Question

The Central Bank of Kenya has appointed you as an Auditor for assessing inter company transactions and relationships betweeen affiliated banks given various banks seeking licencing as subsidiaries in other East African Countries.Advise on the potential areas of examination within the following themes:

i)Other expense allocations

ii)Compensating balances

iii) Purchases or swaps of assets

iv) Asset exchange

v) Tax allocation

vi) Fees paid by subsidiaries

vii) Transactions with affiliates

viii) Dividends paid by subsidiaries to parent

Answer 1

The auditor will Advise on the potential areas of examination within the following themes:-

1.) Other expense allocations:-

• Always remember to document why measures such as headcount, square footage or hours directly relate to the benefit received.
• Prohibited allocation methodologies include any methodology based on budgets, funding or available funds.
• Administrative expenses may not be distributed or rotated among sponsored projects. Pooled allocation methodologies may not be used to charge administrative costs to sponsored projects except by service centers with approved rates.
• Allocation methodologies must be documented and auditable. Documentation should include support for the specific costs allocated and indicate how the allocation methodology is logically related to the cost being allocated. This support should be retained by the department and made available for review.
• Allocation methodologies should be reviewed periodically to ensure they are reasonable.
• Methodologies based on sampling, surveys, etc. should be reviewed and updated at least once each fiscal year. Significant changes made to the population may signal the need to review the allocation methodology.

2.) Compensating balances:-

• A compensating balance is a minimum bank account balance that a borrower agrees to maintain with a lender. Verify The agreement related to this.
• check the purpose that The purpose of this balance is to reduce the lending cost for the lender, since the lender can invest the cash located in the compensating bank account and keep some or all of the proceeds.
• verify the borrower may also benefit from being granted a somewhat lower interest rate. However, the borrower is also paying interest on a net loan balance that is smaller than the amount of the loan, so the effective interest rate for the entire arrangement is higher.

3.)  Purchases or swaps of assets:-

• . PHYSICAL EXISTENCE. The technique of verification is checking the existence of assets, The assets must have a physical existence in some sort of moveable or immovable property. The auditor can count, measure, examine and inspect for verification of various assets.
  2. PROPER VALUATION: The technique of verification is the valuation of an asset. There are fixed and circulating assets. Management does the valuation process. The auditor can check the value assigned to each asset. The audit staff can examine the arithmetical accuracy.
  3. OWNERSHIP OF BUSINESS. The technique of verification is the determination of ownership. The asset must be owned by the business. The receipt, vouchers agreement, and deeds can help to note the title of ownership. The asset must be held in the name of the business.
  4. POSSESSION WITH BUSINESS. The technique of verification checking the possession of The asset cashier The may assets possess should cash while being in the possession of management. An officer may hold stock in trade. The auditor should physically check the assets in the custody of various employees.
  5. FREE FROM ON ASSETS CHARGE. When The loan technique is taken off the verification assets are is transferred the examination in the charge name of lenders. The auditor should check that assets are free. In case of borrowing, he can examine the need to note the charge.
  6. PURCHASED FOR BUSINESS. The technique of verification is to check the purchase. The assets must be purchased in the name of the company. The documents can show the name of the company. The assets must not be held in the name of any employee.
  7. ADEQUATE DISCLOSURE. The technique of verification is the adequate disclosure of assets and liabilities. All assets and liabilities can be stated under their proper heading, Even the contingent liabilities are also disclosed for information.

4.) Tax allocation:- When considering the cost allocation approach, think about the needs of the internal and external users of the financial statements. These include

• Organizational leaders and those charged with governance of the organization use this information to exercise oversight of the entity’s resources, make decisions about future resource allocation, and develop strategies to advance the organization’s mission. This information may be included in dashboard reporting and benchmarking analysis.
• Donors use financial information to help understand how well an NFP is doing in fulfilling its mission and its stewardship of resources.
• Creditors use the financial statements to understand an NFP’s current financial position and its longer-term sustainability.
• Sponsors are those entities that provide funding for a particular program in the form of exchange transactions – frequently in the form of government grants or contracts and have a need for understanding allocation of resources.
• Rating agencies use the financial statements as a basis for much of their analysis reported to members of the public, who are looking to become informed about a particular organization. They benchmark the percentage of expenses devoted to programs as a key component in the formulas they use to monitor, rate, and compare NFPs.

5.) Asset exchange:-

•    Verify whether the expenditure is of capital or Revenue in nature
• Ascertain depreciation if required is duly provided
• Check whether the item is disclosed properly as per schedule VI ,Part I & Part II of the Companies act
• Verify that all the General principles , procedure , accounting standard and guidance notes are duly complied with
• Check Whether ( the item to be verified ) needs to disclosed under CARO ,2003 6)      Verify whether proper v

6.) Fees paid by subsidiaries:-

• verify that fees paid by subsidiaries in mode either cash or cheque .
• check the amount paid by subsidairies and that same amount recorded in account
• check proper accounting treatment are follow...