CH08-CFS

MCQ--CFS.1

Advik Ltd is an unlisted public company. The company acquired few companies in the last 3-4 years which have been assessed as its subsidiaries/ associates/ joint ventures (hereinafter jointly called as ‘components’). The company prepares its condensed consolidated financial statements every quarter to review the performance of the group. In the past years, the company used to get the financials of its components reviewed/ audited on a quarterly basis. AJ & Co LLP is the statutory auditor of parent company and KSH & Associates is the statutory auditor of all the components. Quarterly condensed consolidated financial statements of the group are reviewed by the statutory auditors as per the terms of the engagement letter. AJ & Co LLP has communicated to Advik Ltd that in line with the requirements of the Companies Act 2013, it would also be required to undertake audit/ limited review of all the components which would be consolidated with those of Advik Ltd and for which KSH & Associates are the statutory auditors currently. Management is not agreeing with the same as they don’t want to change KSH & Associates as auditors of the components and the requirement mentioned by AJ & Co LLP would lead to duplication of work of auditors as well as the management. Please advise.

(CNO-Unique)

• a) In an audit/review of consolidated financial statements (whether condensed or complete), the principal auditor is required to perform various procedures in accordance with SA 600, Using the work of another auditor and hence the requirement of auditor is valid.

• b) In an audit/review of consolidated financial statements (whether condensed or complete), the principal auditor is required to perform various procedures in accordance with the requirements of the Companies Accounts and Audit Rules 2014 and hence the requirement of auditor is valid.

• c) In an audit/review of consolidated financial statements (whether condensed or complete), the principal auditor is not required to re-perform audit/ limited review of the components and hence the requirement of auditor is not correct

• d) Management and the auditor need to decide this mutually as this is based on the contractual arrangement between them.

MCQ--CFS.2

KB Ltd is engaged in the business of construction. It has multiple subsidiaries and associates in India. The company acquired PPP Gmbh in Germany on 1 February 2021. The company also obtained control in PPP Gmbh on the same date. Its investment in PPP Gmbh was of a huge amount. The company has been preparing its CFS over the last few years and this has also become a matter of concern for the company for the year ended 31 March 2021. The management is of the view that consolidation of PPP Gmbh would not be required in CFS for the year ended 31 March 2021 because this is the first year of acquisition. However, the auditors have not been agreeing for the same. The timeline of submission of audited financial statements is due in few months’ time. In the meantime, the management moved on the consolidation of PPP Gmbh taking audited financial statements of PPP Gmbh which are available in the GAAP of its local country and GAAP conversion adjustments from its local GAAP to Indian GAAP have been made by the parent company. GAAP conversion adjustments are significant at CFS level. In the meantime, the management has also been consulting whether the consolidation would be required or not also considering the fact that comparative figures in case of PPP Gmbh would not be available. Further the auditors have also raised observations regarding the GAAP conversion adjustments over which management has a disagreement. As per the management the auditors are not required to comment on GAAP adjustments because audited financial statements of PPP Gmbh have been given to the auditors. Please help to resolve these matters.

(CNO-CFS.100)

• a) Consolidation of PPP Gmbh should be done but GAAP conversion adjustments are not required to be audited.

• b) Consolidation of PPP Gmbh should not be done and accordingly, GAAP conversion adjustments would not arise.

• c) Consolidation of PPP Gmbh should be done, and GAAP conversion adjustments are alsorequired to be audited.

• d) Consolidation of PPP Gmbh is a choice of management as the accounting standard does not mandate this. However, in case it is done then the GAAP conversion adjustments would be required to be audited.

MCQ--CFS.3

VDN Ltd is a medium-sized company engaged in the business of retail. It has two subsidiaries and one joint venture. Both the subsidiaries are larger in size as compared to the parent company. The accounting policies of the parent company, its subsidiaries and joint venture were same. However, during the year ended 31 March 2021, one of its subsidiary, SMA Pvt Ltd changed the method of depreciation of Property, plant and equipment (PPE) to written down value method which is different from the method followed by the parent company i.e., Straight line method. Further this subsidiary also changed the method of valuation from FIFO to Weighted average method which has become different from parent as the parent follows FIFO method. These changes were made by the subsidiary because it reflected the better picture of its standalone financial statements. Now for the purpose of CFS, the auditors have asked the management of parent company to ensure that accounting policies of the group companies should align with that of parent in line with the requirements of accounting standard. But the management of parent and subsidiary company believe that out of three group companies other than parent, only one group company requires this change for the purpose of consolidation and the same should be ignored by the auditors. Please suggest.

(CNO-CFS.100)

• a) The view of management is correct.

