CA FINAL AS PER NEW SYLLABUS

AUDIT AS PER ICAI WITH Q/A

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BY CA SHIVAM NAGPAL
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 CA FINAL 2 AUDIT MAGIC BOOK

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 CA FINAL 4 AUDIT MAGIC BOOK

INDEX
Sr. No. Particulars (chapters with 100 % Q/A) Page
No.

CFS AUDIT IN 10
PAGES WITH ALL Q/A

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 CA FINAL 5 AUDIT MAGIC BOOK

CHAPTER: GROUP AUDIT (CFS)

GROUP FS
Points to remember
• Parent which presents CFS consolidate
all subsidiaries domestic as well as
foreign!!
• Operations of subsidiary are included in
CFS from date on which parent gained
control of subsidiary. i.e. June month!!

1) WHAT IS CONSOLIDATED FINANCIAL STATEMENT (CFS)

A. MEANING (JUST READ)
1. CFS are FS of group presented as those of a single entity. (Can be prepare Suo-moto or required
by Law/regulation)
2. L&R may require CFS to be audited by statutory auditor of entity (Parent). (i.e. auditor who audits
standalone FS of entity).
3. CFS to extent possible, in same format as adopted by parent for its separate FS.
4. AS 21 & Ind AS 110 lays down principles & procedures for preparation & presentation of CFS

Consolidated Financial
Statements include

Consolidated Consolidated Consolidated Any explanatory

Consolidated statement of cash flow statement of notes annexed
balance sheet profit and loss statement change in equity to/forming part
(if applicable) thereof
and
B. CFSs APPLICABILTY - MANDATORY UNDER COMPANIES ACT, 2013
1. According to Sec 129(3) of Co. Act, 2013, where co. has one/more subsidiaries/associate co. &
joint venture, it shall, in addition to its own FS prepare CFS of Co. + subsidiaries in same form &
manner as that of its own. (As per Schedule III & AS.)
2. CFS shall approved by BOD’s before they are signed on behalf of Board, along with
its standalone FS & also laid before AGM along with standalone FS.
3. Co. shall attach along with its FS, separate statement containing salient features of
its subsidiaries in Form AOC-1.

STUDENT NOTE:

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 CA FINAL
C. CFSs NOT APPLY/EXEMPTION
As Per Co. Act
1. Wholly/partially-owned subsidiary & all its
members have been Intimated in writing &
for which proof of delivery is there + None
of members objected 1.
2. Co. whose securities Not listed or not in
process of listing (in or o/s India) 2.
3. Ultimate/Intermediate holding co. files CFS.
All 3 condition to satisfy = MT: NIL
Note:
1. “Consolidation shall begin from date investor obtains control of investee & cease when investor loses control of
investee”.
2. However, co. which is not required to prepare CFS under Accounting Standards, it is sufficient if co. complies with
provisions of CFS provided in Schedule III.
Ques
Q: Whether preparation of CFSs is mandatory?
If yes, please elaborate requirements under Law
Q: Elaborate situations wherein requirement
related to preparation of CFS not apply. (SMQ)
Q: P Ltd acquired 51% shares of C Ltd during
year 20-21. In next FY. 20% shares sold by PLtd.
P Ltd while preparing FS for year FY 20-21 & 21-
22 did not consider FS of C Ltd for consolidation.
(SMQ = illustration) [IMP.]
OR
Q: R Ltd. owns 51% voting power in S Ltd. It
however, holds & discloses all shares as "Stock-
in-trade". shares held exclusively with a view to
their subsequent disposal. (SMQ)
OR
Q: M Ltd. acquired 51 % shares of S Ltd. On
1/4/20 & sold 25% shares during FY. 20-21. M
Ltd. did not prepare CFSs. (SMQ)
Q: H Ltd. is Investment Co. preparing FSs as per
Ind AS. Co obtains funds from various investors
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6 AUDIT MAGIC BOOK
As Per AS 21 As Per Ind AS 110
No such Exemption for
Subsidiary excluded from
Control is temporary
consolidation when
/operates under severe
long-term restrictions
Control is intended to Consolidation = Mandatory
temporary Except
It operates under severe
> An investment entity need not
long-term restrictions which
present CFS if it measures
significantly impair its ability
subsidiary at FVTPL
to transfer fund to parent
(Fair value through P&L)
Any One Note: Parent of investment entity
shall consolidate all entities that it
controls, incl. those controlled
through investment entity
subsidiary, unless parent itself is
investment entity. * See E.g.
Meaning of investment entity-
1. Obtains fund from investors for
providing them investment mgt.
Service
2. Invest solely for capital
appreciation/ investment
income/both
3. Evaluates performance of all its
investments on fair value basis.
Points
> Above point B = Applicability + C = Only Co. Act
Exemption Write (SMQ)
> Above point C = Only Co. Act Exemption Write
1. Explain Ind AS 110 Provisions (Don’t Write
about investment entity) + 2 Notes Given above
2. Ques = Copy paste
3. Intention of P Ltd is quite clear that control in
C Ltd is temporary as former company
disposed off acquired shares in next year.
4. P Ltd is required to prepare CFS exemption
for ‘temporary control’, or “for operation
under severe long-term restrictions” is not
available under Ind AS 110.
Accordingly, It, is required to prepare CFS till
date of disposal of shares to comply with same.
1. Explain CFS Applicability Point B
2. Investment co. exemption + definition
CONT. 7015451014 CA SHIVAM NAGPAL
 CA FINAL 7 AUDIT MAGIC BOOK

