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Hi Kim,
I have a question pertaining to group audit report.
the question is
‘ Describe the imact on the Group auditor’s report if the adjustments are not made’The group has 2 subsidiaries
First subsidiary has material uncertainty issue and those charged with governance state that they are unwilling to discloseSecond subsidiary has not adjusted intercompany transaction and reluctant to make adjustment(assume material but not pervasive)
From my perspective, first subsidiary will give rise to adverse opinion since it is both material and pervasive on the grounds of material misstatement. The reason it’s pervsive is material uncertainty represents significant proportion of financial statement(FS) and fundamentally important to the users of FS.
For the second subsidiary, this will give rise to qualified opinion because it is material and not pervasive on the grounds of material misstatement.
Then, for aggregated impact on FS, which opinion do we express ? qualified opinion or adverse opinion ? and why ?
i’m having difficulty answering this question because i’m not sure which opinion will need to be issued and on what basis
Thank you for your help Kim !
The auditor’s report on subsidiary 1’s FS should include a qualified opinion – see 2nd to last para on page 117 of the notes.
I don’t understand what you are suggesting re subsidiary 2 – intra-group transactions are eliminated on consolidation – they do not affect the individual co’s.
Suppose there was a material misstatement in S2’s financial statements – say non-depreciation of assets. There is no reason why the consolidated FS have to included the misstatement – P’s management can adjust for this on consolidation.
The auditor’s report on the group FS is not a “sum” or combination of individual opinions on the subsidiaries’ FS – it depends on how it affects the consolidated FS and disclosures thereto – so there may be NO affect.
Hi Kim,
For subsidiary 1, the reasoon i said it’s adverse becuase the company has material uncertainty on going concern therefore shouldn’t it be adverse opinion ?
For subsidiary 2, on intra group transaction, i know they must be eliminated but management have not eliminated and reluctant to eliminate because they intend to overstate on assets, liability including any unrealized profit overstating profit. THerefore i mentioned it’s qualfied opinion.
The reason i issued opinion was becuase management was reluctant to adjust it.
THen, if the consolidated FS is not the sum of individual opinion of the subsidiaries, then when the question asks for the impact on Group audit, we just mention individual impact and aggregated impact and that’s all ?
1. NO this is WRONG. Lack of disclosure in one note (amongst the 30 or so notes that are typically included in a set of financial statements) does not affect the amounts in the SOFP/SOPL/CFS so is NOT pervasive. https://opentuition.com/topic/audit-opnion-2/
2. As you have now clarified, the misstatement is in the CONSOLIDATED financial statements and NOT in the subsidiary’s. It would come down to materiality. If failure to eliminate intra-group sales/cost of sales resulted in 5%+ misstatement of profit, it would seem material —> “except for”. (The effects of overstatement of receivables/payables will cancel out in SoFP and is unlikely to have any significant effect on ratios.)
There is a learning outcome: “E3f) Explain the implications for the auditor’s report on the group financial statements of an entity where the opinion on a component (subsidiary) is modified in a given situation.” For example – misstatement in subsidiary gives rise to “except for” opinion in auditor’s report on subsidiary. If not corrected on consolidation AND material to the consolidated FS – the group audit opinion will also be “except for”. If corrected OR immaterial to the consolidated FS – there would be no effect on the group audit opinion.
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