• b) For CFS, method of depreciation of SMA Pvt Ltd may continue to be different, however, method of valuation of inventory should be aligned with that of the parent.

• c) For CFS, method of valuation of inventory of SMA Pvt Ltd may continue to be different, however, method of depreciation should be aligned with that of the parent.

• d) The auditor should get these changes made in the standalone financial statements of SMA Pvt Ltd.

MCQ--CFS.4

AJ Private Ltd is engaged in the business of retail having annual turnover of Rs. 1,800 crores. The company has a plan to get listed on Bombay Stock Exchange next year. The company has 3 associates, 4 subsidiaries, and 1 joint venture. The company prepares its consolidated financial statements on a quarterly basis for the purpose for internal purposes. The quarterly financials are reviewed by the statutory auditors of the company. The group companies of the parent company have increased in terms of their size looking at the total assets and revenue of the group. For the purpose of audit of consolidated financial statements for the year ended 31 March 2021, management has request the statutory auditors that it would be able to provide management certified accounts of the joint venture as its audit would not get completed on time and even without joint venture, the auditors would be able to cover 75% of the total assets of the group at consolidated level. However, the statutory auditors are insisting that they need to cover at least 80% of the total assets of the group at consolidated level as per the requirements of the Auditing Standards and for that financials of the joint venture should also be audited. Please advise.

(CNO-CFS.120)

• a) Auditors should accept the management certified accounts of joint venture.

• b) Auditors cannot accept management certified accounts of joint venture and should report the matter to the Registrar of Companies.

• c) Auditors cannot accept management certified accounts of joint venture and should report the matter to the Securities and Exchange Board of India, considering the plan to get listed next year.

• d) Auditors should accept management certified accounts of joint venture provided the revenue of the joint venture is less than 10% of the total revenue of the group.

MCQ--CFS.5

Current period adjustments are those adjustments that are made:

(CNO-CFS.100)

• a) Only on the first occasion of the preparation and presentation of consolidated financial statements

• b) Only on the first occasion of the audit of consolidated financial statements

• c) In the accounting period for which the consolidation of financial statements is done

• d) None of the above.

MCQ--CFS.6

M/s ABC & Co LLP has been appointed as the statutory auditors of WEF Ltd. Previous auditor of WEF Ltd was M/s LMN & Co LLP. WEF Ltd is subsidiary of WEF Holding Ltd, UK. For the purpose of consolidation, WEF Ltd is required to send financial information of the company for the year in the Reporting package comprising of balance sheet, statement of profit and loss, statement of cash flow and notes to accounts. Since WEF Holding Ltd has many group companies across the globe, to ensure consistency in reporting of numbers under various heads, a standard reporting package is used by all the group companies. The group companies do not have any provision to change the groupings/ classifications which need to be reported as per the Group accounting manual which is prepared as per the Group’s accounting policies. Group follows IFRS. ABC & Co LLP is also required to audit the reporting package of WEF Ltd as per IFRS. During the course of audit, the auditor observed that some classifications are not in line with IFRS, however, due to the limitation of the reporting package no such corrections can be made. How should the auditor deal with this?

(CNO-CFS.100)

• a) Since all the classifications are in line with the requirements of the Group as per the Reporting package, the auditor need not change anything and should issue clean report.

• b) Since all the classifications are in line with the requirements of the Group as per the Reporting package, the auditor need not change anything and should issue clean report. However, the auditor may also include a note separately in respect of the corrections required.

• c) Since all the classifications are in line with the requirements of the Group as per the Reporting package, the auditor cannot change anything. However, the auditor is required to issue to report as per IFRS wherein the classifications are wrong and hence the auditor should issue qualified report if the amount is material.

• d) Since all the classifications are in line with the requirements of the Group as per the Reporting package, the auditor need not change anything. However, the auditor should issue his report as per the Group accounting manual instead of IFRS

MCQ--CFS.7

The auditor is required to audit a complete set of annual financial statements for the year ended 31 March2018 prepared under Ind AS by the management solely for preparation of consolidated financial statements of the holding company. Is the auditor required to include 'Other Legal and Regulatory Requirements' to comment on matters such as maintenance of proper books of accounts, compliance with accounting standards etc. in the audit report?

(CNO-Unique)

• a) Since the auditor is required to audit complete set of annual financial statements for the year ended 31 March 2018 prepared under Ind AS, it will be mandatory for the auditor to include 'Other Legal and Regulatory Requirements' in his audit report.

• b) The audit report is not issued pursuant to requirement of section 143 and hence 'Other Legal and Regulatory Requirements' is not required to be included in the audit report.