& commits its performance for fair return & 3. Ques Copy Paste
capital appreciation to its investors. (IMP.) 4. H Ltd. is investment co. preparing its FS as
During year Co. invested 25% in S1 Ltd., 50% in per Ind AS is not required to prepare CFSs
S2 Ltd. & 60% in S3 Ltd. = CFS Required?? (SMQ) however, it shall be sufficient if co. complies
OR with provisions on CFSs provided in Sch. III
Q: M Investments Ltd. has subsidiary, Investors
Fund Mgt. Ltd., major business of M Ltd. is to
pool money from investors on collective basis &
invest this money in various funds. CFSs
Required or not? [PEQ N21 + RTP-Nov. 22]
Q: A Ltd. holds ownership of 10% of voting & control over composition of BODs of B Ltd. While planning
audit factors to be considered by auditors of A Ltd for the audit of its CFSs? (SMQ) (IMP.)
A: A Ltd considered as parent of B Ltd & it would consolidate B Ltd in its CFSs as a subsidiary.
1. Auditor should verify A Ltd’s mgt’s assessment of having control in B Ltd despite having only 10%
voting power. Auditor verify how A Ltd. controls composition of BODs of B Ltd.
2. There Are various means by which such kind of control can be established.
Auditor may verify minutes of Board meetings, shareholder agreement entered into by parent,
agreements with B Ltd to which parent might have provided any technology/know how
3. As per SA 550 on, “Related Parties”, auditor should review info. provided by mgt. of entity identifying
names of all known related parties. A person/other entity that has control/significant influence,
directly/indirectly through one/more intermediaries, over reporting entity are considered as RP.
4. In forming opinion on FSs, auditor evaluate whether identified RP relationships & transactions
appropriately accounted for & disclosed in accordance with Ind AS 110 & Schedule III

Q: J Ltd holds majority ownership of R Ltd. & K Ltd. S Ltd. is intermediate subsi. of J Ltd. J Ltd presents
CFSs for audit purpose. As Auditor give two reasons which are considered for exclusion of components
from CFS. [PEQ Jan. 21]
A: Exclusion of Components from CFSs
> As Per AS + As Per Ind AS + AS per co. Act = Explain
Reporting of reasons of exclusion:
• Where subsidiary/associate/jointly controlled entity is excluded from CFSs, Auditor should examine
reasons for exclusion.
• In case an entity which is excluded from consolidation on ground of temporary relationship, auditor
should verify that intention of parent, to dispose subsidiary, investment in associate or interest in
jointly controlled entity, in near future, existed at time of acquisition/investment.
• Auditor satisfy himself that exclusion made by mgt. falls within exceptions covered in AS 21 or Ind-
AS 110, as the case may be.
Auditor should also verify that reasons for exclusion are given in CFSs.

