Audit of Consolidated Financial Statements – CA Final Audit Question Bank

Audit of Consolidated Financial Statements – CA Final Audit Question Bank is designed strictly as per the latest syllabus and exam pattern.

Audit of Consolidated Financial Statements – CA Final Audit Question Bank

Question 1.
ANC Ltd., having two subsidiaries but did not have any holding company, is a company whose securities are not listed on any stock exchange, whether in India or outside India. The CEO of the ANC Ltd. says that since it is an unlisted company therefore consolidation of financial statement is not applicable. Comment on the contention of the CEO.
Answer:
Preparation of Consolidated Financial Statement:
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.

In the given case, ANC Ltd. is a holding company of two subsidiaries and not a subsidiary company.

Conclusion: Contention of the CEO of the company is not tenable and the company needs to prepare consolidated financial statements.

Question 2.
Write short note on: Responsibility of holding company for preparation of Consolidated Financial Statements. [Nov. 12 (4 Marks)]
Answer:
Responsibility of holding company for preparation of Consolidated 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.

The responsibility for the preparation and presentation of consolidated financial statements, among other things, is that of the management of the parent. This includes:

(a) identifying components, and including the financial information of the components to be included in the consolidated financial statements;
(b) where appropriate, identifying reportable segments for segmental reporting;
(c) identifying related parties and related party transactions for reporting;
(d) obtaining accurate and complete financial information from components;
(e) making appropriate consolidation adjustments;
(f) Harmonisation of accounting policies and accounting framework; and
(g) GAAP conversion, where applicable.

Apart from the above, the parent ordinarily issues instructions to the management of the component specifying the parent’s requirements relating to financial information of the components to be included in the consolidated financial statements.

The instructions ordinarily cover the accounting policies to be applied, statutory & other disclosure requirements applicable to the parent, including the identification of and reporting on reportable segments, and related parties & related party transactions, and a reporting timetable.

Question 3.
Deluxe Ltd. holds the ownership of 51% of voting power and control over Executive Ltd. Holding company have prepared the consolidated financial statement as required by Sec. 129 of the Companies Act, 2013. What will be your objective, as an Auditor, in the audit of such Consolidated Financial Statement? [May 18 – Old Syllabus (4 Marks)]
Or
Write a short note on: Auditor’s objectives in an audit of consolidated financial statements. [RTP-Nov. 19]
Answer:
Objectives of Auditor while auditing the Consolidating Financial Statements:
The auditor of the CFS is responsible for expressing an opinion on whether the CFS are prepared, in all material respects, in accordance with the FRF under which the parent prepares the CFS.

Therefore, the auditor’s objectives in an audit of CFS are:

(a) to satisfy himself that the consolidated financial statements have been prepared in accordance with the requirements of applicable financial reporting framework;
(b) to enable himself to express an opinion on the true and fair view presented by the consolidated financial statements;
(c) to enquire into the matters as specified in section 143(1) of the Companies Act, 2013;
(d) to report on the matters given in the clauses (a) to (i) of section 143(3) of the Companies Act, 2013; for other matters under section 143(3)(j) read with rule 11 of the Companies (Audit and Auditors) Rules, 2014; and
(e) The auditor should also validate the requirement of preparation of CFS for the company as per applicable FRF.

Question 4.
While doing the audit of consolidated financial statements, which current period consolidation adjustments are to be taken into account. [May 09 (8 Marks)]
Or
X Limited is the holding company of Y Limited and Z Limited. Explain the nature of current period consolidation adjustments which will be taken into account for the preparation of Consolidated Financial Statements. [May 14 (6 Marks)]
Or
You have been appointed to audit consolidated financial statements of Xerna Ltd. for the financial year 2020-21 while vouching, you observed that Intra Group Transactions have not been eliminated
You are, therefore, required to guide the management by explaining what are current period adjustments and list out the same.
Answer:
Current Period Consolidation Adjustment
These are those adjustments which are made in the accounting period for which Consolidated Financial Statements are prepared.

These adjustments primarily relate to elimination of intra-group transactions and account balances including:
(a) intra-group interest paid and received or management fees, etc;
(b) unrealised intra-group profits on assets acquired/transferred from/to other subsidiaries;
(c) intra-group indebtedness;
(d) adjustments relating to harmonising the different accounting policies being followed by the parent and its components;

(e) adjustments to the F.S. (of the parent and the components being consolidated) for recognized subsequent events or transactions that occur between the balance sheet date and the date of the auditor’s report on the consolidated F.S. of the group.

(f) adjustments for the effects of significant transactions or other events that occur between date of components balance sheet and not already recognised in its F.S. and the date of the auditor’s report on the group’s consolidated F.S. when the financial statements of the component to be used for consolidation are not drawn upto the same balance sheet date as that of the parent;

(g) In case of a foreign component, adjustments to convert a component’s audited F.S. prepared under the component’s local GAAP to the GAAP under which the consolidated F.S. are prepared.

(h) determination of movement in equity attributable to the minorities interest since the date of acquisition of the subsidiary.

(f) adjustments of deferred tax on account of temporary differences arising out of elimination of profit and losses resulting from intra-group transactions and undistributed profits of the component in case of consolidated F.S. prepared under Ind AS.

Question 5.
Write short note on: Permanent Consolidation adjustments. [May 13, Nov. 15 (4 Marks)]
Answer:
Permanent Consolidation Adjustments:
Permanent consolidation adjustments are those adjustments that are made only on the first occasion or subsequent occasions in which there is a change in the shareholding of a particular entity which is consolidated. These adjustments are:

Determination of Goodwill or Capital Reserve as per applicable AS.
Determination of the amount of equity attributable to minority.

Verification Points

Auditor should verify that the adjustment of goodwill or capital reserve and minority interest have been made appropriately.
The auditor should pay particular attention to the determination of pre-acquisition reserves of the components. Date(s) of investment in components assumes importance in this regard.
Examine whether the pre-acquisition reserves have been allocated appropriately between the parent and the minority of the subsidiary.
Verify the changes that might have taken place in permanent consolidation adjustments on account of subsequent acquisition of shares in the components, disposal of the components in the subsequent years.

“ICAI Examiner Comments”
Most of the examinees referred to irrelevant points on AS-21 and temporary adjustment.

Question 6.
H Limited, a company registered with SEBI, has three subsidiaries and one associate. While doing the audit of Consolidated Financial Statement (CFS) of H Limited you have come to know that the associate entity had made a provision dividend in its financial statement. H Limited computed its share of the results of operations of the associate after taking into account the proposed dividend. Comment. [Nov. 13 (4 Marks)]
Answer:
Adjustment of dividend provisions made by associate in consolidated financial statements:
Explanation (b) to Para 6 of AS 2i-“Accounting for Investments in Associates in Consolidated Financial Statements” requires that in case an associate has made a provision for proposed dividend in its financial statements, the investor’s share of the results of operations of the associate is computed without taking in to consideration the proposed dividend.

In the present case, the consolidated financial statements are prepared in violation of AS-23 to the extent that share of result of operations of associate is computed after taking into account the proposed dividend.

Conclusion: Auditor is required to state the matter and quality the report accordingly.

Question 7.
A Ltd. holds the ownership of 10% of voting power and control over the composition of Board of Directors of B Ltd. While planning the statutory audit of A Ltd., what factors would be considered by you for audit of financial statements? [May 15 (6 Marks)]
Answer:
Special considerations in case of entities controlling the composition of Board of Directors of others:
Ownership of voting power is not necessary to control the other enterprise. Control may be exercised by controlling the composition of the Board of Directors (in the case of a company) or corresponding governing body (in the case of any other enterprise) with a view to obtain economic benefits.

For example, an entity holds only 10 per cent of the share capital of another entity but it has control over the composition of the Board of Directors/governing body of the second entity. In such a case, the first entity would be considered as a parent of the second entity and, therefore, it would consolidate the second entity in the consolidated financial statements as subsidiary.

The auditor, therefore, apart from carrying out general procedures, should verify whether the parent controls the composition of the Board of Directors or corresponding governing body of any entity.

In this regard, the auditor may verify the Board’s minutes, shareholder agreements entered into by the parent, agreements with the entities to which the parent might have provided any technology or know-how, enforcement of statute, as the case may be, etc.

