Auditing Impairment Losses of Goodwill Under Hong Kong Financial Reporting Standards: A Comprehensive Guide for Hong Kong Auditors
The audit of impairment losses of goodwill is a complex and critical area in financial statement audits. As a Hong Kong auditor, you need to ensure compliance with the Hong Kong Financial Reporting Standards (HKFRS) and fulfill the requirements set by the Accounting Financial Reporting Council (AFRC). In this blog post, we will discuss the key aspects to consider when auditing this specific financial statement line item, focusing on risk assessment, internal controls, and audit procedures. We will also introduce our powerful Audit Program 3.0, which can effectively help CPA firms reduce time costs by 99.99% as all illustrative documentation is generated and customized.
1. Assessing Assertion Level Risks, Inherent Risks, and Control Risks
The first step in auditing impairment losses of goodwill is to assess the assertion level risks, inherent risks, and control risks associated with this financial statement line item. Applying HKSA 315 (revised) guidance on the identification and evaluation of the risks of material misstatement, auditors should consider factors such as the complexity of the client’s business and industry, the accuracy and completeness of the goodwill balances, and the potential for management override.
To justify the risk levels assigned to each type of risk, auditors should document the client’s specific risk factors and the potential impact on the impairment losses of goodwill. It’s essential to stay informed about the economic and regulatory environment, as changes in these areas could significantly influence the risk assessment.
The following is a sample of illustrative documentation of the risk assessment process extracted directly from our Audit Program 3.0:
“Assertion Level risk assessment for Impairment losses of Goodwill
Assertion 1: Occurrence
The recorded impairment losses represent actual write-downs of goodwill during the period. The company tests goodwill for impairment annually or more frequently if indicators of impairment exist. The risk for the occurrence assertion is assessed as low risk as the testing procedures are well defined and consistently applied.
Assertion 2: Completeness
All required impairment losses have been recorded. The company has a systematic process in place to identify impairment indicators and perform impairment tests. No issues have been identified with the identification of impaired goodwill in previous periods. The risk for the completeness assertion is assessed as low risk.
Assertion 3: Accuracy
The impairment losses recorded are accurate based on the results of goodwill impairment testing. The valuation model and key assumptions used in testing are reviewed periodically by management. The risk for the accuracy assertion is assessed as low risk.
In summary, the overall risk for impairment losses of goodwill is assessed as low risk. The company has controls and a systematic process in place for identifying and measuring goodwill impairment. The assessment has been documented in compliance with relevant auditing standards and is adequately justified to allow another auditor to reach the same conclusion.”
2. Understanding the Design and Implementation of Internal Controls
As part of the requirements set forth in HKSA 315 (revised), auditors must gain a deep understanding of the client’s internal controls surrounding impairment losses of goodwill. This involves evaluating the design and implementation of control activities, as well as the frequency, type of control, and personnel responsible for each activity.
When documenting internal controls, it’s important to provide a clear, step-by-step description of the business process for impairment losses of goodwill. This should include details on the initiation, authorization, and recording of transactions, as well as the periodic review and reconciliation of the goodwill balance. Moreover, auditors should scrutinize the segregation of duties and consider how the client’s IT systems and applications contribute to an effective control environment.
3. Designing Audit Responses and Procedures
After identifying and assessing the risks and understanding the client’s internal controls, the next step is to design audit responses that address each assertion level risk. To achieve this, auditors must carefully consider the factors influencing impairment losses of goodwill and develop appropriate audit procedures.
In documenting these procedures, it’s crucial to provide a comprehensive explanation of the steps involved, the documents to be checked, and any necessary confirmations or discussions with management. For example, auditors may need to test the accuracy and completeness of the goodwill, verify the appropriateness of the impairment testing methodology used, and assess the reasonableness of management’s assumptions and judgments related to impairment losses.
The following is a sample of illustrative documentation of the design of audit procedures extracted directly from our Audit Program 3.0:
“Assertion 1: Occurrence
Audit Procedure 1.1: Obtain a detailed schedule of goodwill impairment losses recorded during the financial year. Select a sample of recorded impairment losses and verify the existence of the related acquired goodwill by reviewing the acquisition agreements and other relevant supporting documentation.
Audit Procedure 1.2: For the selected sample, review the client’s calculation of goodwill impairment losses in accordance with Hong Kong Financial Reporting Standards, and ensure that they are based on valid triggers, such as significant decline in the acquired business’s performance, industry downturns, or other indicators of impairment.
Audit Procedure 1.3: Inquire with management about the process for identifying and recording goodwill impairment losses, and evaluate the design and implementation of internal controls related to the occurrence of goodwill impairment losses.
Assertion 2: Completeness
Audit Procedure 2.1: Perform a walkthrough of the client’s process for identifying and recording goodwill impairment losses. Check for any potential gaps or inconsistencies in the process that could result in unrecorded impairment losses.
Audit Procedure 2.2: Review the client’s impairment testing procedures and assess whether all goodwill balances have been subject to an annual impairment test as required by Hong Kong Financial Reporting Standards. Investigate any instances where impairment testing appears to be incomplete or inconsistent.
Audit Procedure 2.3: Reconcile the total goodwill impairment losses recorded in the general ledger to the detailed schedule of goodwill impairment losses obtained in Audit Procedure 1.1. Investigate any discrepancies identified during the reconciliation.
Assertion 3: Accuracy
Audit Procedure 3.1: For the selected sample of recorded goodwill impairment losses, recalculate the impairment loss amounts using the relevant provisions of Hong Kong Financial Reporting Standards and the client’s impairment loss calculation methodology. Compare the recalculated amounts to the recorded amounts and investigate any significant discrepancies.
Audit Procedure 3.2: Review the client’s assumptions, estimates, and discount rates used in calculating the goodwill impairment losses and assess their reasonableness and consistency with industry norms and the client’s historical practices.
Conclusion:
The audit procedures designed above are in response to the low risk-level on the assertions identified on the class of transaction of impairment losses of goodwill. By performing these procedures, the overall risk level should remain at Low Risk. These procedures are in compliance with Hong Kong Standards on Auditing (HKSA) 230 Audit Documentation and HKSA 220 Quality Management for an Audit of Financial Statements.”
Revolutionizing the Audit Process with Audit Program 3.0
Navigating the complexities of auditing impairment losses of goodwill under HKFRS can be challenging. However, with our innovative Audit Program 3.0, CPA firms can significantly reduce time costs by 99.99%. Our automated program generates customized, illustrative audit programs, risk assessments, and documentation of internal controls relevant to any client industry and principal activity. By streamlining the audit process, Audit Program 3.0 allows auditors to focus on ensuring the highest level of audit quality and compliance.
In conclusion, auditing impairment losses of goodwill under HKFRS requires a thorough understanding of risks, internal controls, and audit procedures. By following the guidelines set out in this blog post, auditors can navigate the intricacies of this financial statement line item and uphold the rigorous standards set by the AFRC. Moreover, with the unparalleled efficiency of Audit Program 3.0, CPA firms can confidently tackle even the most challenging audits and deliver exceptional results.