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Dear sir,
Please correct me if I am wrong for the following summary regarding the goodwill of the component:
“1) Annual impairment test is required for goodwill of components irrespective of whether there is any indication of impairment.
2) Assessing the goodwill impairment is the responsibility of both component and group auditors.
3) The impairment of goodwill of components should be assessed individually at component levels by component auditors and then should be checked by group auditor which is then consolidated.
4) The goodwill of components and its impairment should be in the FS of both the components and the group.
5) The goodwill is likely to be overstated as the implication of the regulations was not identified by group audit manager (and component auditor was also incompetent).”Further, if any component is not significant (lower than 15% threshold) for the group and fixed assets of the component is material for the group then the group auditor can only use analytical procedures on the FS of that component?
1) yes
2) no – component auditor does not “see” goodwill because it arises only on consolidation
3) impairment test is management’s responsibility (in this case Magnolia’s management because they are responsible for the consolidated financial statements) – Crocus will audit the impairment test
4) no – it is fundamental that you should understand that goodwill is a balance only in the consolidated financial statements
5) it’s overstated in the first place because Magnolia’s management has failed to recognise an indicator of impairment/tested impairment. The group audit manager has failed to detect the overstatement. Component auditor has nothing to do with goodwill.An auditor is never restricted to using only analytical procedures – that would be a scope limitation.
Dear sir,
Thank you so much for the clarification !
I also need to confirm that:
1) This government regulations may affect the goodwill and hence the going concern status, valuation of fixed assets and inventories of the component.
2) Goodwill and fixed assets of the component may have been impaired.
3) It may also affect other group components as they may have the restricted products of Daisy Co. The valuation of their inventories should be adjusted to the lower cost and NRV.4) Further in “Further Actions” of recommended answer it is mentioned that “The group audit team should confirm the materiality level which was used in audit procedures is in line with their assessment of an appropriate component materiality” I am not sure what it is trying to say. Maybe it is saying that “the group engagement team, or a component auditor on its behalf, shall perform an audit of the component using component materiality”.
5) Or component auditor and group auditor will use different materiality levels for the audit of the component?Thanks,
1) It’s not “and hence”. Consider Daisy, first of all – the regulation affects a product (chemical) that it manufactures and sells. So, most obviously, the NRV of the inventory of this chemical may be less than cost. There may be a going concern risk but only 1/2 of Daisy’s business is international, so if this is only one of many chemicals sold abroad the risks is not significant. (Foxglove & Co have considered and concluded on this.) However, since Daisy may now produce much less of this chemical, this may affect the value in use (and hence recoverable amount) of plant and equipment (PE) used in the manufacture of this chemical. (More audit work still needs to be done in this area.) Consider now Magnolia – if PE needs to be written down in Daisy, that will flow through to the consolidated SoFP. Also, goodwill ($3m) in the consolidated SoFP represents the excess that Magnolia was prepared to pay over the fair value of Daisy’s net assets i.e. for future profits. So the reduction in the revenue stream from the now prohibited chemical impairs the value of goodwill.
2) Yes as explained above.
3) Correct
4) It’s just saying to confirm that the materiality used by Foxglove in the audit of Daisy is sufficient for the audit of the consolidated financial statements.
5) If all components are making profits, the materiality levels used by the component auditors to form an opinion on the component will be less than the materiality needed for the consolidated financial statements – you have to contrive the numbers with a loss-making subsidiary (see page 99 of the notes) for group materiality to be less than materiality for an individual component.
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