The auditor would have to use his professional judgment to determine whether the parent controls the composition of the Board of Directors of any other entity. If yes, whether that entity has been consolidated as a subsidiary in the consolidated financial statements.

“ICAI Examiner Comments”
Most of the candidates discussed SA 550 on Related Parties but did not mention about audit procedures. Many candidates could not identify holding subsidiary relationship thereby they did not refer to consolidation of Holding and Subsidiary company accounts. Candidates could not narrate the opinion to be made where related party transactions are not properly accounted and disclosed.

Question 8.
Parent Ltd. acquired 51% shares of Child Ltd. during the year ending 31.03.2020. During the financial year 2020-21 the 20% shares of Child Ltd. were sold by parent Ltd Parent Ltd. while preparing the financial statement for the year ending 31.03.2020 and 31.03.2021 did not consider the financial statements of Child Ltd. for consolidation. As statutory auditor how would you deal with it? [May 15 (6 Marks)]
Or
Moon Ltd. acquired 65% shares of Sun Ltd. on 28th October 2020. On 25th April 2021 they sold 25% shares of Sun Ltd. While preparing consolidated financial statements for the year ended 31st March, 2021, accountant of Moon Ltd. did not consider financial statements of Sun Ltd. for consolidation. Comment. [May 17 (5 Marks)]
Answer:
Auditor’s duties in case of exclusion of subsidiaries/associates in consolidation:
As per section 129(3) ofthe Companies Act, 2013, where a company has one or more subsidiaries or associate companies, itshall, 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.

As per Rule 6 of Companies (Accounts) Rules, 2014, the consolidation of financial statements of the company shall be made in accordance with the provisions of Schedule III to the Act and the applicable AS. However, a company which is not required to prepare consolidated financial statements under the Accounting Standards, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act.

As per AS 21 “Consolidated Financial Statements” consolidation of a subsidiary is not required if the relationship of parent with the subsidiary is intended to be temporary or subsidiary operate under sever long term restrictions which significantly impair its ability to transfer funds to the parent.

Where an enterprise owns majority of voting power by virtue of ownership of the shares of another enterprise and all the shares are acquired & held exclusively with a view to their subsequent disposal in the near future, the control by the first mentioned enterprise would be considered temporary and the investments in such subsidiaries should be accounted for in accordance with AS 13 “Accounting for Investments”.

The auditor should satisfy himself that the exclusion made by the management falls within these two categories.

As per Ind AS 110, there is no such exemption for ‘temporary control’, or “for operation under severe long-term funds transfer restrictions” and consolidation is mandatory for Ind AS compliant financial statement in this case.

In the given case, Parent Ltd. has acquired 51% shares of Child Ltd. during the year ending 31.03.2020 and sold 20% shares during the year 2020-21. Parent Ltd. did not consolidate the financial statements of Child Ltd. for the year ending 31.03.2020 and 31.03.2021.

Conclusion: The intention of Parent Ltd. is quite clear that the control in Child Ltd. is temporary as the former company disposed off the acquired shares in the next year of its purchase.

Parent Ltd. is not required to prepare consolidated F.S. as per AS 21. However, for compliance of Sec. 129(3), Parent Ltd. is required to made disclosures in the F.S. as per the provisions provided in Schedule III to the Companies Act 2013.

If the Parent Ltd. is required to prepare its financial statements under Ind AS, it shall have to prepare Consolidated F.S. in accordance with Ind AS 110 as exemption for ‘temporary control’, or “for operation under severe long-term funds transfer restrictions” is not available under Ind AS 110.

“ICAI Examiner Comments”
Most of the candidates mentioned that as per Sec, 129(3) of the Companies Act, 2013 where a company having subsidiary, which is not required to prepare consolidated F.S. under the accounting standards, it shall be sufficient if the company complies with the provisions on consolidated F.S. provided in Schedule III to the Act. Only few candidates referred to AS 21 and AS 13.

Question 9.
H Ltd. owns 55% voting power in S Ltd. It however holds and discloses all the shares as “Stock-in-trade” in its accounts. The shares are held exclusively with a view to their subsequent disposal in the near future. H Ltd. represents that while preparing Consolidated Financial Statements, S Ltd. can be excluded from the consolidation. As a Statutory Auditor, how would you deal?
Answer:
Consolidation of Financial Statement:
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.

There could be two reasons for exclusion of a subsidiary, associate or jointly controlled entity
(a) The relationship of parent with the subsidiary, associate or jointly controlled entity is intended to be temporary, or
(b) The subsidiary, associate or joint venture operates under several long-term restrictions which significantly impair its ability to transfer funds to the parent.
The auditor should satisfy himself that the exclusion made by the management falls within these two categories.

In the present case, H Ltd’s intention is to dispose off the shares in the near future as shares are being held as stock in trade and it is quite clear that the control is temporary.

Conclusion: H Ltd. is not required to consolidate as per requirement of AS 21, However, for the compliance of provisions related to consolidation of financial statements given under Section 129(3) of the Companies Act, 2013 read with Companies (Accounts) Rules, 2014, H Ltd. is required to consolidate the financial statements as per the provisions on consolidated financial statements provided in Schedule III to the Act.

Question 10.
B Ltd. is the Subsidiary company of A Ltd. ABC & Associates has been appointed as auditor of A Ltd. for the Financial year 2020-2021 and XYZ & Associates has been appointed as auditor of B Ltd. for the year 2020-21. Explain the role of ABC & Associates and XYZ & Associates as auditors of the parent company and subsidiary respectively. [Nov. 16 (4 Marks) MTP-Oct 20]
Answer:
Role of Auditor of Parent Company and Subsidiary company:
SA 600 “Using the work of Another Auditor” establishes the standard when an auditor, reporting on the financial statements of a group (consolidated financial statements), uses the work of another auditor on the financial information of one or more components included in the financial statements of the entity. Accordingly, role of auditor of parent company and subsidiary are as follows:

Role of Auditor of Parent Company:
(a) Consider the professional competence of Other Auditor, if Other Auditor is not a member of ICAI.
(b) Visit component and examine books of account, if essential.
(c) Obtain sufficient appropriate evidence, that work of Other Auditor is adequate for Principal Auditor’s purposes.
(d) Discuss audit procedures applied by Other Auditor.
(e) Review a written summary of Other Auditor’s procedures and findings through questionnaires/ checklist.
(f) Consider significant findings of Other Auditor and discuss audit findings with Other Auditor. Perform supplemental tests if necessary.

Role of Auditor of Subsidiary Company:
The auditor of subsidiary company, knowing the context in which his work is to be used by the principal auditor, should co-ordinate with the principal auditor w.r.t. following:
(a) Adhering to time-table.
(b) Bringing to the attention of PA any significant finding.
(c) Compliance with relevant statutory requirements.
(d) Respond to detailed questionnaire.

Question 11.
You are appointed as an auditor of Nawab Limited, a listed company which is a main supplier to the UK building and construction market. With a turnover of ₹ 2.9 billion, the company operates through 11 business units and has nearly 180 branches across the countries.
As an auditor, how will you draft the report in case:
(a) When the Parent’s Auditor is also the Auditor of all its Components?
(b) When the Parent’s Auditor is not the Auditor of all its Components?
(c) When the Component(s) Auditor Reports on Financial Statements under an Accounting Framework Different than that of the Parent?
(d) When the Component(s) Auditor Reports under an Auditing Framework Different than that of the Parent?
(e) Where the financial statements of one or more components are not audited? [MTP-April 18]
Or
You are appointed as an auditor of Najib Limited, a listed company which is a main supplier to the USA building and construction market. With a turnover of Rs. 1.9 billion, the company operates L through 11 business units and has nearly 170 branches across the countries.
As an auditor, how will you draft the report in case:
(i) When the Component(s) Auditor Reports on Financial Statements under an Accounting Framework different than that of the Parent?
(ii When the Component(s) Auditor Reports under an Auditing Framework different than that of the Parent? [RTP – Nov. 18]
Or
You are appointed as an auditor of Azad Limited, a listed company which is a main supplier to the USA building and construction market. With a turnover of? 1.6 billion, the company operates through 9 business units and has nearly 135 branches across the countries. As an auditor, how will you draft the report in case (i) When the Parent’s Auditor is also the Auditor of all its Components? and (ii) When the Parent’s Auditor is not the Auditor of all its Components? [MTP-May 20]
Answer:
Reporting Considerations
(a) Parent Auditor is also the auditor of all of its components
Auditor should issue an audit report expressing opinion whether the consolidated financial statements give a true and fair view of the state of affairs of the Group as on balance sheet date and as to whether consolidated profit and loss statement gives true and fair view of the results of consolidated profit or losses of the Group for the period under audit.

Where the consolidated financial statements also include a cash flow statement, the auditor should also give his opinion on the true and fair view of the cash flows presented by the consolidated cash flow statements.

Auditor of Parent should report whether principles and procedures for preparation and presentation of consolidated F.S. as laid down in the relevant AS [s] have been followed. In case of any deviation, the auditor should make adequate disclosure in the audit report so that users of the consolidated F.S. are aware of such deviation.

(b) Parent’s Auditor is not the Auditor of all of its components
If the parent’s auditor is not the auditor of the components included in the consolidated F.S., the auditor of the consolidated F.S. should also consider the requirement of SA 600.

If the parent’s auditor decides that he will make reference to the audit of the other auditors in the report as required by SA 706, he should disclose clearly the portion of the F.S. audited by the other auditor (s]. This may be done by stating the amount or %age of total assets and total revenue of subsidiary(s] included in consolidated F.S. not audited by him.

It is to be noted that reference in the report of the auditor of consolidated F.S. to the fact that part of the audit of the group was made by other auditor is not to be construed as a qualification of the opinion but rather as an indication of the divided responsibility between the auditors of the parent and its subsidiaries.

(c) Component Auditor Reports on F.S. under an Accounting Framework different than that of the Parent
When a component’s F.S. are prepared under an accounting framework that is different than that of the framework used by the parent in preparing group’s consolidated F.S., the parent’s management perform a conversion of the components’ audited F.S. from the framework used by the component to the framework under which the consolidated F.S. are prepared.

The conversion adjustments are audited by the principal auditor to ensure that the financial information of the components] is suitable and appropriate for the purposes of consolidation.

Alternatively, component may prepare financial statements on the basis of the parent’s accounting policies, as outlined in the group accounting manual. The local component auditor can then audit and issue an audit report on the components F.S. prepared in accordance with “group accounting policies”.

The Principal auditor can then decide whether or not to rely on the components’ audit report and make reference to it in the auditor’s report on the consolidated financial statements.

(d) Component Auditor Reports under an Auditing Framework Different than that of the Parent
Audits of F.S., including consolidated F.S., are performed under auditing standards generally accepted in India.

In order to maintain consistency of the auditing framework and to enable the parent auditor to rely and refer to the other auditor’s audit report in their audit report on the consolidated F.S., the components’ F.S. should also be audited under a framework that corresponds to Indian Auditing Standards.

(e) Components Not Audited
F.S. of all components included in consolidated F.S. should be audited or subjected to audit procedures. Such audits and audit procedures can be performed by the auditor reporting on the consolidated F.S. or by the components’ auditor.

Where the F.S. of one or more components continues to remain unaudited, the auditor reporting on the consolidated RS. should consider unaudited components in evaluating a possible modification to his report on the consolidated F.S.

The evaluation is necessary because the auditor has not been able to obtain sufficient appropriate audit evidence in relation to such consolidated amounts/balances.

Auditor should evaluate both qualitative and quantitative factors on the possible effect of such amounts remaining unaudited when reporting on the consolidated F.S. using the guidance provided in SA 70S, “Modifications to the Opinion in the Independent Auditor’s Report”.

Question 12.
C Ltd. is holding 55% shares of D Ltd. M/s. AB & Associates are statutory auditors of C Ltd. Whereas for D Ltd. there is another firm appointed as statutory auditors. What are the reporting responsibilities of M/s. AB & Associates for audit of consolidated financial statements?[May 17 (5 Marks)]
Answer:
Reporting Responsibilities of auditor of Holding Company if auditor of subsidiary company is different:
If the parent’s auditor is not the auditor of the components included in the consolidated F.S., the auditor of the consolidated F.S. should also consider the requirement of SA 600.

If the parent‘s auditor decides that he will make reference to the audit of the other auditors in the report, he should disclose clearly the portion of the F.S. audited by the other auditor(s). This may be done by stating the amount or %age of total assets and total revenue of subsidiary(s) included in consolidated F.S. not audited by him.

