2345 Component auditor’s report

Oct-2012

OAG Guidance

Complete Set of Financial Statements

A complete set of financial statements and footnotes prepared in conformity with generally accepted accounting principles and audited in accordance with generally accepted auditing standards are generally reported on pursuant to professional standards.

Use of Group financial reporting framework and Standard Reporting Forms

Components may be required to report to the group engagement team on standard company forms such as computerized spreadsheets, reporting packages or other worksheets designed for consolidation. These forms, although suitable for this special purpose, are ordinarily not in financial statement format. As a consequence, they are not intended to be complete financial statements that present fairly (or give a true and fair view of) the financial position, results of operations, and cash flows of a component in conformity with accounting principles generally accepted in either the group or component, because of:

• the presentation and classification of items,
• the omission of information,
• adjustments required by the parent to facilitate the group consolidation, and
• other reasons.

Nevertheless, the use of standard company forms may provide the most effective means of reporting where the audit of component financial information is undertaken to enable the group auditor to report on the group financial statements.

If a conventional form of auditor's report is required, standard company forms are usually inadequate for a fair presentation in conformity with generally accepted accounting framework.

In most circumstances, the component financial statements or financial information will be other than a complete set of financial statements and footnotes (i.e., standard company forms, prepared by either the component management or by the component auditor). Therefore, component auditors will prepare a Memorandum of Work Performed and Report Clearance Summary to the group engagement team on the results of the work performed on the component financial statements or financial information. When the component auditor is not an OAG audit team, the group engagement team can request a stand-alone auditor’s report from the external firm/auditor. In such circumstances, they need to prepare their reports as required by the relevant GAAS.

Standard company forms, including instructions for completion, need to be reviewed by group management and the group engagement team to ensure that, once properly completed, they will provide sufficient information for preparing the group financial statements. In addition, the component engagement team needs to promptly inform the group engagement team if the standard company forms omit information that the component engagement team considers significant.

As discussed in OAG Audit 2324, the group engagement team will evaluate its involvement in the work of the component auditors of significant components. The group engagement team can not presume that the component auditors will bring to their attention all matters relating to the component's financial information that are relevant in preparing the group consolidated financial statements. All that can be inferred is that the component's financial statements have been prepared in accordance with the requirements of the company accounting manual. Further, company accounting manuals may include a “catch all” phrase such as “as well as any other matters required under [Group financial reporting framework].” Unless the component auditors have competence in Group financial reporting framework, they may not be able to identify those other matters.

However, when the component auditor has competence in Group financial reporting framework and is reporting on the component's standard reporting forms (or other special purpose financial information other than a complete set of financial statements prepared in accordance with Group financial reporting framework), it is appropriate for the group engagement team to ask the component auditor to report in their Memorandum of Work Performed (OAG Audit 2343) and Report Clearance Summary as to whether they have identified any additional material matters (e.g., related to accounting measurement and recognition requirements of the Group financial reporting framework) which may be relevant to the group consolidation, but the component auditor cannot assert that all information necessary for consolidation purposes has been disclosed because only the group engagement team can make that judgment. As discussed in OAG Audit 2362, at the completion of the group audit, the group engagement team will again evaluate whether sufficient appropriate audit evidence has been obtained, which requires the group engagement team to reconsider whether their involvement in the work of component auditors was sufficient.

Ordinarily, the component auditor will prepare for the audit, review, or specified procedures performed, a Memorandum of Work Performed and a Report Clearance Summary. The content of the Memorandum of Work Performed and Report Clearance Summary is discussed in OAG Audit 2343.

To the extent the financial statements need to be either (a) adjusted for differences in accounting principles for use in connection with consolidation or (b) translated or remeasured (in the case of highly inflationary economies) from the local currency, special reports may be required. Either the group engagement team or the component engagement team must take responsibility for the adjustments; the component engagement team that audited the financial statements should take such responsibility.

When the component auditor is not an external firm/auditor, he or she needs to prepare their reports as required by the relevant GAAS. Adapted as necessary, the guidance included in OAG Audit 2372 would be used.

See OAG Audit 2335 for an explanation of the different type of work to be performed at components.

Use of Statutory Reports

For statutory purposes, it will normally be necessary to report on conventional financial statements.

In some circumstances, the statutory audit report on the financial statements of a component prepared using GAAS might be sufficient for the group audit purposes, in which case the component auditor would not need to prepare a separate report. Otherwise, the group engagement team will need to advise the component auditor if an alternative form of reporting is required for consolidation purposes.

OAG Guidance

Templates to be used in all communication of results (e.g., Memorandum of Work Performed and Report Clearance Summary) between OAG component auditors and OAG group engagement teams can be found on the Intranet. These templates apply for any audit, audit of one or more account balances, classes of transactions or disclosures, review or specified procedures engagement that involves more than one engagement team operating independently to provide assurance/results related to separate components, which when consolidated or combined, constitute the consolidated entity.

Date of the communications between OAG teams

The Memorandum of Work Performed and Report Clearance Summary should not be dated before the date on which the team has obtained sufficient appropriate audit evidence on which to base the opinion or conclusion on the financial statements/financial information. That date is no later than the group audit report date (CAS 230).

Note, however, that this date does not represent the documentation completion/archiving trigger date for the component engagement. As explained in OAG Audit 1181, the documentation completion/archiving date is triggered by the date of the audit report (CAS 230.14); therefore, in the case of a group audit, the group audit report date. Therefore, clear communication is required so that the required completion/archiving date is well understood. If also performing a statutory audit on the component's financial statements, the archiving date for that engagement would be considered separately.