Offsettingi

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Offsetting Audit Case Example: ABC Manufacturing Company

Context

ABC Manufacturing Company may engage in transactions that give rise to financial assets and liabilities with the right to offset under certain conditions, such as derivative contracts, repurchase agreements, or bank overdrafts that are offsettable against cash balances.

Audit Objective

To obtain reasonable assurance that offsetting of financial assets and liabilities in ABC Manufacturing Company’s financial statements is done in accordance with the applicable financial reporting framework and that the resulting net presentation accurately reflects the company’s financial position.

Types of Audit Evidence and Documentation for Offsetting Assertions

1. Existence

• Case: Verify that financial assets and liabilities subject to offsetting exist at the reporting date.

• Documentation: Document the inspection of supporting documentation and agreements that substantiate the existence of these assets and liabilities, including confirmation with counterparties where applicable.

2. Rights and Obligations

• Case: Confirm that the company has the legal right to offset the reported assets and liabilities and that it intends to settle them on a net basis or to realize the asset and settle the liability simultaneously.

• Documentation: Summarize the review of contractual agreements and legal opinions to verify the enforceability of the right to offset and the company’s intention regarding settlement.

3. Completeness

• Case: Ensure that all financial assets and liabilities eligible for offsetting are identified and reported on a net basis as permitted or required by the applicable financial reporting framework.

• Documentation: Outline procedures for assessing the completeness of offsetting, such as reconciling all eligible assets and liabilities to ensure they have been appropriately netted in the financial statements.

4. Valuation and Allocation

• Case: Assess the appropriate valuation of financial assets and liabilities subject to offsetting, ensuring that the net amount presented in the financial statements reflects the expected recoverable or payable amount.

• Documentation: Document the valuation considerations and any adjustments made to ensure the net amounts of offset assets and liabilities are measured in accordance with the applicable financial reporting standards.

5. Presentation and Disclosure

• Case: Review the financial statements to ensure that offsetting is properly applied and adequately disclosed, including the criteria for offsetting and the gross amounts of assets and liabilities before offsetting.

• Documentation: Note the evaluation of presentation and disclosure of offsetting, verifying that disclosures meet the requirements of the financial reporting framework and provide clear information about the nature and impact of offsetting on the financial position.

6. Assessment of Internal Controls over Offsetting

• Case: Evaluate the design and implementation of internal controls related to the identification, measurement, and disclosure of offsetting financial assets and liabilities.

• Documentation: Document the review of internal controls over offsetting, identifying any control deficiencies and their implications for the audit strategy.

7. Inquiries of Management

• Case: Perform inquiries with management regarding the policies and procedures for offsetting financial assets and liabilities, including any significant judgments in the application of offsetting criteria.

• Documentation: Summarize inquiries and management’s responses, including discussions on the application of offsetting criteria and any significant judgments or estimates involved.

8. Communication with Those Charged with Governance

• Case: Discuss significant findings related to the audit of offsetting with management and those charged with governance, especially any concerns about the application of offsetting criteria or the adequacy of disclosures.

• Documentation: Prepare a summary of communications regarding offsetting, including any disagreements with management’s approach and the resolution of such disagreements.

Conclusion

The audit of offsetting is critical for ensuring that the net presentation of financial assets and liabilities in the financial statements accurately reflects the company’s financial position in line with the applicable financial reporting framework. Documenting the audit procedures and findings related to each relevant assertion for offsetting provides a basis for the auditor’s opinion on the financial statements, enhancing the reliability and transparency of the reported financial information. This approach assists stakeholders in understanding the impact of offsetting on the company’s financial position and performance.