STUDENT NOTE:

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 CA FINAL 8 AUDIT MAGIC BOOK

2) RESPONSIBILITY OF PARENT & AUDITOR FOR CFS

A. WHAT IS RESPONSIBILITY OF PARENT/HOLDING COMPANY (SMQ)
Responsibility preparation & presentation of CFSs, among other things, is that of mgt of parent.
This includes: [MT: Parent are Responsible for Adjustment of CSR, Accounting Policy & GAAP in Financial Info.]
1. Adjustment - Making consolidation adjustments.
2. C - Identifying components & including Those components in CFSs.
3. S - Identifying reportable segments for segmental reporting.
4. R - Identifying related parties & RPTs.
5. Accounting Policy - harmonization of accounting policies.
6. GAAP - GAAP conversion.
7. Financial Info. - Obtaining accurate & complete financial info.

Apart from above, parent ordinarily issues instructions to mgt. of component specifying parent’s
requirements relating to financial info. of components to be included in CFSs.

B. WHAT IS RESPONSIBILITY/OBJECTIVE OF AUDITOR (SMQ)

[MT: Whether 1 & 3 of 143 is applicable on VAT]

1. 143(1) - To enquire into matters specified in 143(1).

2. 143(3) - To report on matters given in 143(3).
3. V - Validate requirement of preparation of CFS
4. A - Whether CFSs have been prepared as per Applicable FRF.
5. T - To express opinion Whether CFS True and fair view.

Note: Standards on Auditing, Statements and Guidance Notes Also Apply To CFS
Auditors is expected to: [MT: POU]
1. Plan their work to to conduct effective audit in efficient manner
2. Obtain understanding of accounting & internal control systems
3. Use professional judgement

3) AUDIT CONSIDERATIONS
A. AUDIT CONSIDERATION & PROCEDURE
Following features of CFS have impact on related audit procedure
1. CFSs are prepared on basis of separate FSs of parent and its components, using consolidation
procedures prescribed by AS
2. Auditor of CFSs may use work of other auditors as per SA’s unless auditor of CFSs is also auditor
of other components of group.

Note: CFSs also include some ‘other financial information’ (i.e. some additional disclosure in CFS,
proportion of items included in CFSs to which different accounting policies applied, Subsequent
events.) Which are not include in SFS

STUDENT NOTE:

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 CA FINAL 9 AUDIT MAGIC BOOK

B. MATERIALITY CONSIDERATION (+ Relevance of SA 600 in CFS Audit)

Q: CA H appointed as Auditor of M Ltd, it has 3 subsi. namely M Ltd., N Ltd., L Ltd. & also 15 branches
across India. With regard to determination of materiality during audit of CFSs, what should be
considerations of CA H? How he deals in report if there are observations (for modification &/or
emphasis of matter) made by component auditors? [May 22 (5 Marks)]
OR
Q: Describe relevance of SA 600 while auditing CFSs. (imp.)

1. Relevance of SA 600
• SA 600, ‘Using Work of Another Auditor’ when auditor, reporting on FSs of an entity (Group—in
case of CFSs), uses work of another auditor on financial information of one/more components
included in FSs of entity.
• Principal auditor, if he decides to use work of another auditor for audit of CFSs, should comply
with requirements of SA 600.

2. Materiality Consideration
Computation of materiality is done component wise on standalone basis. But for CFS Auditor should
consider following for materiality – [MT: 2 Materiality & Component]

Auditor is required to Auditor can also use
compute materiality materiality computed on
for group as a whole group level to determine
To Assess Appropriateness whether component's FSs are
of consolidation adjustments material to group to
scope in additional components
Principal auditor Principal auditor
computes materiality also obtains certain
for each component confirmations from
& communicates to component auditor
component auditor i.e. Independence/
code of ethics

Note: However, while considering observations (for modification &/or emphasis of matter) of
component auditor in his report on standalone FSs, principles of SA 600 need to be considered.
So, concept of materiality to be considered while considering observation of component auditor!!
Ques Points
Q: T Ltd. is holding 68% share of B Ltd, 51% share > Explanation same as above materiality
of C Ltd. RS & Co. are Auditors of T Ltd. MN & Co. consideration
are Auditors of B Ltd. & C Ltd. MN & Co qualified
report of B Ltd. due to material discrepancies in RS & Co. cannot ignore qualification of B Ltd.
standalone FS. While framing opinion on CFS of T while framing opinion on CFSs of T Ltd.
Ltd., RS & Co. (Principal Auditor) have ignored
qualification of B Ltd. considering it not material
at Group Level. Comment. [MTP Oct. 22] (Imp.)

STUDENT NOTE:

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 CA FINAL 10 AUDIT MAGIC BOOK

4) AUDITING THE CONSOLIDATION

A. PLANNING AUDIT OF CFS
Auditor should make plans, among other things, for following:

Group structure & group-wide controls including assessment of IT system

1. Understanding: & related general and applications IT controls
Accounting policies of parent, its components & consolidation process.

Extent of use of other auditor’s work

2. Determining:
Nature
Timing of Audit procedures to be performed on risk of material misstatements.
Extent

3. Coordinating work to be performed.

B. HOW AUDITOR ENSURE COMPLETENESS OF COMPONENT INCULDED IN CFSs

Q: CA. M At time of planning audit, wants to be sure that all components included in CFSs. List out
procedures perform to verify completeness. (Test Your Understanding SM) (Imp.)
MT:
[Co: WIP h]
[Auditor: I AM with SHAREHOLDERS]
1. Review Working papers for prior years
2. Inquiring mgt. to Identify any new components or any component goes out of CFS
3. Review parent’s Procedures for identification of components

4. Review Investments of parent & its components to determine shareholding in other entities
5. Review JV’s & joint Arrangements
6. Review other Arrangements entered into by parent that have not included in CFS
7. Review statutory records Maintained by parent, i.e. registers u/s 186, 190 of Co. Act
8. Identify changes in Shareholding that have taken place

5) SPECIAL CONSIDERATION
A. PERMANENT CONSOLIDATION ADJUSTMENT (SMQ)
These adjustments are made on first occasion, or subsequently when there’s change shareholding of
entity which is consolidated
These are:
1. Determination of goodwill/capital reserve.
2. Determination of equity attributable to minority interest/NCI

Auditor should verify above calculations by:

1. Determine pre-acquisition reserves of components (Date of investment is imp. for This)
2. Pre-acquisition reserves properly allocated b/w parent & minority/NCI
3. Verify changes in permanent consolidation adj on account of subsequent acquisition/disposal of
shares.
It may happen, in case of one subsy, its goodwill & in case of other Capital Reserve, parent may net
off both & show single amt in B/Sheet as per FRF. Auditor should verify if gross amt of g/w & capital
reserve shown in notes to CFS.

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 CA FINAL 11 AUDIT MAGIC BOOK

B. CURRENT PERIOD CONSOLIDATION ADJUSTMENT (SMQ)

These Adjustments made in accounting period for which consolidation of F.S. is done.
These primarily relate to elimination of intra group transactions & a/c balances including:

Intra-group Indebtness

1. Loan given/Received
2. Intra-group Interest paid or received
PPE/Asset Transferred

3. Unrealized intra Group profits

4. Record deferred Tax on unrealized inter Co. profits elimination

Harmonizing different accounting policies

5. Adjustment Foreign component converting Component’s local GAAP to GAAP under CFS
For Recognizing subsequent events/transactions that occur b/w B/S date &
date of auditor’s report

There are two types of subsequent events:

1. First type = Consists of events/transactions that provide additional evidence about conditions that existed at
date of FSs, including estimates inherent in process of preparing FSs (i.e. adjusting events).
2. Second type = Consists of events that provide evidence about conditions that did not exist at date of FSs but
arose subsequent to that date (i.e. non-adjusting events).

Events occurring after B/S date which do not require adjustments would not normally require disclosure,
although they may be of such significance that they may require disclosure in report of approving authority.
For such events, following shall be disclosed:
a) Nature of the event &
b) Estimate of its financial effect/statement that such an estimate cannot be made.

