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Q：
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If the company qualifies for the exemption from preparing consolidated financial statements under Companies Ordinance, can the company still prepare consolidated financial statements?
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A：
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Yes. Even if the company is qualified for the exemption from preparing consolidated financial statements under sections 379(3)(a) of Companies Ordinance, the company may still elect to prepare the consolidated financial statements so long as the annual consolidated financial statements comply with sections 380 and 383 of Companies Ordinance and in every respect with the requirements applicable to annual consolidated financial statements, in which event no company-level financial statements are required to be prepared by it.
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When should group auditor and component auditors be appointed?
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A：
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Pursuant to Section 396(1) of the Companies Ordinance, a company must appoint the auditor of the company for a financial year by a resolution passed at the annual general meeting held in respect of the previous financial year.
As stated in HKSA 600, a component auditor is an auditor who, at the request of the group auditor, performs work on financial information related to a component (subsidiary) for the group audit. The group auditor is responsible for the direction, supervision and performance of the group audit engagement. The component auditor should be prepared to cooperate with the group auditor. This implies that group auditor should be appointed prior to component auditor such that group auditor is able to provide direction as well as supervision to the component auditor before component auditor begins audit work.
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Could a subsidiary appoint an auditor different from the holding (parent) company?
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Yes. A subsidiary could appoint an auditor different from its holding (parent) company.
It is very common that subsidiaries and parent companies may be incorporated in different jurisdictions, and the qualification of auditor and reporting requirements in each jurisdiction may be different.
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If the subsidiary has appointed an auditor different from the holding (parent) company, how will the auditor of the holding company perform group audit for the consolidated financial statements?
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A：
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Under HKSA 600, the group auditor has sole responsibility to express an audit opinion on the group financial statements even the components (subsidiaries) are audited by another auditor.
The group auditor shall consider using the work of the component auditor and communicate its requirements to the component auditor on a timely basis. HKSA 600 requires that the group auditor shall perform an audit of the financial information of the significant component using component materiality and the group auditor shall be involved in the risk assessment of the subsidiary’s auditor (component auditor) to identify significant risks of material misstatement of the group financial statements.
Pursuant to section 412 of Companies Ordinance, the group auditor has the right to require from component auditors the information and explanations they require, and to require the group management to take all reasonable steps to obtain the necessary information and explanations from subsidiaries.
The group auditor should carry out the following work to review the component auditors' work:
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Send a questionnaire to all component auditors requesting detailed information and explanation on their work, including the accounting policies, limitations placed on the scope of the auditors' work, results of test of internal control, reliability of the accounting records and any reasons of qualifications (if any).
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Carry out a detailed review of the other auditors' working papers on each subsidiary whose results materially affect the view given by the group financial statements.
If the group auditor is still not satisfied as a result of the above review, he should arrange for further audit work to be carried out either by the component auditors on their behalf, or jointly with them.
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