Audit of Consolidated Financial Statement

CA Final – Advanced Auditing & Professional Ethics Additional Questions for Practice (Chapter 9)
9
Chapter Audit of Consolidated Financial Statement
Q.1 Whether preparation of consolidated financial statements is mandatory? If yes, please

elaborate on the requirements under the statute. [Study Material – ICAI]
Ans.: Consolidation of Financial Statements:
 As per section 129(3) of the Companies Act, 2013, where a company has one or more
subsidiaries or associate companies, it shall, in addition to its own financial statements
prepare a consolidated financial statement of the company and of all the subsidiaries and
associate companies in the same form and manner as that of its own and in accordance
with the applicable accounting standards.
 However, by virtue of second proviso to Rule 6 of Company (Accounts) Rules, 2014, the
requirement related to preparation of consolidated financial statements shall not apply
to a company if it meets the following conditions:
(i) it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another
company and all its other members, including those not otherwise entitled to vote,
having been intimated in writing and for which the proof of delivery of such
intimation is available with the company, do not object to the company not
presenting consolidated financial statements;
(ii) it is a company whose securities are not listed or are not in the process of listing on
any stock exchange, whether in India or outside India; and
(iii) its ultimate or any intermediate holding company files consolidated financial
statements with the Registrar which are in compliance with the applicable
Accounting Standards.
Conclusion: Preparation of consolidated financial statements is mandatory for all
holding companies unless exempted under the provisions of Rule 6 as stated above.
Q.2 Please elaborate on the situations wherein the requirement related to preparation of
consolidated financial statements may not apply. [Study Material – ICAI]
Ans.: Situations in which preparation of consolidated financial statements may not apply:
As per 2nd proviso to Rule 6 of Company (Accounts) Rules, 2014, the requirement related to
preparation of consolidated financial statements shall not apply to a company if it meets the
following conditions:
(i) it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another company
and all its other members, including those not otherwise entitled to vote, having been
intimated in writing and for which the proof of delivery of such intimation is available
with the company, do not object to the company not presenting consolidated financial
statements;
(ii) it is a company whose securities are not listed or are not in the process of listing on any
stock exchange, whether in India or outside India; and
(iii) its ultimate or any intermediate holding company files consolidated financial statements
with the Registrar which are in compliance with the applicable Accounting Standards.
©CA. Pankaj Garg www.altclasses.in Page 1

Q.3 CA. Vimal is the auditor of Excellent Ltd., a parent company which presents Consolidated
Financial Statements. The management of Excellent Ltd. has provided the list of the
components included in the Consolidated Financial Statements. As an auditor of
Consolidated Financial Statements, CA Vimal has to verify that all the components have
been included in the Consolidated Financial Statements and review the information
provided by the management in identifying the components. State the procedures to be
followed by CA. Vimal in respect of completeness of this information.
[Nov. 20 – New Syllabus (5Marks)]
Ans.: Auditor’s procedures in Auditing the consolidation:
(a) The auditor should obtain a list of subsidiaries, associates & joint ventures included in
CFS.
(b) The auditor should review the information provided by the management of the parent
identifying the subsidiaries, associates and joint ventures.
(c) The auditor should verify that all the subsidiaries, associates and joint venture have
been included in the consolidated financial statements.
(d) In respect of completeness of this information, the auditor should perform the following
procedures:
 review his working papers for the prior years for the known subsidiaries, associates
and joint ventures;
 review the parent’s procedures for identification of subsidiaries and joint ventures;
 review the investments to determine the shareholding in other entities;
 review the joint venture and other relevant agreements entered into by the parent;
 review the statutory' records maintained by the parent, for example register
required under section 186 of the Companies Act, 2013.
(e) The auditor should also identify the changes in the shareholding that might have taken
place since the last audit.
Q.4 JRS Limited holds the majority ownership of R Ltd. & K Ltd. S Ltd. is an intermediate
subsidiary of JRS Limited in Surat. The JRS Limited presents the consolidated financial
statements for audit purposes to MMT & Co. As a statutory auditor of MMT & Co. obtain a
listing of all the components and verify that all the components included in financial
statements unless any component meet criterion for exclusion. Explain any two reasons
which are considered by MMT & co for exclusion of components from the consolidated
financial statements and reporting of reasons of exclusion thereof.
[Jan. 21 – New Syllabus (5 Marks)]
Ans.: Exclusion of Components from the Consolidated F.S.
 As per Para 11 of AS 21, “Consolidated Financial Statements”, subsidiary should be
excluded from consolidation when:
(a) control is intended to be temporary because the subsidiary is acquired and held
exclusively with a view to its subsequent disposal in the near future; or
(b) it operates under severe long-term restrictions which significantly impair its ability
to transfer funds to the parent.
 As per Para 31 of Ind-AS 110, an investment entity shall not consolidate its subsidiaries.
Instead, an investment entity shall measure an investment in a subsidiary at fair value
through profit or loss in accordance with Ind AS 109 (Financial Instruments).

Reporting of reasons of exclusion:

 Where a subsidiary or an associate or a jointly controlled entity is excluded from the
consolidated financial statements, the auditor should examine the reasons for exclusion.
 In the case of an entity which is excluded from consolidation on the ground of temporary
relationship, the auditor should verify that the intention of the parent, to dispose the
subsidiary, investment in associate or interest in jointly controlled entity, in the near
future, existed at the time of acquisition of the subsidiary, making investment in associate
or jointly controlled entity.
 The auditor should satisfy himself that the exclusion made by the management falls
within the exceptions covered in Para 11 of AS 21 or Para 31 of Ind-AS 110, as the case
may be.
 The auditor should also verify that the reasons for exclusion are given in the consolidated
financial statements.
Q.5 Before commencing an audit of consolidated financial statements, the auditor should plan
his work to enable him to conduct and effective audit in an efficient and timely manner.
What are the important aspects that an auditor should consider in audit plan?
[Jan. 21 – Old Syllabus (5 Marks)]
Ans.: Planning the audit of CFS:
 Before commencing an audit of consolidated financial statements, the auditor should plan
his work to enable him to conduct an effective audit in an efficient and timely manner.
 The auditor should make plans, among other things, for the following:
(a) understanding of the group structure and group-wide controls including assessment
of Information Technology (IT) system and related general and applications IT
related controls (manual and automated) for consolidation process;
(b) understanding of accounting policies of the parent and its components as well as of
the consolidation process including the process of translation of F.S. of foreign
components;
(c) determining and programming the NTE of the audit procedures to be performed
based on the assessment of the risk of material misstatement in the consolidation
process;
(d) determining the extent of use of other auditor’s work in the audit; and
(e) coordinating the work to be performed.
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Law stated in this publication is upto 31.10.2020 and is relevant for May 2021 Exams and onwards.
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CA Final – Advanced Auditing & Professional Ethics Additional Questions for Practice (Chapter 9)

Q.1 Whether preparation of consolidated financial statements is mandatory? If yes, please

©CA. Pankaj Garg www.altclasses.in Page 1

©CA. Pankaj Garg www.altclasses.in Page 2

Reporting of reasons of exclusion:

©CA. Pankaj Garg www.altclasses.in Page 3

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