Introduction
In this article, we will cover the audit procedures for testing impairment of investment. This includes the objective of auditing the impairment testing, key assertions and then to the specific audit procedures for the audit of the impairment of investment.
The consolidation method records ‘investment in subsidiary’ in the parent company’s balances as an asset in the Balance Sheet. Impairment occurs when a business asset suffers a depreciation in market value. Many companies evaluate its investment in subsidiaries for impairment annually and record impairment loss when the carrying amount of assets exceeds the recoverable amount. While auditing entity’s investment, the auditor should be aware of the applicable accounting guidance.
Table of contents
Objective of Impairment of investment (in subsidiary) Audit
The objective of the impairment of investment audit is the assessment of the existence and the assessment of the recoverable amount. Recoverable amount of investment in subsidiaries can be applied by a variety of valuation methods.
Key Assertions of Impairment of investment (in subsidiary) Audit
Key assertions for impairment of investment are described below:
Completeness
Completeness is checking that the investment is properly recorded and it will vary depending on the type of investments.
Valuation
Valuation is gaining evidence that investments are carried at cost or fair value.
Existence
Existence is ascertaining that the investment balance exists.
Key Audit Procedures for Impairment of investment (in subsidiary) Audit
In the section, we will cover all key audit procedures for testing impairment of investment in subsidiary. Please note that below are just the key audit procedures. In practice, there might by other procedures can by carried out and tailored to meet the audit objectives.
- First, auditor shall obtain the financial statements of each subsidiary. Then cross check the investment recorded in the book against the share capital of each subsidiary by considering the percentage of shareholding. In this procedure, auditor shall ensure that the amount recorded as investment should agree with the level of shareholding in the equity of the subsidiaries.
- The auditors need to identify impairment indicators, models being used for the impairment assessment and the assumptions to support the value of the investment. The main consideration for the determination of impairment assessment of investments in subsidiaries is a key audit matter.
- Auditors need to inquire management about the current market conditions supporting the evaluation of potential impairment indicators.
- They should test the key assumptions used in the impairment assessment and perform procedures accordingly.
- Auditors will involve valuation specialists to assist in the evaluation of management’s valuation models, especially in testing key assumptions and financial information.
- Procedures should be performed to assess the valuation models for evidence of management bias considering evidence from third party analyst report.
- Auditor should check whether there is any partial disposal of investment in subsidiary and this will be accounted for an equity transaction with owners.
- If there is any partial disposal investment in subsidiary that results in loss of control auditor should check relevant accounting standards are used in that case.
- Auditor should consider non-interest bearing inter-company balances while performing an impairment review of an investment in subsidiary.
