency, transla?ng the subsidiarys accounts balances and gures from RMB to SGD.
UNDER FRS 21
FRS 21 Para 23: General Transla?on Guidelines Monetary items translated using closing rates Non-monetary items (historical cost) translated using exchange rate at date of the transac?on Non-monetary items (fair value) translated using rates as at date when fair value was determined FRS 21 Para 39: Transla?on Guidelines when func?onal currency diers from presenta?on currency Assets & liabili?es translated at closing rate as at B/S date Income and expenses translated at exchange rates as at dates of the transacMon All resul?ng exchange dierences shall be recognised as a separate component of equity
Design of audit procedures: Transla?on tests on exchange rates applied by client in transla?ng dierent line items Auditor to assess which rates did client use Year end rate vs Historical Rate Audit procedures design: Reasonableness Test, Substan?ve tes?ng on transac?on transla?on rates (depending on risk) Consolida?on Auditor to ensure required disclosures are made:
FRS 21 Para 45: Cannot eliminate inter-coy balances without showing the results of currency uctua?ons in the consolidated nancial statements Other currency risks involving RMB exposure in Footnotes
Future intercompany transac?ons and balances have to be eliminated Complicated arrangements & signicant intra group transac?ons will lead to greater complexity and tes?ng in the audit Leads us to next issue: assessing procedures and controls in place to separate inter-coy and external transac?ons e.g. separate inventory numbering & records, dis?nct set of sales invoice numbers (internal & external sales)
Sales of inventory from Parent to Subsidiary; Subsidiary to purchase other inputs from Chinese suppliers; Subsidiary to make sales to customers
FRS 27 Para 20 Intragroup balances, transac?ons, income and expenses shall be eliminated in full FRS 27 Para 21 Prots and losses resul?ng from intragroup transac?ons that are recognised in assets, such as inventory and xed assets, are eliminated in full
iii.
Test of details e.g. tracing sales reports to intra group sales invoices & Delivery Orders (separately from external sales) Agreeing intra group sales in the consolida?on schedule
High inherent risk present in having a complex group structure (eg circular ownership structures) Diculty in tracking intra group sales & balances Higher poten?al for material misstatements in elimina?ons of intra group transac?ons Greater risk of fraud going undetected due to overly complex structure Frequent acquisi?ons, disposal or reorganiza?ons Greater risk of material misstatements in Conso FS
being recorded
Track intra group transac?ons separately Monitor any new intra group rela?onships/ dealings
If the group engagement team plans to request a component auditor to perform work on the nancial informa?on of a component, the group engagement team shall obtain an understanding of the following: . If a component auditor does not meet the independence requirements that are relevant to the group audit, or the group engagement team has serious concerns about the other mafers listed in paragraph 19(a)-(c), the group engagement team shall obtain sucient appropriate audit evidence rela?ng to the nancial informa?on of the component without reques?ng that component auditor to perform work on the nancial informa?on of that component
Comparability & consolidaMon issues: auditor has to ensure consistency in accoun?ng treatments applied (e.g. valua?on of inventory, revenue recogni?on) to consolidate accounts! Ensure clients compliance with Singapore accoun?ng standards Tax related problems that might arise
For purely reporting purposes in China: EK has to prepare FS according to Accounting Standards for Business Enterprises (ASBE) However, FRS 27 Para 25: if a member of the group uses accounting policies other than those adopted in the consolidated financial statements.. Appropriate adjustments are to be made
ASBE allows only a cost model to compute the value of xed and intangible assets while the FRS allows a choice for revalua?on model FRS provides an op?on to expense all borrowing costs while ASBE (under certain circumstances), maintain that borrowing costs should be capitalised
This is no longer the case under FRS 23 cannot expense o borrowing costs (this dierence refers to the old standards)
ASBE prohibits reversing all impairment losses but FRS only prohibits reversal of goodwill impairment
Presenta?on of FS ASBE restricts some aspects of the statement that would be allowed under FRS Expenses have to be analysed by: Func?on for income statement presenta?on Direct method for cash ow statements
Increase in extent of work to be done Need to assess managements reconcilia?on of the dierent accoun?ng treatment applied Consolida?on is trickier need to establish consistency before summing up gures of subsidiary & group Design of audit procedures: Inquiry of management/ subsidiary accountants specic accoun?ng treatment/es?mates applied
(3)
Audit on Subsidiary
To determine if addi?onal audit work has to be performed on DEKPs (our) part in this case, likely that the subsidiary has to be audited, unless exempted If addi?onal audit work has to be performed on our part, are we suciently qualied? Competent? Possess required exper7se? Would DEKP have to audit a separate FS of the subsidiary as well? Would we have to rely on the work of another auditor? Can we rely on the component auditors work?
does not release audited FS DEKP to audit subsidiary if it is a signicant component of Group. Signicant component is determined by: Individual nancial signicance to group
Ask Management: what is the size of the subsidiary? E.g. If revenue of subsidiary cons?tutes large % of Groups Revenue Signicant
Specic nature of circumstances (ie. component likely to include signicant risks of material misstatements) Contemplate risks in designing procedures: High risks use larger samples in test of details. Low risks use analy?cs If EK cons?tutes a signicant component, the audit of the subsidiary must be carried out by group engagement team
Audit work already done before we reach the audit at Group Consolida?on level Leads us onto next ques?on: Who is to be appointed auditor of subsidiary for the next FYE? If DEKP (us) need to audit separate FS for subsidiary Assess various considera?ons in taking up new audit engagement eg. independence/ reliance on client See our capabili?es vs complexity of audit Communica?on w exis?ng auditor of past audits If group CFO retains exis?ng auditor (third party) can we rely on their work?
Does the component auditor exhibit compliance with ethical requirements? Is the component auditor independent? Does the component auditor possess adequate professional competence? Considering the regulatory environment in which the component auditor operates, can we rely on the audited work done?
THE
END
Thank you for your attention (: