Component Auditors – NBC Institute

AAA – Nov 2014 – L3 – SB – Q4 – Group Audits

Plan and control the group audit of the Cinnamon Group, assess subsidiary issues, and define the relationship with component auditors.

Question

The Cinnamon Group is an international business made up of ten subsidiaries and a head office. You are the manager in charge at the firm undertaking the group audit, but there are separate local auditors for the Cayenne subsidiary in the United States, the Habenaro subsidiary in Mexico, and the Hybrid subsidiary in Columbia. You are aware of the following information:

Hybrid Issues: Hybrid is a loss-making subsidiary with current year-end losses totaling ₦27 million. There are significant control problems, high levels of bad debts, and 25% staff turnover. The local auditors have stated their intention to give a qualified opinion for the year just ended due to material issues.
Cayenne Financial Year Misalignment: Cayenne operates to a financial year ending October 2013, differing from the group’s December 2013 year-end.
Habenaro Sale: Shortly after the year-end in January 2014, the Cinnamon Group announced the sale of Habenaro for ₦250 million, and this disposal is currently ongoing.
Loan Guarantees: The Cinnamon Group is guaranteeing loans of approximately ₦100 million for its subsidiaries.

Required:

a. Set out how you would plan and control the group audit of the Cinnamon Group.
(5 Marks)

b. Consider the impact of each of the above issues on the group audit.
(10 Marks)

c. Explain the nature of the relationship between your firm and the auditors of the subsidiaries, making particular reference to the extent to which your firm may rely on the component auditors’ work and to the considerations involved where joint audits are conducted.
(5 Marks)

(Total: 20 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit Planning, Component Auditors, Financial Year Alignment, Group Audit, Loss-Making Entities, Subsidiary Audit
Level: Level 3

Topic: Group audits
Series: NOV 2014

AAA – Nov 2018 – L3 – Q6 – Group Audits

Evaluating the use of component auditors, audit scope, and group audit instructions for a multinational group audit

Question

You are the Group Engagement Partner on the audit of the consolidated financial statements of GoodLife Investment Plc for the year ended 31 December 2017. GoodLife Investment Plc is a group of companies with subsidiaries in various countries across Africa. Based on the relative size of the components in terms of revenue, profit before tax, total assets, total liabilities, and net assets, you have identified some of the subsidiaries as significant components.

Component materiality has been determined as N22 million. In addition, from your preliminary risk assessment, you have identified some components that are likely to contain significant risk of material misstatements in the group financial statements. You plan to request component auditors to perform work on the financial information of the following components as at 31 December 2017.

Component ID	Component Name	Component Auditor	Country	Classification of Component	Likely Significant Risks of Material Misstatement
GIP	Goodlife Investment Plc	JPM & Co. (Chartered Accountants)	Nigeria	Significant component	– Fraudulent revenue recognition
					– Credit risk (allowance for loan impairment and impairment of other financial assets)
					– Valuation of financial instruments
GISAL	Goodlife Investments South Africa Limited	QSS Audit (Chartered Accountants)	South Africa	Significant component
GIL	Goodlife Insurance Limited	JPM & Co. (Chartered Accountants)	Nigeria	Insignificant component	– Valuation of insurance liabilities
GPRS	Goodlife Properties & Real Estate Services	Adibe & Co. (Chartered Accountants)	Nigeria	Significant component
GSL	Goodlife Stores Limited	Kwesi & Co. (Chartered Accountants)	Ghana	Insignificant component

Required:

a. Identify four factors that need to be considered by the group auditor in determining the use of component auditors to work on the financial information of these components. (4 Marks)

b. Discuss three principles to be applied when determining the type of work to be performed on each of the components above. (Link specific consideration to relevant components as shown above). (9 Marks)

c. List four contents of a Group Audit Instruction to a component auditor. (2 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit Instructions, Component Auditors, Financial Consolidation, Group Audit, Material Misstatement
Level: Level 3

Topic: Group audit

AAA – Nov 2014 – L3 – SB – Q4 – Group Audits

Plan and control the group audit of the Cinnamon Group, assess subsidiary issues, and define the relationship with component auditors.

