- 20 Marks
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)
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