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Dear sir,
In suggested answer it is written as “The suggestion to transfer the debts into the parent company would not resolve the problem; if the debt obligations were ‘transferred’ to the parent using an appropriate journal, they would be replaced by a matching liability to the parent company in the financial statements of Northwest Co, and the same problem would exist and while this would be eliminated in the consolidated accounts, this does not allow the auditor of Northwest Co to gather sufficient appropriate evidence in relation to the going concern status of the company.”
I think, the journal will be:
In Subsidiary account:
Dr. Loan payable
Cr. Payable to parentIn Parent account:
Dr. Receivable from Subsidiary
Cr. Loan payable1) These journals are cancelled in consolidation, so the net off journal has no effect on the consolidated accounts? In consolidated accounts, the loan payable of Northwest will be consolidated.
2) The loan payable will exist in Northwest accounts, which need to be audited by Northwest auditors?
3) The group auditor need to audit the accounts of Northwest as the component is significant because it is loss making component and has also significant debt obligations?
4) The examiner commented an alternative understanding of the suggestion that “debt could be transferred by the lender, ie so that it did not refer to Northwest Co at all.”. Does this mean that the loan will be removed from the accounts of Northwest Co as the lender will receive or will ask the amount from the Valerian Co and this option will work as there is no need to obtain evidence for Northwest accounts as no such loan will exist?Thanks for clarification.
Dear sir,
The suggested answer says “if the debt obligations were ‘transferred’ to the parent using an appropriate journal, they would be replaced by a matching liability to the parent company in the FS of Northwest Co, and the same problem would exist and while this would be eliminated in the CFS, this does not allow the auditor of Northwest Co to gather sufficient approproate evidence in relation to the going concern status of the company.”
Further, it says “The group engagement partner is recommending inappropriate accounting treatment to transfer the debt into the parent company without any matching liability in Northwest’s accounts, i.e., by transferring the debts and then consequently cancelling any obligations from Northwest Co due to Valerian Co.”
Can you please explain these two statements.
Thanks,
The entries would be as you say – but “you” are “an audit manager at Thornhill & Co responsible for the audit of Northwest Co, a subsidiary of Valerian Co”.
So although the intra-group bances are eliminated in the consolidated financial statements of Valerian, that makes no difference to the financial statements of Northwest (on which you are reporting). The debt will still be debt in the SoFP of Northwest.
The above would be “appropriate” in so far as there would be still be a liabililty in Northwest’s financial statements.
The answer I have then says:
“It is POSSIBLE that the group engagement partner is recommending some form of INAPPROPRIATE accounting treatment to transfer the debt into the parent WITHOUT any matching liability in Northwest’s accounts, for example, by transferring the debts and then consequently cancelling any obligations from Northwest due to Valerian. This form of accounting manipulation could be used to disguise the true financial position of the group and may constitute fraud. Any suggestion to pursue this line of action should be firmly refused.”In this case, the other side of the the entry to “cancel” the debt in Northwest’s financial statements would presumably be a Cr to SoPL (either income or reduction in expense) – this would amount to fraudulent financial reporting.
Ok. Thank you for clarification.
1) Does the group auditor need to audit the accounts of Northwest as Northwest is a significant component because it is a loss making component and also has significant debt obligations?
2) The BPP provided a tip that “the group auditor’s offer might also be read as saying that the debt could be transferred by the lender, ie so that it did not refer to Northwest Co at all.” What does this mean?
Thank you for your comments.
The component auditor audits the subsidiary’s financial statements.
The group auditor audit’s the parent’s separate and consolidated financial statements.
The group auditor applies ISA 600 https://www.accaglobal.com/hk/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/group-auditing.htmlI cannot comment on BPP’s interpretation.
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