These are subject to audits by the Auditor General .The audit is carried out as for any other company.
Central Government and Local Authorities
The audit of these accounts is governed again by the Audit and Exchequer Act and is carried out by the Controller and Auditor General who is accountable to the National Assembly
Audit of Holding Companies and Group Accounts
Authoritative documents are:
- The Companies Act Cap 486
- IAS 27
- IAS 28
- IAS 31
- IFRS 3
- ISA 600 Using the work of another auditor
The Companies Act requires that where a company at its year end has a subsidiary then the directors of that company called a holding company are required to produce consolidated accounts or group accounts which show a true and fair view of the state of affairs and the results of the company and its subsidiaries so far as they concern the members of the holding company.
Audit of Group Accounts
The major problems in this area can be split into three sections:
1. The audit of the holding company obtaining and confirming information about subsidiaries
2. Checking consolidation working papers and
3. Placing reliance on the work of other auditors
The audit of the accounts of a holding company follows the same lines as any company audit. However, special consideration has to be given to the dealings with and presentation of investments in subsidiary companies.
Audit work on the holding company
We will concentrate on the verification of investments in subsidiary companies.
1. Obtain a schedule which should contain the following information. All the data which the Companies Act requires to be disclosed in the holding company's own accounts, copies of the accounts of each subsidiary with a note who the auditor is, details of any qualifications in any of the audit reports, summary of movements in investments in subsidiary and on current and loan accounts with its subsidiary, reconciliations of intercompany balances.
2. Existence and ownership must be verified by examining the share certificates and ensuring that they are in the name of the holding company. If not, then blank signed transfer forms should be available from the nominees. If the share certificates are held by third parties, then an appropriate certificate must be obtained.
3. Current and loan accounts: Their verification is normally done by obtaining a certificate from its subsidiary confirming the balances. Also if the auditor of the holding company is the auditor of the subsidiary, he can reconcile entries in both sets of books himself. The auditor must satisfy himself that dealings between group companies are not used to cover up material errors.
4. Valuation: Valuation is verified as follows: If the shares were acquired in the year consider cost and authorization. Examine accounting treatment of any premium or discount on acquisition and any dividends received out of pre-acquisition profits. The balance sheet value of its subsidiary must be considered and this could include review of each individual subsidiary's account to confirm that it is still a going concern.
Checking consolidation papers
The auditor pays particular attention to the calculation of:
a) Goodwill arising on acquisition and consolidation
b) Pre-acquisition and post-acquisition profits
c) Minority interest
d) Treatment of intercompany profits in stocks
e) Agreements of intercompany indebtedness
f) Necessary cancellations in respect of intercompany cash in transit
g) Turnover, excluding group trading
h) Necessary adjustments in respect of group companies with different accounting period ends
The consolidated accounts must comply with all relevant accounting and legal requirements.
Reliance on the work of other auditors:
The primary auditor or the principal auditor is solely responsible for the holding company's accounts. It is inevitable however that in large groups the holding company's auditor thus the principal auditor are not always the auditors of the subsidiary company, therefore, there is need for then to rely on the work of other auditors. The student must note that the principle auditors are fully responsible for their opinion on the group accounts and need not for this reason refer in their report to the fact that the accounts of some subsidiary or associated company have been audited by other firms. I refer you to the following important topics covered in the ISA. Accounting policies, availability of information, scope of work of the secondary auditors or other auditors, the materiality of the amounts involved. If the principal auditor is satisfied that the accounts present a true and fair view and comply with the Companies Act the auditor will be able to issue a an unqualified audit report. However, qualification will be necessary in the following circumstances.
1. A material subsidiary if qualified then there may be need for this qualification to be noted in the holding company's report.
2. Failure by the principal auditor to obtain satisfactory information with regard to material subsidiary or material amounts that have been consolidated from an audited account.
3. Material disagreement with any of the consolidation calculations.
4. Non-compliance with legal or professional requirements as far as disclosure is concerned.
The student is strongly advised to read the ISA on reliance on the other auditors and keep in mind the following requirements:
1. A complete list of subsidiaries showing the share holdings of the holding company and other group members should be kept. He should have copies of the accounts of each subsidiary noting qualified audit reports, agreement of intercompany balances, division between pre and post acquisition profits, accounting policies adopted and ensure that each set of accounts is properly signed by directors and auditors.
2. Questionnaires used to determine the work undertaken by subsidiary company auditors.
3. Any letters of weakness sent by each subsidiary company auditor.
4. A checklist showing companies act requirements and IAS 27 and IAS 28.
Other matters to be covered are
1. Accounting policies: these should be uniform throughout the group and should be properly disclosed.
2. Consolidated adjustments should be carried out correctly both conceptually and mathematically.
3. He should ensure that all material subsidiaries have been audited.
4. He should investigate all known co-terminus accounts.
5. He should investigate for window dressing
6. He should consider foreign subsidiaries if any.