International Developments in Accounting Dr. Samuel Owusu-Agyei Office HU 3.40

Transnational audits

Contents What is Transnational Audits & role of TAC Adjustments for groups and planning of group audits. Recognise audit problems & risks in group situations & audit procedures to address it. Evaluating work done by component auditor. Impact on Auditor’s Report if the opinion on the component is qualified or otherwise modified. When joint audits would be allowed.

Transnational audit An audit of financial statements which are or may be relied upon outside the entity’s home jurisdiction for the purpose of significant lending, investment or regulatory decision The operation of groups across jurisdictions to enter new markets, raise foreign capital, benefit from forex differences, tax, avoid local takeovers etc.

Groups Head Co B Co C Co D Co

Transnational audit committee (TAC) The growth in such transnational engagements has led to a number of issues The role of regulators across different jurisdictions has led to variable degrees of engagement quality The incomplete nature of ISA adoption worldwide has led to variations in audit approach Different audit approaches due to cultural issues TAC promotes high-quality international audits. Mediates International Federation of Accountants (IFAC) and Federation of Firms (FoF)

Nature of Groups Being listed in several countries means that the group is subject to the regulations of all stock exchanges on which it is listed, and so is bound by listing rules outside of its home jurisdiction. The group also contains many foreign subsidiaries, meaning that it operates in a global business and financial environment.

Group Adjustment- foreign components Group financial statements require consolidation adjustments. Differences in currencies - Gains and losses on foreign transactions - Retranslations Differences in reporting standards Development expenditure Foreign subsidiary’s accounting policies

Group Audits The organisation and planning of a group audit may be significantly more complex than for a single company. Procedures will mainly focus on adjustments made on consolidation The components of the group may be audited by firms other than the principal group auditor.

Issues in Auditing foreign subsidiaries Language barriers Country specific problems( e.g. hyperinflation) Differences in local accounting and auditing conventions Permit to work Cultural differences Group auditor should assess if they are adequately resourced for these

Group Auditor The group auditor is the firm with responsibility for the opinion on the group financial statements. There will be a group engagement team led by the group engagement partner who will be responsible for the performance of the group audit and providing a group audit report.

Group and component auditors The group auditor must decide how much reliance he will place on the work performed by component auditors. In order to do this the group auditor will consider the qualifications, experience, competence, ethical standpoint and resources of the component auditors.

Matters to discuss with component auditors Inform the firm that we will require written representations as evidence of compliance The use that is to be made of their work and report Areas that are considered to require special consideration

Matters to discuss with component auditors The necessary accounting framework, auditing standards and reporting requirements that must be complied with Questionnaire or checklist that the other component auditor will be required to complete to detail the audit work performed. The timetable of events and deadlines

Group Auditor’s Risk The group auditor’s job is extremely complex and likely to face a number of risks not faced during the audit of the parent company alone: Understanding the structure of the group Appraising the quality of the component auditor The fact that their group opinion is often based upon the work of others and as such this demonstrates significant audit risk.

Groups – Significant Components ISA 600 states that a component company can be deemed by the group auditor to be a significant component either by: being significant in size or posing a significant risk of material misstatement. In which case....

D GmbH y/e 31.12.12 Auditor = KPMG (Germany) Planning a Group Audit Parent EY = 'Group Auditor' – has the sole responsibility for forming the auditor's opinion on the group accounts A Co Y/e 31.12.12 Auditor - EY B Co y/e 31.12.12 Auditor = EY C Co y/e 30.09.12 Auditor = PWC D GmbH y/e 31.12.12 Auditor = KPMG (Germany)

D GmbH y/e 31.12.12 Auditor = KPMG (Germany) Components PWC and KPMG are component auditors. They are responsible for forming an opinion on the individual companies A Co Y/e 31.12.12 Auditor - EY B Co y/e 31.12.12 Auditor = EY C Co y/e 30.09.12 Auditor = PWC D GmbH y/e 31.12.12 Auditor = KPMG (Germany) B, C and D are components.

D GmbH y/e 31.12.12 Auditor = KPMG (Germany) D Co For an overseas subsidiary, the directors of the parent have a responsibility to ensure that the group auditors receive all the co-operation they require. A Co Y/e 31.12.12 Auditor - EY B Co y/e 31.12.12 Auditor = EY C Co y/e 30.09.12 Auditor = PWC D GmbH y/e 31.12.12 Auditor = KPMG (Germany) B, C and D are components.

D GmbH y/e 31.12.12 Auditor = KPMG (Germany) A Co Y/e 31.12.12 Auditor - EY B Co y/e 31.12.12 Auditor = EY C Co y/e 30.09.12 Auditor = PWC D GmbH y/e 31.12.12 Auditor = KPMG (Germany) C Co Non-coterminous y/e not a problem, as long as within 3 months of y/e. > 3m – interim accounts should be prepared.

D GmbH y/e 31.12.12 Auditor = KPMG (Germany) A Co Y/e 31.12.12 Auditor - EY B Co y/e 31.12.12 Auditor = EY C Co y/e 30.09.12 Auditor = PWC D GmbH y/e 31.12.12 Auditor = KPMG (Germany) C Co (2) 'Component auditor' – EY has the right to require from PwC all info and explanations as they require.

D GmbH y/e 31.12.12 Auditor = KPMG (Germany) A Co Y/e 31.12.12 Auditor - EY B Co y/e 31.12.12 Auditor = EY C Co y/e 30.09.12 Auditor = PWC D GmbH y/e 31.12.12 Auditor = KPMG (Germany) C Co (3) 75% ownership - not a problem as long as the component is accounted for correctly (in this case, a subsidiary).

Groups – Access to Information Under ISA 600, if the group auditor has concerns about: the quality of work from component auditors the ability to obtain sufficient appropriate audit evidence if necessary the availability of information on consolidation from the client Qualified or Disclaimer opinion

Consolidation Audit Procedures There are a number of procedures that should be performed by the group auditor: Confirming the balances extracted from the financial statements of each component prior to their inclusion on the consolidation schedule Reviewing the disclosures necessary for the group accounts, such as related parties Gathering evidence appropriate to the various consolidation adjustments.

Letters of support An agreement made between a company and its component or fellow component under which one company agrees to provide support in the form of funding to enable the other company to meet its debts and liabilities. A letter of support may be required from the parent where it appears that a component is not a going concern and will be unable to pay non-group payables as they fall due.

Letters of support – Audit work The following should be obtained. Written confirmation from the company's solicitors to the effect that the giving of the support is permitted or If the transaction is not permitted by the company’s constitution, a certified copy of the resolution amending it to give the company the necessary capacity to give the letter of support.

Modifications A component may have a material qualification that has no impact on the group opinion which would remain unmodified. Similarly a pervasive qualification in a component’s audit report may only have a material impact on the group opinion. Ultimately the decision as to the impact of a modification to a component's audit report on the consolidated opinion is a matter of judgement for the group auditor.

Joint Audits “Where two or more auditors are responsible for an audit engagement and jointly produce an audit report to the client“ This could happen as a result of: A new acquisition A company operating from widely dispersed locations Foreign subsidiaries employing a local audit firms to satisfy the laws of the country in which they operate.

Joint Audits - Considerations Before accepting appointment as a joint auditor it will be necessary to consider the experience and standards of the other firm. The allocation of work between the firms need to be agreed and the auditors should agree whether joint or separate engagement letters will be sent. Both firms must sign the audit report and both are responsible for the whole audit.