Auditing Consolidation Closing

closing consolidation

Auditing Consolidation Closing

This topic assumes an understanding of Tianlong Audit Methodology (TAM) and does not summarize or repeat our methodology. Instead, we read this topic in conjunction with TAM.

The principal objectives in auditing the company’s consolidation conclusions are to determine whether:

  • The transaction is properly approved (Completeness and Rights and obligations assertions)
  • A scope exception applies under the applicable financial reporting framework (Existence/Occurrence and Presentation and disclosure assertions)
  • The company has appropriately consolidated the investee in accordance with the applicable financial reporting framework (Existence/Occurrence, Completeness, Valuation/Measurement and Presentation and disclosure assertions)
  • The company has identified all entities that need to be evaluated for consolidation (Completeness assertion)
  • The company has identified and evaluated events that would trigger a reassessment of the previous consolidation conclusion (Existence/Occurrence, Completeness, Valuation/Measurement and Presentation and disclosure assertions)

1. Inherent risk factors

Inherent risk factor  Related assertions 
Nature of the item
Our prior audit experience indicates that there have been frequent errors with consolidation accounting Existence/occurrence, Completeness, Valuation/measurement, Presentation & Disclosure
The nature of the transaction is complex and/or significant Valuation/measurement, Presentation & Disclosure
Complex or unusual transactions occurred at or near the end of the period Existence/occurrence, Completeness, Valuation/measurement
The activities of the entity being evaluated for consolidation are predetermined at inception Valuation/measurement
Documentation is susceptible to manipulation by management Existence/occurrence, Completeness, Valuation/measurement
Related parties of the company are involved in the transaction Completeness, Valuation/measurement
Nature of the business/industry  
The volume of transactions is highExistence/occurrence, Completeness, Valuation/measurement, Presentation & Disclosure
The company is required to consolidate a significant number of entities Completeness
The company records a number of non-standard journal entries in consolidation Existence/occurrence, Completeness, Valuation/measurement
Policies, procedures and controls are not well defined, and management’s documentation is not rigorous Existence/occurrence, Completeness, Valuation/measurement, Presentation & Disclosure, Rights & Obligations
Organization of the entity  
Personnel responsible for this area have a lower level of competence or experience Existence/occurrence, Completeness, Valuation/measurement, Presentation & Disclosure
The entity has inadequate IT systems for the volume of transactions, size, and/or complexity of the area Existence/occurrence, Completeness

2. Primary substantive procedures applicable to consolidation conclusions

The following is the list of PSPs for consolidation conclusions:

  • 01: Review transaction agreement(s) and meeting minutes
  • 02: Determine whether a scope exception applies
  • 03: Determine whether the company has control over the investee
  • 04: Identify entities for consolidation
  • 05: Evaluate potential reconsideration events

2.1 Review transaction agreement(s) and meeting minutes

Obtain and review the executed agreements and any related attachments.

Obtain and review meeting minutes (and attachments) which include approval of the transaction or formation of the new legal entity by those charged with governance (TCWG) or others with appropriate levels of authority.

Review key terms and conditions

Obtain the executed agreement and any other relevant documents such as information memoranda or Board presentations. Review the key terms and conditions to determine whether they are consistent with those approved by those charged with governance (TCWG) or others with appropriate levels of authority.

Review TCWG support

Obtain and read any documents submitted to TCWG or others with appropriate levels of authority for the approval of the transaction, including presentations prepared by external financial advisors or internal mergers and acquisitions personnel.

Review TCWG approval

Obtain and review meeting minutes (and attachments) to determine whether the transaction was properly approved by TCWG or others with appropriate levels of authority.

2.2 Determine whether a scope exception applies

Obtain and review management’s analysis summarizing the accounting treatment to determine whether a scope exception applies under the applicable financial reporting framework.

Review analysis

Obtain and review management’s analysis summarizing the accounting treatment to determine whether a scope exception applies under the applicable financial reporting framework.

Agree with information to legal documents

Corroborate management’s conclusion by agreeing with relevant information to the underlying legal documents.

