The disposal of a subsidiary is a significant event for a company, and as such, requires a careful and thorough audit approach. This article will cover the accounting treatment, audit risks, audit assertions, walkthrough testing, a test of control, and substantive audit procedures for auditing a subsidiary’s disposal.
Accounting Treatment:
The disposal of a subsidiary is accounted for under International Financial Reporting Standards (IFRS) 5 “Non-Current Assets Held for Sale and Discontinued Operations.”
The accounting treatment of a subsidiary’s disposal is dependent on whether the subsidiary meets the criteria to be classified as held for sale or discontinued operations.
Audit Risks:
- Misstatement of the carrying amount of the subsidiary.
- Misstatement of the fair value of the subsidiary.
- Misstatement of the gain or loss on the disposal of the subsidiary.
- Misstatement of the cash flows from the disposal of the subsidiary.
- Misstatement of the ongoing involvement with the subsidiary.
- Misstatement of the presentation of the subsidiary as held for sale or discontinued operations.
- Misstatement of the related party transactions with the subsidiary.
- Misstatement of the contingent liabilities of the subsidiary.
- Misstatement of the transfer of assets and liabilities from the subsidiary.
- Misstatement of the related tax effects of the disposal of the subsidiary.
Audit Assertions:
- Existence or occurrence: The subsidiary exists and has been properly classified as held for sale or discontinued operations.
- Completeness: All transactions related to the disposal of the subsidiary have been recorded.
- Valuation or allocation: The subsidiary has been accurately valued and the gain or loss on disposal has been properly calculated.
- Rights and obligations: The rights and obligations of the subsidiary have been accurately transferred to the buyer.
- Presentation and disclosure: The disposal of the subsidiary has been properly presented and disclosed in the financial statements.
Walkthrough Testing:
The auditor should perform walkthrough testing to verify that the accounting process for the disposal of the subsidiary is complete and accurate. This includes reviewing the documentation supporting the classification of the subsidiary as held for sale or discontinued operations, the calculation of the gain or loss on disposal, and the transfer of assets and liabilities from the subsidiary.
Test of Control:
The auditor should perform a test of control over the process of disposing of a subsidiary to ensure that it is in line with the company’s policies and procedures. This includes reviewing the approval process for the disposal, the documentation supporting the disposal, and the internal controls over the disposal process.
Substantive Audit Procedure:
Substantive audit procedures are the specific tests and evaluations performed by the auditor to obtain sufficient evidence to support their opinions on the financial statements.
In the context of auditing the disposal of a subsidiary, the substantive audit procedures would involve the following steps:
- Review the subsidiary’s financial statements to ensure that they comply with accounting standards and are properly prepared.
- Evaluate the process used to determine the carrying value of the subsidiary, including the calculation of any impairments.
- Analyze the terms and conditions of the disposal agreement, including any provisions related to post-disposal obligations, warranties, and contingencies.
- Perform analytical procedures to evaluate the change in the subsidiary’s financial position before and after the disposal.
- Compare the amounts recognized in the financial statements with the actual cash and non-cash transactions related to the disposal, including any payments made or received, to determine if there are any discrepancies.
- Evaluate the tax implications of the disposal, including any deferred taxes and any tax consequences arising from the sale of the subsidiary.
- Confirm with the buyer any amounts received or due from the sale of the subsidiary.
- Evaluate the accounting treatment of any gain or loss on the disposal and its impact on the overall financial statements.
- Perform substantive tests on any contingent liabilities related to the disposal, such as warranty claims or lawsuits.
- Obtain an understanding of the internal control environment related to the disposal of the subsidiary and perform tests of control, as appropriate.
These substantive audit procedures are designed to help the auditor obtain sufficient evidence to support their opinion on the financial statements, including the disposal of a subsidiary.
The procedures should be performed in accordance with auditing standards and be tailored to the specific circumstances of the audit engagement.