Introduction
In the labyrinth of financial auditing, the impairment of investment holds a significant position. As intricate as it sounds, it involves assessing the existence and recoverable amount of investments, especially in subsidiaries. By leveraging various valuation methods, auditors can determine a realistic, recoverable amount of these investments. This article aims to demystify the key assertions involved in the process of impairment of investment auditing, and the crucial procedures that are part-and-parcel of this auditing task. It will serve as a valuable guide for those involved in financial auditing and anyone interested in gaining a deeper understanding of this subject.
Purpose of Impairment of Investment Auditing
The fundamental aim of performing an impairment of investment audit lies in assessing the actuality and the recoverable amount of a given investment. Specifically, the recoverable value of investments in subsidiaries can be determined by employing various valuation techniques.
Critical Assertions for Impairment of Investment
Outlined below are the crucial assertions associated with the impairment of investment:
Completeness
Completeness pertains to the validation that all investments are appropriately documented. The specifics of this process will differ based on the investment’s nature.
Valuation
Valuation refers to the collection of evidence ensuring that investments are documented at their cost or fair value.
Existence
The assertion of existence concentrates on affirming the authenticity of the investment balance.
Essential Audit Procedures for Impairment of Investment
The procedures enumerated below are critical for testing the impairment of investment in a subsidiary. Bear in mind that these are not comprehensive, and further procedures may be adapted to satisfy specific audit goals.
1. Acquire the financial statements of each subsidiary. Cross-validate the investment noted in the books against the share capital of each subsidiary, taking into account the percentage of shareholding. The investment noted should coincide with the level of shareholding in the subsidiary’s equity.
2. Spot impairment indicators, models used for impairment evaluation, and the assumptions underpinning the investment’s worth.
3. Discuss with the management about prevailing market conditions that shape potential impairment indicators.
4. Assess the key assumptions applied in the impairment evaluation and execute procedures in line with these.
5. Engage valuation experts to help in examining management’s valuation models, particularly in validating key assumptions and financial data.
6. Implement procedures to scrutinize the valuation models for signs of management bias, taking into account insights from third-party analyst reports.
7. Inspect if there’s any partial disposal of investment in the subsidiary, which would be recorded as an equity transaction with owners.
8. If there’s a partial disposal investment in a subsidiary that leads to loss of control, ascertain that appropriate accounting standards are adhered to.
9. Take into account non-interest-bearing inter-company balances when conducting an impairment review of an investment in a subsidiary.
Conclusion
Conducting impairment of investment audits is crucial to ensure the accuracy and reliability of a company’s financial reports. While the task might seem daunting, understanding key assertions and following precise audit procedures, as outlined in this guide, can simplify the process. Remember, these practices not only contribute to a healthier financial ecosystem for your company but also enhance your credibility in the financial world. As such, treat this guide as a valuable asset to your auditing toolkit.
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