It is to be noted that reference in the report of the auditor of consolidated F.S. to the fact that part of the audit of the group was made by other auditor (s) is not to be construed as a qualification of the opinion but rather as an indication of the divided responsibility between the auditors of the parent and its subsidiaries.

Requirements of SA 600:
When the principal auditor concludes, based on his procedures, that the work of the other auditor cannot be used and the principal auditor has not been able to perform sufficient additional procedures regarding the financial information of the component audited by the other auditor, the principal auditor should express a qualified opinion or disclaimer of opinion because there is a limitation on the scope of audit.

When the principal auditor has to base his opinion on the financial information of the entity as a whole relying upon the statements and reports of the other auditors, his report should state clearly the division of responsibility for the financial information of the entity by indicating the extent to which the financial information of components audited by the other auditors have been included in the financial information of the entity, e.g., the number of divisions/branches/ subsidiaries or other components audited by other auditors.

Question 13.
H Co. Ltd., is a holding company with two subsidiaries R Co. Ltd. and S Co. Ltd., The H Co. Ltd., adopts straight line method of depreciation for its assets whereas S Co. Ltd., follows written down value or diminishing value method. Though R Co. Ltd., follows straight line method of depreciation, it does not give effect to component accounting of depreciation in respect of high value assets, while consolidating the financials of the R Co. Ltd., and S Co. Ltd., with those of H Co. Ltd., determine the possible issue that you have to ensure for compliance in the light of above facts. [May 18 – New Syllabus (5 Marks)]
Answer:
Consolidated Financial Statements:
In preparing consolidated financial-statements, the financial statements of the parent and its subsidiaries are combined on a line by line basis by adding together like items of assets, liabilities, income and expenses.

Consolidated financial statements are prepared using uniform accounting policies for like transactions. If a member of the group uses different accounting policies, appropriate adjustments are made to its financial statements when they are used in preparing the consolidated financial statements.

If it is not practicable to use uniform accounting policies in preparing the consolidated financial statements, that fact should be disclosed together with the proportions of the items in the consolidated financial statements to which the different accounting policies have been applied.

As per paras 60 and 61 of Ind AS 16, ‘Property, Plant and Equipment’, a change in the method of depreciation shall be accounted for as a change in an accounting estimate as per Ind AS 8, ‘Accounting Policies, Changes in Accounting Estimates and Errors’. Therefore, the selection of the method of depreciation is an accounting estimate and not an accounting policy.

Therefore, there can be different methods of estimating depreciation for property, plant and equipment, if their expected pattern of consumption is different. The method once selected in the individual financial statements of the subsidiary should not be changed while preparing the consolidated financial statements.

Accordingly, in the given case, the property, plant and equipment of S Co. Ltd. (subsidiary company) may be depreciated using WDV method and property, plant and equipment of parent company may be depreciated using SLM, if such method closely reflects the expected pattern of consumption of future economic benefits embodied in the respective assets.

However, under the provisions of Companies Act, 2013 and as per requirement of AS 10, component accounting of depreciation is mandatory. Auditor should insist the parent company to ask R Co. Ltd. (subsidiary company) to give effect to component accounting of depreciation before consolidation of financial statements.

Question 14.
H Limited is an investment company preparing its Financial Statements in accordance with Ind AS. The company obtains funds from various investors and commits its performance for fair return and capital appreciation to its investors. During the year under audit, it had been observed that the company had invested 25% in SI Ltd., 50% in S2 Ltd. and 60% in S3 Ltd. of the respective share capitals of the Investee Companies. When checking the investment schedule of the company, an issue cropped as to whether there would arise any need to consolidate accounts of any such investee companies with those of H Limited in accordance with Section 129(3) of the companies Act, 2013 which contains no exclusion from consolidation. Analyse the issues involved and give your views. [Nov. 18-New Syllabus (5 Marks)]
Answer:
Auditor’s duties in case of exclusion of subsidiaries/associates in consolidation:
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.

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). As per Para 33, parent of an investment entity shall consolidate all entities that it controls, including those controlled through an investment entity subsidiary, unless the parent itself is an investment entity.