6. Adj. for effects of significant transactions/events b/w date of component’s b/sheet (not already
recognized) & auditor’s report on Group’s CFS

Note: Difference b/w reporting dates of component f/s & date of CFS

Not more than 6 months in AS

Not more than 3 months in Ind AS

Following information to be disclosed in CFS separately

1. Amount of net assets & net assets as % of consolidated net assets.
2. Amount of share in P&L & % share in P&L as % of consolidated P&L.
3. Amount in OCI & % of OCI as % of Consolidated OCI.

STUDENT NOTE:

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 CA FINAL 12 AUDIT MAGIC BOOK

C. DISCLOSURE WHICH ISN’T REQUIRED IN CASE OF CFSs

Q: At time of consolidation, mgt. of ABC has consolidated all info. & explanations disclosed in notes
also. Auditor is of view that only that info. & explanations should form part of notes to CFSs which
are relevant at group level. Mention aspects which are given in notes to separate FSs of parent
& subsidiaries, need not be included in CFSs. [Nov. 22 (5 Marks)]

Examples of info. which is given in SFS of parent/subsy, need not be given in CFS
MT: [FIRM Have Unutilized Monies & Bonus Shares]
F: Expenditure in Forex on account of royalty/know-how/professional/consultation fees & interest
I: Value of imports on C.I.F. basis by co. during the in respect of: a) Raw materials
b) Spare parts
c) Capital goods

R: Value of imported Raw material/spare parts/component consumed & value of indigenous RM, SP & C
consumed & % of each to total consumption.
M: Disclosure under MSME development Act 2006.

Disclosure of unutilised monies out of issue indicating form in which have been invested.
Source from which bonus shares are issued i.e. capitalisation of profits/reserves/from SP A/c

D. MANAGEMENT REPRESENTATION REGARDING CFSs

Q: CA. K requires written representations from parent’s mgt. on matters material to CFSs. What
specific matters such WR can include? (Test Your Understanding SM)

SA 580, “Written Representations” requires auditor to obtain WR from Mgt. Auditor of CFSs should
obtain evidence that Mgt. of parent acknowledges its responsibility for a T&F presentation of & mgt.
has approved CFSs.
MT: [CSR Completeness & Appropriateness]

Mgt. Representations regarding CFS:

C: Completeness of components included in CFS
S: Identification of reportable segments for Segmental reporting
R: Identification of Related parties & RP transactions for reporting
Completeness & Appropriateness of permanent & current period consolidation adjustments, incl. elimination
of intra-group transactions.

STUDENT NOTE:

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 CA FINAL 13 AUDIT MAGIC BOOK

6) REPORTING
DIFFERENT CASES OF DRAFTING REPORT (SMQ) (V.V. IMP.)

CASE 1: When Parent’s Auditor is also Auditor of all its Components

1. Auditor should issue audit report expressing opinion whether Consolidate

Balance P&L Cash flow statement

Sheet Statement

Gives true and fair view

2. Auditor should report whether principles & procedures for CFS as laid down AS/Ind AS have been
followed. In case of deviation
Requirements As per SA 705 to be followed

CASE 2: When Parent’s Auditor is not Auditor of all its Components

1. Auditor should consider requirement of SA 600.
4. Reference in report of auditor
2. As per SA 706, if auditor makes reference to work of other auditor on CFS to fact that part of audit
Done
Disclose Clearly Magnitude of portion of FS audited by other auditor by other auditor
This May be done by
Stating aggregate amts, or % of total assets/revenues/cash flows Not to be construed as a
Qualification
3. Total assets/revenues/cash flows not audited by parent’s auditor
of opinion rather, indication of
should Be presented before giving effect to permanent/current divided responsibility.
period consolidation Adjustments.

CASE 3: When accounting framework of parent & component is different

A. Alternative 1-
1. Parent Mgt. convert components audited FS from framework of component to framework used to
prepare CFS
2. Conversion adjustments are audited by principal auditor to ensure that financial info. of components
is appropriate
B. Alternative 2-
1. Component prepare FS as per parents accounting policies in group accounting manual (GAM), which
contains accounting policies & disclosures consistent with parents FRF
2. local component auditor can then audit & issue audit report on component FS.
3. Parent auditors perform procedures to determine compliance of group accounting policies (GAM)
with GAAP applicable to parent’s FSs.

