Page 259 - CA Final PARAM Digital Book.

and, therefore, it would consolidate B Ltd. in the consolidated financial statements as subsidiary

➢ Audit Procedure
(Obtain Understanding)- The auditor should make plans, among other things, for the
understanding of accounting policies of the parent, subsidiaries, associates and joint
ventures and determining and programming the nature, timing, and extent of the audit
procedures to be performed etc.

(Control overboard)- The auditor should verify whether the parent controls the
composition of the Board of Directors or corresponding governing body of any entity.
There would be various means by which such kind of control can be obtained.

In this regard, the auditor may verify the Board’s minutes, shareholder agreements
entered into by the parent, agreements with the entities to which the parent might have
provided any technology or know how, enforcement of statute, as the case may be, etc.

(Adjustments)-The auditor should verify that the adjustments warranted by the relevant
accounting standards have been made wherever required and have been properly
authorized by the management of the parent. The preparation of consolidated financial
statements gives rise to permanent consolidation adjustments and current period
consolidation adjustments.

AS 18-Further, the duties of an auditor with regard to reporting of transactions with
related parties as required by Accounting Standard 18 are given in SA 550 on Related
Parties.

SA 550-As per SA 550 on, “Related Parties”, the auditor should review information
provided by the management of the entity identifying the names of all known related
parties. A person or other entity that has control or significant influence, directly or
indirectly through one or more intermediaries, over the reporting entity are considered as
Related Party.

Framing Opinion- In forming an opinion on the financial statements the auditor shall
evaluate whether the identified related party relationships and transactions have been
appropriately accounted for and disclosed in accordance with the applicable financial
reporting framework and whether the effects of the related party relationships and
transactions prevent the financial statements from achieving true and fair presentation
(for fair presentation frameworks); or cause the financial statements to be misleading (for
compliance frameworks).

Author’s Note
• Is 10% shareholding minimum for control over the composition of Board?
o No, there is no 10% rule or criteria. Point is we can control BOD if we are able to appoint
or nominate majority of directors either because of law or contracts, even if shareholding
is below 50% and thereby control whole company. This question specifies 10% holding but
it is silent on how ALFA ltd controls BOD of GAMMA.

QNO Permanent Consolidation Adjustment Old Course – (M11R, M13E, M14R, N15E, M16R, N16M, SM17,
438.000 TITANIUM CNO—GA.220 PM17, SM21)
Write a short note on - Permanent Consolidated Adjustments
Answer ➢ Definition
Permanent consolidation adjustments are those adjustments that are made only on the first

occasion or subsequent occasions in which there is a change in the shareholding of a particular
entity which is consolidated. Permanent consolidation adjustments are:
Determination of goodwill or capital reserve as per applicable accounting standards.
Determination of amount of equity attributable to minority/ no controlling interests

➢ Pre-acquisition Reserves
The auditor should verify that the above calculations have been made appropriately. The auditor

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