Week 8 PC Auditing

Question 1

What to watch out for foreign subsidiary

Answer 1

According to IFRS 10 - company must consolidate the subsidiary.

The subsidiary’s FS must be translated into Canadian dollar… for the purpose of foreign currency translation, we must determine what the functional currency of sub is in (IAS 21)

Question 2

What happens when a FS is displaying a foreign subsidiary amount in foreign currency

Answer 2

Sub F/S must first be translate to CAD. First determine the functional currency (IAS 21)

Question 3

What is a functional currency?

Answer 3

Currency of the primary economic environment in which entity operates

• one which primarily generates and expends cash
• currency that mainly influences sales price of G/S
• currency that mainly influence labour, materials, other cost
• e.g. if the operation is a stand alone operation with little reliance to other company, their functional currency will be the local currecy

Question 4

How to recognize functional currency?

Answer 4

IAS 21 requires that monetary items be translated at the exchange rate in effect on the B/S date.

• non monetary items (fixed asset) measured at their historical cost (translate at historical exchange rate). Same with revenue/expenses related to non-monetary items (depreciation)
• any exchange gain/loss arising on translation will be accounted for in the current period of IS

Question 5

What is monetary item?

Answer 5

Units of currency held and asset/liabilities to be received/paid in fixed/determinable units of currency

Question 6

If it’s required to put all received cash in a segregated trust account until expense incurred.

Answer 6

• As money not available. company must provide FS users information relevant to its intended purpose.
• company must physically separate a portion of money and present as restricted cash.

Question 7

If hold different bank accounts in different currency

Answer 7

need to apply IAS 21 - amounts need to be translated at the balance sheet rate since the functional currency is Canadian (not separate operations)

Question 8

What happens when the audit is a first time audit

Answer 8

Must obtain sufficient appropriate audit evidence regarding opening balance and comparative statements. The need to confirm the validity of opening balance will require additional procedures performed.

• if validity of OB can’t be confirm, may have a qualified audit opinion