Audit Procedures For Investment In Subsidiary

Investment in a subsidiary is a complex financial transaction that requires the consideration of multiple factors. The investment can take various forms such as stocks, bonds, or other securities.

As per IFRS 9 Financial Instruments, investments resulting in control are treated as subsidiaries, while investments not resulting in control are treated as associates, joint ventures, or financial assets.

The recognition of investment in a subsidiary is based on the initial cost, while the measurement is based on fair value. Fair value should be updated at the end of each reporting period to ensure accuracy.

Auditors must consider the potential risks and take appropriate steps to mitigate these risks through detailed audit procedures. These procedures should include analyzing the financial statements of the subsidiary, assessing the internal control system of the subsidiary, and performing analytical review to identify any irregularities.

Auditors should also review the terms of the investment and any related contracts. Furthermore, they should consider any related party transactions and their impact on the financial statements of the subsidiary.

Audit Risk

Assessing the potential risks associated with investing in a subsidiary is a critical component of the audit process.

• Auditors must take into account the complexity of valuing subsidiaries in different sectors or currencies, the difficulty in assessing control over subsidiaries, and the complexity of accounting for subsidiary investments and adherence to IFRS requirements.
• Additionally, auditors must consider the possibility of management override and the need to ensure compliance with laws, regulations, tax laws, and reporting standards.
• Finally, auditors must be alert to the risk of limited access to accurate financial information from subsidiaries.

To manage these risks, auditors must design and perform appropriate audit procedures, such as reviewing documents and interviewing personnel, to gain an understanding of the entity and its environment. The audit process must also include tests of controls and substantive procedures to ensure the reliability of the financial information.

Test Internal Control

Testing internal controls is an essential part of the audit process, helping to ensure the reliability of financial information and compliance with laws and regulations.

During an audit, auditors will assess the design of controls to ensure their suitability in mitigating risks related to the investment in a subsidiary. Auditors will also perform tests to verify the effectiveness of the controls. This testing may include examining documents, observing procedures, or interviewing personnel.

The auditors will also evaluate deficiencies in the internal control and determine whether they are material or not. This evaluation is necessary to identify any potential weaknesses in the system that may lead to misstatements in the financial statements.

To ensure the reliability and accuracy of the internal control, the following measures should be taken:

• Identification of key controls that are relevant to the investment in a subsidiary
• Assessment of the design of controls to ensure their effectiveness
• Performance testing of controls to verify their effectiveness
• Evaluation of any deficiencies in the internal control and determination of their materiality

Any weaknesses identified during the testing should be addressed promptly to ensure the integrity of the financial statements.

The audit of the internal control is an important step in assuring that the financial statements are free from material misstatement.

Audit Assertion

The audit assertion process is a critical component of the audit, assuring the validity and accuracy of the financial statements. This process requires the auditor to assess the existence, completeness, valuation and allocation, presentation and disclosure, cutoff, and accuracy of the subsidiary’s investments. The following table summarizes the assertions related to investment in a subsidiary:

The auditor must use professional judgment to assess the assertions and evaluate the internal control structure of the subsidiary to ensure that the financial statements are free of material misstatement. The auditor should also evaluate the risk of material misstatement and the degree of reliance that can be placed on the internal control structure. By performing the audit assertion process, the auditor is assuring that the financial statements are valid and reliable.

Audit Procedure

Through a comprehensive analysis of the financial statements, the auditor can ensure the accuracy and completeness of the subsidiary’s investments. The procedures should include:

• Reviewing transactions between the parent and subsidiary to ensure compliance with IFRS standards.
• Assessing the carrying amount of the investment and performing impairment tests.
• Analyzing the fair value and valuation method of the investment.
• Evaluating the internal control environment.
• Review the consolidated financial statements of both entities for compliance with IFRS and the absence of material misstatements.
• Compare the accounting policies of the parent and the subsidiary for consistency and adherence to IFRS.

This procedure should provide the auditor with sufficient evidence to express an opinion on the financial statements. Through this process, the auditor can ensure that the investment in the subsidiary is properly recorded and reported.

Conclusion

The audit procedures for investment in a subsidiary involve assessing the audit risk associated with the investment, testing the internal control environment, and evaluating the audit assertion.

The results of the audit procedures can assure that the investment is appropriate and managed effectively. This is an important step in the overall process of investing in a subsidiary and is necessary for the efficient and effective management of the subsidiary investment.