• c) The audit report is not issued pursuant to requirement of section 143 and hence some of the requirements related to 'Other Legal and Regulatory Requirements' may be included in the audit report as per the discretion of the management of the Company.

• d) The auditor may include 'Other Legal and Regulatory Requirements' in the audit report but he would need approval of the Board of Directors for doing so.

MCQ--CFS.8

IRC Ltd is in the business of construction and infrastructure. The company is listed in India having an annual turnover of INR 2500 crores. The company has various projects offices/ operations in India and outside India. The functional currency of the company and its project offices is INR. The company has five joint ventures and various jointly controlled operations. The company has been audited by Luthra & Associates, a firm of Chartered Accountants, since beginning. During the year ended 31 March 2018, new auditors were appointed as the statutory auditors of the company for the audit of the financial statements for the year ended 31 March 2018. New statutory auditors have raised various points related to the consolidation procedures followed by the company. Management did not agree to the observations of the auditors as they have been following this since many years now and there was no observation of previous auditors in respect of the same. Auditors have highlighted a point that joint ventures have been consolidated by the company in its standalone financial statements. However, management has an argument that those are in the nature of its operations and hence to reflect the true and fair view it would be appropriate to consolidate the same in the standalone financial statements. Please advise as auditors how would you deal with this matter.

(CNO--Unique)

• a) Since the matter is related to consolidation, which is more relevant for consolidated financial statements, hence no reporting in respect of this matter would be required in the auditor’s report for the year ended 31 March 2018.

• b) Auditor should look at the materiality and conservatism principle. Company has included extra information in the financials which can be considered by the auditors and basis that clean audit report should be given.

• c) Management should restate the financials to adjust the error related to consolidation of joint ventures in standalone financial statements. Otherwise, auditor may modify his opinion on current year's financial statements considering the materiality.

• d) As per the requirements of accounting standard, joint venture if consolidated in standalone financial statements should not be consolidated again in the consolidated financial statements. Basis that this point should be dropped by the auditor.

MCQ--CFS.10

WCO Private Ltd is a joint venture of WCO Gmbh and MSON Ltd. WCO Gmbh is a company based out of Germany and is also listed in Germany. WCO Gmbh prepares its financial statements as per IFRS. MSON Ltd is a company based out of India and is also listed in India. MSON Ltd prepares its financial statements as per Ind AS. For the purpose of reporting of financial information to WCO Gmbh and MSON Ltd for consolidation purposes, WCO Private Ltd uses reporting package (which comprises of balance sheet, profit and loss and other notes to accounts). WCO Private Ltd prepares its financial statements as per Ind AS. WCO Private Ltd has taken useful life of some fixed assets in its Ind AS financial statements based on their useful lives which is different from the useful lives of similar nature fixed assets taken by WCO Gmbh (in line with their accounting policies). The reporting package of WCO Private Ltd is audited before reporting to WCO Gmbh. The auditor audits the reporting package which is prepared in line with the Group accounting policies of WCO Gmbh and mentions in his report that the reporting package has been prepared as per the Group accounting policies of WCO Gmbh. WCO Private Ltd makes an adjustment for changes in useful lives in the reporting package on the basis of Group accounting policies of WCO Gmbh. The auditor has asked the management to take same useful lives of fixed assets in the reporting package which have also been taken by them in its Ind AS financial statements. Management has not agreed with the view of the auditor. Please suggest the right course of action.

(CNO--CFS.100)

• a) Position taken by the management is correct.

• b) Position suggested by the auditor is correct and if the management does not agree then auditor may have to modify his report on the basis of materiality.

• c) The matter relates to an estimate (i.e., useful life) which may be subject to changes under different GAAPs and hence auditor should ignore this point.

• d) The report would be for special purpose which should always be a clean report

MCQ--CFS.11

Brown Ltd is a holding company with two subsidiaries Black Ltd and White Ltd. You have been given the task of covering the valuation of non-current tangible assets in the consolidated financial statements. You note that Black Ltd and Brown Ltd. adopt straight line method of depreciation for its assets whereas White Ltd, follows written down method for calculating the depreciation. Which of the following adjustment would be considered as correct in respect of the consolidated financial statements preparation?

(CNO-CFS.100)

• a) White Ltd is required to depreciate the assets adopting straight line method of depreciation which is the method adopted by the holding company.

• b) Brown Ltd is required to make suitable adjustments as to the depreciation charged by White Ltd, at the time of consolidation.

• c) Brown Ltd and Black Ltd are required to depreciate the assets adopting written down value as to facilitate the harmonization of accounting policies.

• d) No adjustment is required as there can be different methods of calculation of depreciation for its assets for the group companies