CASE 4: When auditing framework of parent & component is different

1. Normally audit of CFS is as per Indian GAAS - Auditing std. generally accepted in India.
2. In order to
• Maintain consistency of auditing framework
• To enable parent auditor to rely and refer to other auditor’s audit report in their audit report on
CFSs, components’ FSs should also be audited under a framework that corresponds to Indian GAAS

CASE 5: Components not audited

1. Normally, FS of all components should be audited/subject to audit.

2. If one or more components remain unaudited then auditor should

Evaluate possible modification due to inability to obtain sufficient/appropriate audit evidence.
3. Evaluate qualitative & quantitative factors and provide opinion as per guidance in SA 705

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 CA FINAL 14 AUDIT MAGIC BOOK

Q: H Co. Ltd., is holding co. with 2 subsi. H Co. Ltd., adopts straight line method of depreciation for its
assets whereas subsi S Co. Ltd., follows WDV. Though subsi R Co. Ltd., follows straight line method of
depreciation, it does not give effect to component accounting of depreciation in respect of high value
assets. While consolidating, determine possible issues. (Imp.)
A: Explain case = 3
Change in selection of method of depreciation is accounting estimate & not accounting policy as per
Ind-AS 8. Entity should select method that closely reflects expected pattern of consumption of future
economic benefit. That method should be applied consistently from period to period unless there is a
change in expected pattern of consumption of those future economic benefits in separate FSs as & CFSs.

Therefore, there can be different methods for calculation of depreciation for its assets, if expected
pattern of consumption is different. Method once selected in standalone FSs of subsidiary should not
be changed while preparing CFSs.
Copy paste ques
However, each part of item of PPE with a cost that is significant in relation to total cost of item should
be depreciated separately under Component Method of Depreciation as per AS 10. Thus, R Co. Ltd.,
though adopting straight line method but does not giving effect to component accounting of
depreciation in respect of high value assets, is not in compliance with Ind AS 16/AS10.

Q: CA. M is auditor of CFSs of D ltd. CFSs consist of FSs of 8 subsi. audited by other auditors. Following
information available for 8 subsidiaries: -
Total assets 1500 crores Two subsidiaries located O/s India whose FSs prepared as per
Total revenues 1000 crores accounting principles generally accepted in respective countries &
Net cash outflows 10 crores
audited by other auditors under GAAS applicable in respective countries.
how such info. should be included in auditor’s report on CFSs of company? (TYU SM) (Imp.)
A: Write Case 2
It should be included in Other Matter paragraph of auditor’s report.
Draft “Other Matter Paragraph” is as under: -
We did not audit FSs & other financial info, in respect of 8 subsi, whose FSs include total assets of Rs.1500
cr. & total revenues of Rs.1,000 cr. & net cash outflow of Rs. 10 cr. for year ended on that date. These
are audited by other auditors its detail furnished to us by mgt. of Holding Co.
Our opinion on CFSs, relates to amounts & disclosures in respect of subsidiaries & our report in terms
Sec 143(3), is based solely on reports of such other auditors.
2 subsidiaries are located o/s India whose FSs prepared as per accounting principles generally accepted
in their respective countries & audited by other auditors under GAAS applicable in their respective
countries. Holding Co’s mgt converted FSs of such subsidiaries to accounting principles generally
accepted in India.
We have audited these conversion adjustments. Our opinion relates to balance & affairs of such
subsidiaries is based on report of other auditors. Our opinion CFSs, is not modified in respect of above
matters with respect to our reliance on work done by other auditors & FSs + other info. certified by Mgt.

Ques
Q: While accepting audit assignment as principal
auditor, what will be points of consideration for
principal auditor of co.? (SMQ) (Imp.)
PA = Principal Auditor
Points
PA considers whether their own participation is
sufficient to able to act as PA = Consider these
1. Materiality of portion of financial info.
2. PA’s knowledge regarding business of components
3. ROMM in FS of components audited by other auditor
4. Performance of additional procedures.

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