In the given case H Limited is an investment company preparing its Financial Statements in accordance with Ind AS. Company had invested 25% in SI Ltd., 50% in S2 Ltd. and 60% in S3 Ltd. of the respective share capitals of the Investee Companies.

Conclusion: H Ltd. is not required to consolidate accounts of investee companies as provided under Para 31 of Ind-AS 110. However, company is required to comply with the provisions on consolidated financial statements as provided in Schedule III.

Question 15.
What is meant by “Group financial statements”? Give reference of relevant Auditing Standard and issues addressed concerning the audit of Group financial statements. . [Nov. 18 – Old Syllabus (4 Marks)]
Answer:
Meaning of Group Financial Statements:

Group Financial Statements also known as Consolidated financial statements are the financial statements of a group presented as those of a single entity.
Group financial statements are presented for a Group of entities under the control of a Parent.
A group comprises a parent and its subsidiaries. A parent is an entity that has one or more subsidiaries. Group financial statements are presented, to the extent possible, in the same format as adopted by the parent for its separate Financial Statements.
AS-21 and Ind AS-110 lays down principles and procedures for preparation and presentation of Consolidated Financial Statements.

Question 16.
R Ltd. owns 51% voting power in S Ltd. It however, holds and discloses all the shares as “Stock-intrade” in its financial statements since the shares are held exclusively with a view to their subsequent disposal in the near future. R Ltd. represents that while preparing Consolidated Financial Statements, S Ltd. can be excluded from the consolidation. As the Statutory Auditor of R Ltd., how would you deal when the consolidated financial statements are to be drawn up in compliance with Ind AS.
[May 19 – Old Syllabus (4 Marks)]
Or
M Ltd. acquired 51% shares of S Ltd. on 01.04.2020 and sold 25% of these shares during the financial year 2020-21. M Ltd. did not prepare Consolidated Financial Statements for the financial year 2020-21 on the plea that the control was only temporary. Do you agree with the view of M Ltd.? Decide, assuming that M Ltd. is required to prepare its financial statements under Ind As. [Nov. 19 – Old Syllabus (4 Marks)]
Answer:
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.

There is no exemption for ‘temporary control’, or “for operation under severe long-term funds transfer restrictions” in Ind AS 110 and consolidation is mandatory for Ind AS compliant financial statement in this case.

Conclusion: Auditor should ask the management for the consolidation of S Ltd. If Consolidation not made, auditor should modify the audit report on Consolidated Financial Statements.

Question 17.
ALM Associates has been appointed as auditor of M/s Harry Ltd. which acquired 55% shares in M/s Sam Ltd. on 15th October, 2020. During audit of Harry Ltd. the auditors found that the company have not prepared consolidated financial statements because on the date of acquisition the fair value of certain assets & liabilities has not been ascertained which is significant and are accounted for on estimated basis only. Help ALM Associates in framing opinion paragraph of audit report. [May 19 – New Syllabus (4 Marks)]
Answer:
Consolidation of financial statements:
As per section 129(3) ofthe 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.

As per Rule 6 of Companies (Accounts] Rules, 2014, the consolidation of financial statements of the company shall be made in accordance with the provisions of Schedule III to the Act and the applicable AS. However, a company which is not required to prepare consolidated financial statements under the Accounting Standards, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act.

In the present case, during audit, auditors found that the company have not prepared consolidated financial statements because on the date of acquisition the fair value of certain assets and liabilities has not been ascertained which is significant and are accounted for on estimated basis only.

Conclusion: Consolidation is mandatory, auditor is required to state the fact in auditor report on standalone financial statements.

Note: Answer given in the Suggested answer oflCAI is entirely different covering therein the draft of Adverse opinion and Basis for Adverse opinion.

Author’s view: It is not necessary that auditor of standalone financial statements should be appointed as auditor of consolidated financial statements, so while auditing standalone financial statements, auditor is not required to modify the opinion on standalone financial statements on the ground of non-consolidation.

Further, when consolidated F.S. are not available, how the auditor is issuing report on consolidated financial statements (It is specified in the suggested answer – Opinion Section – the accompanying consolidated financial statements do not give a true and fair view)

Audit of Consolidated Financial Statements – CA Final Audit Question Bank

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