Audit of CFS
Audit of CFS needs to be planned properly with regards to following aspects:
1. Accounting policies of Bank and its various components. It is very much probable that the policies of the components may differ from each other depending upon the respective business lines.
2. Auditor should obtain list of all the subsidiaries, associates and joint ventures of Bank, whether to be included under CFS or not. Any entity that has been kept outside CFS should be carefully examined for its exclusion with respect to the relevant statute. At this stage it is important to note that the ownership of the voting rights does not necessarily qualify for the purpose of CFS. It would be necessary to understand the concept of the control of the enterprise. If the auditor establishes that the bank exercises control over the entity in spite of minor shareholding by virtue of control over the composition of board of directors/governing body, such enterprise would qualify for CFS. There would be many other ways to exercise the control. To verify the same it is advisable that the auditor verifies the board minutes, shareholder agreements entered into by the bank with the other entities, the various business agreements such as technology and knowhow supply, or enforcement of statue as the case may be. The auditor would need to exercise professional judgment to determine the control in such cases.
3. The auditor should identify the changes in the shareholding that might have taken place since the last audit.
4. Following transactions require attention for current period consolidation adjustment:
a) Intra group interest/management fees paid and received.
b) Unrealized intra group profits on assets acquired within the components.
c) Intra group indebtness.
d) Adjustments relating to harmonizing different accounting policies within the group.
e) Adjustments made for the effects of the significant transaction or event that occur between the date of financial statement of the bank and one or more of the components, if they follow different financial reporting dates.
f) Determination of movement of equity attributable to minority since the date of subsidiary
g) In case of step acquisition, appropriate adjustments need to be carefully audited.
h) Further due care be taken in respect of impairment of goodwill in addition to review of net worth and profit reconciliation to ensure completeness of consolidation exercise.
5. As far as possible the formats of the financial statements and cash flows used for the purpose of bank’s individual financial reporting should be used for the CFS.
6. The auditor should examine that the financial statements used in the consolidation are drawn up as of the same reporting date. If that is not possible, AS 21 allows adoption of six month old balance sheet of subsidiaries and prescribes that adjustments shall be made for the effects of significant transactions or other events that have occurred during the intervening period. In case that the balance sheet dates of parent and subsidiaries are different, inter-group netting shall be done as on the balance sheet date of the parent entity. In the cases where the balance sheet date coincides with that of the bank, the bank shall publish its CFS without waiting for the audit of their subsidiaries by the Comptroller and Auditor General. However, the bank shall ensure completion of statutory audit of the accounts of such subsidiaries before consolidation with the parent’s accounts.
7. The auditor should examine that the CFS is prepared using uniform accounting policies for like transactions and other events in similar circumstances. If it is not practicable to do so, that fact shall be disclosed together with the proportions of the items in the consolidated financial statements to which the different accounting policies have been applied. For the purpose of preparing the CFS using uniform accounting policies, the banks shall rely on a Statement of Adjustments for non-uniform accounting policies, furnished by the Statutory Auditors of the subsidiaries.
8. In cases where different entities in a group are governed by different accounting norms laid down by the concerned regulator for different businesses, the bank shall use for consolidation purposes the rules and regulatory requirements applicable to the banks in respect of like transactions and other events in similar circumstances. In situations where regulatory norms have not been prescribed by RBI, the norms as applicable according to the accounting standards may be followed.
9. For the purpose of valuation, the investments in associates (other than those specifically excluded under AS 23) shall be accounted for under the “Equity Method” of accounting in accordance with AS 23 which shall be examined by the auditor.
10. The valuation of investments in subsidiaries which are not consolidated and associates which are excluded under AS 23, shall be as per the relevant valuation norms issued by the Reserve Bank of India. The valuation of investments in joint ventures shall be accounted for under the ‘proportionate consolidation’ method as per AS 27. The banks may take into account the provisions of the accounting standards relating to the exclusion of subsidiaries, associates or joint ventures from consolidation under specific circumstances shall be examined by the auditor.