Determine if legal entity

Obtain and review management’s analysis summarizing the accounting treatment to determine whether the entity meets the definition of a legal entity.

2.3 Determine whether the company has control over the investee

Obtain and review management’s analysis to determine whether the company has appropriately consolidated the investee in accordance with the applicable financial reporting framework.

Review analysis

Obtain and review management’s analysis summarizing the accounting treatment and determine whether the analysis properly identifies, as applicable:

  • The relevant activities of the investee
  • Whether the company has the power to make decisions about the relevant activities of the investee
  • Whether the company has exposure, or rights, to variable returns from its involvement with the investee
  • Whether the company has the ability to use its power over the investee to affect the amount of the company’s returns
  • Whether other parties (e.g., related parties) are acting as de facto agents of the company.

Corroborate management’s conclusion by comparing relevant information (e.g., relevant activities, whether the company has the power to make decisions about the relevant activities) to the underlying legal documents and/or other facts and circumstances.

Relevant activities are those activities of the investee that significantly affect the investee’s returns.

The company follows the same model to evaluate control for structured entities and traditional entities. However, we consider whether management has appropriately identified which entities are structured entities because certain disclosure requirements apply only to structured entities. 

Verify ownership interest

Verify the company’s ownership interest in the entity through confirmation or, when appropriate, the examination of the evidence of ownership (e.g., legal agreements, stock certificates, bank statements, broker statements).

2.4 Identify entities for consolidation

Perform procedures to determine that all entities have been identified that need to be evaluated for consolidation.

Test investment rollforward

Obtain the entity’s investment rollforward schedule and perform the following procedures:

  • Compare current period information to prior period information and investigate unusual or unexpected changes or the lack of expected changes
  • For investments that have not changed, agree with the information in the rollforward to the prior period audit workpapers
  • For new investments, agree the information in the rollforward to the underlying legal agreements
  • For investments disposed of, verify that the investment was disposed of by reviewing the underlying legal agreements and other relevant information
  • Test the mathematical accuracy of the schedule or otherwise document our ability to place reliance on this information produced by the entity

Review organization chart

Compare the entity’s organization chart with the list of entities being evaluated for consolidation and investigate possible missing entities.

Review minutes

Read the meeting minutes of TCWG to identify potential entities for consolidation.

Read correspondence

Read correspondence between the entity and its external legal counsel to find indications of acquisitions or mergers and/or formation of legal entities.

2.5 Evaluate potential reconsideration events

Perform procedures to identify and evaluate events that would trigger a reassessment of the previous consolidation conclusion.

Read correspondence

Read correspondence between the entity and its external legal counsel for indications of events that would trigger a reassessment of the previous consolidation conclusion.

Review investment rollforward

Obtain the entity’s investment rollforward schedule and evaluate whether changes to existing interests represent an event that would trigger a reassessment of the previous consolidation conclusion.

Review analysis

Obtain and review management’s analysis summarizing the accounting treatment and conclude on the reasonableness of the assessment.

3. Procedures mapped to what can go wrongs

The following table maps the PSPs to a sample of what can go wrongs that affect the SCOTs in the area of consolidation conclusions:

Possible WCGW Primary substantive procedure
1. The transaction is not presented to TCWG or others with the appropriate level of authority for approval.
2. Approval of the transaction is based on materials that are incomplete or materially inaccurate.
3. New legal entities are not approved by TCWG or others with the appropriate level of authority for approval.
2.1 Review transaction agreement(s) and meeting minutes
1. The company incorrectly determines whether a scope exception applies under the applicable financial reporting framework. 2.2 Determine whether a scope exception applies
1. The company incorrectly concludes that it has (or does not have) control, resulting in an incorrect consolidation conclusion. 2.3 Determine whether the company has control over the investee
1. Management does not identify a complete list of legal entities to evaluate for consolidation. 2.4 Identify entities for consolidation
1. The company does not identify events that would trigger a reassessment of the previous consolidation conclusion, resulting in an improper consolidation conclusion. 2.5 Evaluate potential reconsideration events

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