John Selwood’s Q&As

Q&A
John Selwood’s Q&As
The complexities of subsidiary and small
company audit exemption and the
challenges of accounting estimates require
careful consideration, as this month’s
questions demonstrate
Q
Although the audit
exemption rules set
out in CA 2006 changed
significantly with SI 2012
no 2031, I did not think that
the eligibility criteria for a
small company or a small
group were changed by the
SI. I believe that if a
company is a member of a
group, it can only claim
small company exemption
from audit if the group
qualifies as a small group
and meets two of the three
size criteria. If the
subsidiary company
qualifies as small, the small
companies exemption in
S.477 can presumably be
taken and the subsidiary
company will not require
an audit. But in the May
2013 issue you commented
that a UK subsidiary of a
Jersey company (hence not
in the EEA) is not entitled
to audit exemption. I am
confused. Please provide
some clarification.
A
I am well aware of the
potential for confusion
now that there is the new
subsidiary audit exemption as
well as the pre-existing small
company audit exemption.
AUDIT & BEYOND JULY/AUGUST 2013
It is not uncommon for
delegates on my courses to
mix up the rules but I had
hoped that I would not
confuse things further.
My Q&As in May
concentrated upon subsidiary
company audit exemption and
I had not intended to imply
that group companies would
no longer be eligible for small
company audit exemption. On
the contrary, small company
audit exemption is alive and
well, and will be the
exemption of choice for
members of small groups.
In order to further clarify
this, note that members of
medium-sized or large groups
are not eligible for small
company audit exemption
because they fall outside s479
of CA 2006. For these
Small company
audit exemption
is alive and well,
and will be the
exemption of
choice for
members of
small groups
purposes the meaning of
‘group’ extends to all group
members regardless of where
the various group members
are incorporated.
For example, a small UK
company that is the subsidiary
of a Jersey holding company is
eligible for s477 small
company audit exemption
provided that the group –
including the Jersey holding
company and all subsidiaries
worldwide – is a small group.
A contrasting example
would be a small UK company
that is a member of a large
international group. The UK
company is not eligible for
s477 small company audit
exemption because the
company is a member of an
ineligible group. However,
provided that its parent is
incorporated under the law of
an EEA member state, it might
be eligible for s479A subsidiary
audit exemption.
More questions and answers
relating to subsidiary company
audit exemption can be found
in past issues of Audit &
Beyond and the recent faculty
webinar on the subject. A
recording of this is available
free to members at icaew.com/
aafwebinars
ANSWERING YOUR
EMAIL QUERIES
Many of the questions I
answer in Audit & Beyond
have been asked by
members attending my
training courses and faculty
events such as webinars and
the roadshow (see page 5).
In this issue, one of the
questions I am answering
is based on a question
that was sent to the faculty
via email.
Perhaps unsurprisingly,
the subject is audit
exemptions for subsidiaries
– something that has
recently generated many
questions. I welcome
questions on all auditrelated subjects, and
members are invited to
send these to me through
the faculty, care of
[email protected]
I will not be able to
respond to your emails or
guarantee an answer to
any of your questions, but I
will address as many as
possible in future issues of
Audit & Beyond.
13
MORE GUIDANCE ON ACCOUNTING ESTIMATES
A faculty webinar on how to audit accounting estimates
effectively will take place on 5 September. Philip Lenton, a senior
manager in Deloitte LLP’s national accounting and audit
department, will provide practical guidance on issues including:
planning the audit – understanding how management makes
accounting estimates;
characteristics of estimates likely to give rise to significant
risks;
designing procedures to deal with identified risks; and
documentation of audit work on accounting estimates.
Q
I am auditing a large
property investment
company and a number of
properties are located in
India. The Indian properties
have been revalued in the
year by a local firm of
surveyors in India.
The surveyors have
revalued the properties on
an existing use basis,
because they say that there
are unusual terms in the
leases, meaning that it is
not practical to look at
market values through
price comparisons with
similar types of properties.
The existing use
valuation, prepared by the
surveyors, assumes 8%
growth in rental income
year-on-year for the
foreseeable future. I am
uneasy about this valuation
but I am an auditor not a
surveyor, and I have limited
knowledge of the property
market in India. The valuer
has a good reputation and
relevant local knowledge.
What work should I do on
the valuations?
You are required
to understand
how a valuation
is done and
to determine
whether it is
done properly
14
A
Answering your question
is a great opportunity to
demonstrate the need for
professional scepticism. As the
auditor you are not expected
to have the skills of a surveyor.
However, you are required to
understand how a valuation is
done and to determine
whether it is done properly.
Starting at the beginning,
you need to assess the risk of
error regarding property
valuations. This includes
considering pressures on
management, the needs of
the users of the financial
statements, estimation
uncertainties regarding
valuations etc. Good risk
assessment is only possible
when the auditor understands
the entity. In order to
understand this property
company, the auditor needs to
understand the property
market in India. Without this
knowledge it is difficult to
challenge management
assertions effectively.
So this is a starting point,
and will include a review of
the unusual leases that you
mention. This will help with
the risk assessment and it is
probable, from what you say,
that the valuation of the
properties is a significant audit
risk. This means that you will
need to pay special attention
to this area.
Indeed, ISA 540 on the audit
of accounting estimates
requires that you consider
alternative estimation
This webinar will repeat the faculty lecture on auditing of
accounting estimates, which took place at Chartered
Accountants’ Hall in June. The webinar is available free to all
faculty members and there is a charge of £25 +VAT for
non-members. For more information and to register for the
webinar event visit icaew.com/aafevents
A recording of the webinar will become available online shortly
after the event.
ICAEW guidance on the audit of accounting estimates under the
clarity ISA 540 is available in the practice resources section of the
website at bit.ly/12PorA1
Guidance on auditing accounting estimates is also available in
module 6 of the faculty’s Right First Time document. This can be
downloaded at bit.ly/Z869wN
assumptions in these
situations. You certainly need
to review the leases to ensure
that the terms of the lease do
influence the valuations in the
way that the surveyor
suggests. In addition to gaining
a general understanding of the
Indian property market, you
might wish to specifically
research Indian lease rental
growth rates, in order to
challenge the valuer’s
approach more effectively.
You say that you are not a
surveyor, but auditors do have
the skills to challenge
valuation models.
If you feel that you need
further expertise and local
knowledge you might consider
retaining your own local
valuer to assist you.
It’s vitally important to note
that it is helpful to identify if
the surveyors valuing the
relevant properties are
You might
consider
retaining your
own local valuer
to assist you
qualified, reputable and
otherwise well-placed to do
the work, but it is only a part
of your work to do this.
As with many things in
auditing, understanding the
entity and assessing the risk of
error is the key to properly
addressing the valuation. Once
you have done this, designing
appropriate audit procedures
and challenging the valuations
is much easier.
John Selwood is a member of
the faculty’s Practitioner
Services Committee
JULY/AUGUST 2013 AUDIT & BEYOND