- 15 Marks
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
- a. Factors to Consider in Determining the Use of Component Auditors:
- Competence and Independence: Assess whether the component auditors possess the necessary expertise and independence to perform the required audit procedures on significant components like GIP, GISAL, and GPRS.
- Extent of Communication: Determine if there are sufficient channels for effective communication between the group auditor and component auditors, particularly for components with high risks.
- Familiarity with Group Reporting Requirements: Ensure that component auditors are familiar with group reporting standards and the accounting practices of the group.
- Level of Risk in Component Financial Information: Evaluate the level of inherent and control risks present in each component (e.g., fraud risk and valuation issues in GIP) to determine the depth of involvement required.
- b. Principles in Determining the Type of Work on Each Component:
- Significance of the Component: For significant components such as GIP and GISAL, full-scope audits may be necessary due to their size and potential impact on the group financial statements.
- Risk of Material Misstatement: Components with identified risks, like GIP (fraudulent revenue recognition) and GIL (valuation of insurance liabilities), may require substantive testing or specific audit procedures focused on those risk areas.
- Component Classification (Significant vs. Insignificant): Significant components (GIP, GISAL, GPRS) should have more comprehensive audit procedures compared to insignificant ones (GIL, GSL), which may only require analytical review or limited procedures.
- c. Contents of a Group Audit Instruction:
- Scope of Work: Outline the specific procedures and extent of testing required from the component auditor.
- Materiality Levels: Communicate the component materiality (e.g., N22 million) and any performance materiality relevant to the component.
- Identified Risks: Detail significant risks and areas that require focused audit procedures, such as revenue recognition and financial instrument valuation.
- Reporting Requirements: Specify the format, deadlines, and content of the report to be submitted to the group auditor, including any necessary adjustments or disclosures.
- Topic: Group audit
- Uploader: Kofi