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

2. Transnational audits

3. 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.

4. 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.

5. Groups
Head Co
B Co
C Co
D Co

6. 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)

7. 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.

8. 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

9. 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.

10. 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

11. 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.

12. 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.

13. 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

14. 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

15. 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.

16. 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....

18. 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 Auditor - EY
B Co y/e Auditor = EY
C Co y/e Auditor = PWC
D GmbH y/e Auditor = KPMG (Germany)

19. 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 Auditor - EY
B Co y/e Auditor = EY
C Co y/e Auditor = PWC
D GmbH y/e Auditor = KPMG (Germany)
B, C and D are components.

20. 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 Auditor - EY
B Co y/e Auditor = EY
C Co y/e Auditor = PWC
D GmbH y/e Auditor = KPMG (Germany)
B, C and D are components.

21. D GmbH y/e 31.12.12 Auditor = KPMG (Germany)
A Co Y/e Auditor - EY
B Co y/e Auditor = EY
C Co y/e Auditor = PWC
D GmbH y/e 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.

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

23. D GmbH y/e 31.12.12 Auditor = KPMG (Germany)
A Co Y/e Auditor - EY
B Co y/e Auditor = EY
C Co y/e Auditor = PWC
D GmbH y/e 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).

24. 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

25. 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.

26. 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.

27. 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.

28. 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.

29. 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.

30. 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.