Audit Procedures For Disposal of Subsidiary

A subsidiary company is a separate legal entity that is partially owned by a parent company and has limited shared liabilities. It is usually used by domestic and international corporations in order to establish a presence in other countries or bring together companies in one sector within a corporate group.

Subsidiaries can also be grouped to include a range of industries within a conglomerate. This allows a parent company to influence the subsidiaries, by electing the board of directors and driving the business strategy, while still retaining the independence of the subsidiary company.

The disposal of a subsidiary can often be a complex process. All the necessary steps must be taken to ensure that the disposal is completed correctly.

Audit procedures can help to ensure that the disposal takes place according to the applicable regulations and laws, and the rights of the stakeholders are respected. The audit procedure should include an analysis of the financials, a review of the contract and legal documents, and a review of the internal control system.

The audit should also include a review of the procedures for disposal, including the process for informing stakeholders.

Disposal of Subsidiary

The sale or transfer of an entity’s interest in any subsidiary can result in the termination of its relationship with the parent or other subsidiaries. Disposal of a subsidiary includes several steps that must be followed in order to ensure the process is done correctly and efficiently.

Preparation:

• Due diligence of the target company should be done to make sure that there are no potential issues that may arise in the future.
• Financial and legal documents should be carefully reviewed to ensure that the terms of the sale or transfer are fair and equitable.
• It is important to consider tax implications of the disposal to make sure that all applicable taxes are paid.

Execution:

• Once the due diligence and financial and legal documents have been reviewed and approved, the sale or transfer of the subsidiary can be finalized.
• All necessary paperwork should be prepared and signed.
• Any applicable taxes should be paid.

Post-Transaction:

• A post-transaction audit should be conducted to ensure that all the necessary steps have been taken and all applicable taxes have been paid.
• Any changes in the ownership structure should be documented and filed with the appropriate government agencies.
• Any potential liabilities that may arise in the future should be monitored and managed appropriately.

Audit Risk

When auditing the disposal of a subsidiary, assessing the risks associated with the transaction is of paramount importance. Several potential areas of misstatement should be identified and evaluated during the audit process. These include misstatement of the carrying amount of the subsidiary, fair value of the subsidiary, gain or loss on disposal of the subsidiary, cash flows from disposal of the subsidiary, ongoing involvement with the subsidiary, presentation of the subsidiary as held for sale or discontinued operations, related party transactions with the subsidiary, and contingent liabilities of the subsidiary.

The table below illustrates the common audit procedures for each of these areas to help identify and evaluate potential misstatements.

Audit Procedure

Careful evaluation of potential misstatements is essential for assuring the accuracy of financial statements related to the disposal of a subsidiary. For this purpose, auditors need to consider the following:

• Reviewing the subsidiary’s financial statements for compliance with accounting standards

• Evaluating the calculation of the carrying value of the subsidiary and any impairments

• Analyzing disposal agreement terms and conditions, including post-disposal obligations, warranties, and contingencies

• Performing analytical procedures to assess changes in the subsidiary’s financial position pre- and post-disposal

Comparing recognized amounts in financial statements with actual cash and non-cash transactions is also important to identify any discrepancies.

An effective audit procedure helps to ensure that the financial statements accurately reflect the financial condition of the subsidiary at the time of disposal. It is also crucial to ensure that the financial statements are free from material misstatements.

Conclusion

Subsidiary disposal is a complex process that poses various audit risks to the company. Conducting a successful audit to ensure that the disposal process is carried out correctly is a key step in the process.

An appropriate audit procedure should include:

• Risk assessment
• Review of the disposal process
• Verification of the financial effects of the disposal

The audit should also include:

• Evaluation of the legal compliance of the disposal
• Accuracy of the financial records
• Review of the internal controls related to the disposal