Question

Hybrid Issues: Hybrid is a loss-making subsidiary with current year-end losses totaling ₦27 million. There are significant control problems, high levels of bad debts, and 25% staff turnover. The local auditors have stated their intention to give a qualified opinion for the year just ended due to material issues.
Cayenne Financial Year Misalignment: Cayenne operates to a financial year ending October 2013, differing from the group’s December 2013 year-end.
Habenaro Sale: Shortly after the year-end in January 2014, the Cinnamon Group announced the sale of Habenaro for ₦250 million, and this disposal is currently ongoing.
Loan Guarantees: The Cinnamon Group is guaranteeing loans of approximately ₦100 million for its subsidiaries.

Required:

a. Set out how you would plan and control the group audit of the Cinnamon Group.
(5 Marks)

b. Consider the impact of each of the above issues on the group audit.
(10 Marks)

(Total: 20 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit Planning, Component Auditors, Financial Year Alignment, Group Audit, Loss-Making Entities, Subsidiary Audit
Level: Level 3

Topic: Group audits
Series: NOV 2014

AAA – Nov 2018 – L3 – Q6 – Group Audits

Evaluating the use of component auditors, audit scope, and group audit instructions for a multinational group audit

Question

Component ID	Component Name	Component Auditor	Country	Classification of Component	Likely Significant Risks of Material Misstatement
GIP	Goodlife Investment Plc	JPM & Co. (Chartered Accountants)	Nigeria	Significant component	– Fraudulent revenue recognition
					– Credit risk (allowance for loan impairment and impairment of other financial assets)
					– Valuation of financial instruments
GISAL	Goodlife Investments South Africa Limited	QSS Audit (Chartered Accountants)	South Africa	Significant component
GIL	Goodlife Insurance Limited	JPM & Co. (Chartered Accountants)	Nigeria	Insignificant component	– Valuation of insurance liabilities
GPRS	Goodlife Properties & Real Estate Services	Adibe & Co. (Chartered Accountants)	Nigeria	Significant component
GSL	Goodlife Stores Limited	Kwesi & Co. (Chartered Accountants)	Ghana	Insignificant component

Required:

a. Identify four factors that need to be considered by the group auditor in determining the use of component auditors to work on the financial information of these components. (4 Marks)

c. List four contents of a Group Audit Instruction to a component auditor. (2 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Audit Instructions, Component Auditors, Financial Consolidation, Group Audit, Material Misstatement
Level: Level 3

Topic: Group audit

Question Tag: Component Auditors

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AAA – Nov 2014 – L3 – SB – Q4 – Group Audits

Plan and control the group audit of the Cinnamon Group, assess subsidiary issues, and define the relationship with component auditors.

AAA – Nov 2018 – L3 – Q6 – Group Audits

Evaluating the use of component auditors, audit scope, and group audit instructions for a multinational group audit

AAA – Nov 2014 – L3 – SB – Q4 – Group Audits

Plan and control the group audit of the Cinnamon Group, assess subsidiary issues, and define the relationship with component auditors.

AAA – Nov 2018 – L3 – Q6 – Group Audits

Evaluating the use of component auditors, audit scope, and group audit instructions for a multinational group audit

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AAA – Nov 2014 – L3 – SB – Q4 – Group Audits

Plan and control the group audit of the Cinnamon Group, assess subsidiary issues, and define the relationship with component auditors.

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AAA – Nov 2018 – L3 – Q6 – Group Audits

Evaluating the use of component auditors, audit scope, and group audit instructions for a multinational group audit

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AAA – Nov 2014 – L3 – SB – Q4 – Group Audits

Plan and control the group audit of the Cinnamon Group, assess subsidiary issues, and define the relationship with component auditors.

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AAA – Nov 2018 – L3 – Q6 – Group Audits

Evaluating the use of component auditors, audit scope, and group audit instructions for a multinational group audit

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