Consolidation

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Consolidation Audit Case Example: ABC Manufacturing Company

Context

For ABC Manufacturing Company, which has several subsidiaries, joint ventures, or associates, the consolidation process is critical for accurately reporting the financial performance and position of the entire group. This process must eliminate intercompany transactions and balances and include the correct share of income and expenses from joint ventures and associates, adhering to applicable financial reporting standards like IFRS 10, Consolidated Financial Statements, or ASC 810, Consolidation, under US GAAP.

Audit Objective

To obtain reasonable assurance that the consolidation process is accurately and completely executed, ensuring that the consolidated financial statements of ABC Manufacturing Company reflect the financial position and performance of the group in accordance with the applicable financial reporting framework.

Types of Audit Evidence and Documentation for Consolidation Assertions

1. Completeness

• Case: Verify that all entities that should be consolidated are included in the consolidated financial statements.

• Documentation: Document procedures for identifying all subsidiaries, joint ventures, and associates, including reviewing ownership records, board minutes, and legal documents to ensure completeness in consolidation.

2. Accuracy

• Case: Assess the accuracy of consolidation adjustments, including the elimination of intercompany transactions and balances.

• Documentation: Document specific testing procedures and recalculations performed to verify the accuracy of consolidation entries, highlighting any adjustments made to correct errors identified.

3. Occurrence

• Case: Confirm that all transactions and balances included in the consolidated financial statements have actually occurred and relate to the group.

• Documentation: Summarize the inspection of supporting documentation for significant consolidated transactions and balances to substantiate their occurrence.

4. Rights and Obligations

• Case: Ensure that the consolidated financial statements accurately reflect the group’s rights to assets and obligations for liabilities, including those of consolidated entities.

• Documentation: Document the review of legal agreements and contracts that substantiate the group’s rights and obligations as reported in the consolidated financial statements.

5. Valuation and Allocation

• Case: Evaluate the appropriate valuation of assets, liabilities, income, and expenses included in the consolidated financial statements, and the correct allocation of profit or loss to non-controlling interests.

• Documentation: Document the assessment of valuation methods and allocation processes used in the consolidation, including the basis for any fair value adjustments and the calculation of non-controlling interests.

6. Presentation and Disclosure

• Case: Review the consolidated financial statements to ensure they are correctly presented and adequately disclosed in accordance with the financial reporting framework.

• Documentation: Evaluate the presentation and disclosure of consolidation-related information, verifying that disclosures comply with the reporting standards and provide clear information on the basis of consolidation, the list of consolidated entities, and the impact of consolidation adjustments.

Additional Considerations

• Uniform Accounting Policies: Assess whether the consolidated entities have applied uniform accounting policies. Document any adjustments made to harmonize accounting policies across the group.

• Internal Controls Evaluation: Evaluate the design and effectiveness of internal controls over the consolidation process, including controls over the collection and elimination of intercompany transactions and the preparation of consolidation adjustments.

• Inquiries of Management: Perform inquiries with management and the finance team responsible for the consolidation process regarding the identification of entities for consolidation, the elimination of intercompany transactions, and any significant judgments or estimates made.

• Communication with Those Charged with Governance: Discuss significant findings or issues identified during the audit of the consolidation process with management and those charged with governance, especially concerning the accuracy and completeness of the consolidated financial statements.

Conclusion

The audit of the consolidation process is crucial for ensuring that the consolidated financial statements accurately reflect the financial position and performance of the entire group in line with the applicable financial reporting framework. Documenting the audit procedures and findings related to each relevant assertion provides a basis for the auditor’s opinion on the consolidated financial statements, enhancing the reliability and transparency of the financial information presented by the group.