Page 264 - CA Final PARAM Digital Book.

IMPORTANT – Recent Change in answer.
Last para of the answer has changed recently. Earlier in the answer provided by the institute, it was
mentioned that while considering the observations of the component auditor in his report on the
standalone financial statements, the concept of materiality would “not “be considered.
However, this was inconsistent with SA 600 which requires to consider the concept of materiality while
giving observations in audit report of Consolidated financial statement.
The impact of including the word “not” was that, the component auditor’s observation was mandatory
to be included in audit report of Consolidated financial statement irrespective of whether the
component was material or not.
Such inconsistency has been removed after removal of the word “not”.

QNO Dealing with Modifications in Audit Report of Subsidiary Old Course- (N22M)
442.500 TITANIUM CNO— GA.120
T Ltd. is holding 68% share of B Ltd, 51% share of C Ltd. RS & Co. Chartered Accountants are the statutory
auditors of T Ltd. MN & Co. Chartered Accountants are the statutory auditors of B Ltd. and C Ltd. MN &
Co have qualified the report of B Ltd. due to material discrepancies in standalone financial statement.
While framing the opinion on Consolidated Financial Statement of T Ltd., RS & Co. (Principal Auditor)
have ignored the qualification of B Ltd. considering it not material at Group Level. Comment.
Answer In carrying out the audit of the standalone financial statements, the computation of materiality for the
purpose of issuing an opinion on the standalone financial statements of each component would be done

component-wise on a standalone basis. However, with regard to determination of materiality during the
audit of consolidated financial statements (CFS), the auditor should consider the following:

• The auditor is required to compute the materiality for the group as a whole. This materiality should
be used to assess the appropriateness of the consolidation adjustments (i.e. permanent consolidation
adjustments and current period consolidation adjustments)

• The parent auditor can also use the materiality computed on the group level to determine whether
the component's financial statements are material to the group to determine whether they should
scope in additional components, and consider using the work of other auditors as applicable.

• The principal auditor also computes materiality for each component and communicates to the
component auditor, if he believes is required for true and fair view on CFS.

• The principal auditor also obtains certain confirmations from component auditor like independence,
code of ethics, certain information required for consolidation and disclosure requirements etc.

However, while considering the observations (for instance modification and /or emphasis of matter in
accordance with SA 705/706) of the component auditor in his report on the standalone financial
statements, the principles of SA 600 needs to be considered., The parent auditor should comply with the
requirements of SA 600, “Using the Work of Another Auditor”. Therefore, the concept of materiality would
be considered while considering the observations of the component auditor. Hence RS & Co. cannot ignore
the qualification of B Ltd. while framing the opinion on consolidated financial statements of T Ltd.

QNO Management Representations in Consolidation New Course – (SM23)
442.600 TITANIUM CNO -- GA.320
CA. Kajal Gupta is nearing completion of audit of consolidated financial statements of Rubic Paints and
Chemicals Limited. She requires written representations from the parent’s management on matters
material to the consolidated financial statements. What specific matters such written representations can
include?
Answer The auditor of the consolidated financial statements should obtain written representations from parent‘s
management on matters material to the consolidated financial statements. Examples of such
representations include:

(a) Completeness of components included in the consolidated financial statements;
(b) Identification of reportable segments for segment reporting
(c) Identification of related parties and related party transactions for reporting
(d) Appropriateness and completeness of permanent and current period consolidation adjustments,
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