The Reliability of Financial Reports and Other Information Provided about an Associate
Evidence pertaining to the application of the equity method may be available in the following forms:
- Audited Financial Reports Financial reports of an associate available to the equity holders of that associate generally constitute sufficient appropriate audit evidence as to the equity in the underlying net assets and results of operations of an associate when such statements have been audited by the investor’s auditor, or by another independent auditor. Where an associate is audited by another auditor, the investor’s auditor considers the principles in ASA 600 Special Considerations - Audits of a Group Financial Report (Including the Work of Component Auditors), in particular those in relation to understanding the work of component auditors.
- Unaudited Financial Reports When the information provided about the investee is unaudited, the investor’s auditor uses professional judgment to assess audit risk and to design appropriate audit procedures to evaluate the equity accounting adjustments and disclosures. Sufficient appropriate audit evidence may be obtained for example:
- by having the associate’s auditor perform appropriate audit procedures, in which case the principles of ASA 600 apply; or
- by gaining access to the associate to apply audit procedures; or
- by supplementing a review or agreed-upon procedures report provided by another auditor on the financial information, with additional procedures as appropriate.
In those cases where the auditor of the investor is unable to obtain the access required to enable audit procedures to be carried out, or is unable to obtain evidence of sufficient quality from another auditor, there may be a limitation on the scope of the audit. In such cases, the auditor complies with the requirements in ASA 705 Modifications to the Opinion in the Independent Auditor’s Report.
Where a time lag exists between the balance date of an associate and that of the investor, the auditor ascertains the procedures by which those charged with governance of the investor have attempted to make themselves aware of any significant events or transactions of the associate, that have arisen subsequent to the date of the associate’s financial statements, to the date on which the auditor signs the auditor’s report on the investor’s financial report. Audit procedures could include:
- enquiry of the appropriate levels of the investor’s management, and review of actions taken;
- comparison to any interim financial statements and/or management reports of the associate, where possible;
- examination of any correspondence between the investor and associate;
- where possible, discussion with those charged with governance and/or auditors of the associate; and
- comparison to other appropriate evidence, including industry literature, financial press disclosures, external credit organisations.
In the event of the investor auditor being informed of, or becoming aware of, any significant events or transactions of an associate occurring during the period between balance dates and the date on which the auditor signs the auditor’s report on the investor’s financial report, the auditor makes additional enquiries to evaluate the impact of these events or transactions on the carrying amount of the investment in the financial report. The auditor obtains evidence that management has accounted for or adequately disclosed such events in the financial report.
The investor auditor considers whether there are any significant events or transactions involving the investor which impact on the equity interest in an associate disclosed in the financial report. The provisions of Accounting Standard AASB 110 Events After Balance Sheet Date, and ASA 560 Subsequent Events apply.