7.3 Group audits and component auditors
12 min read•august 19, 2024
Group audits involve examining financial statements that include multiple components, like parent companies and . They're becoming more common as businesses expand globally. The main goal is to gather enough evidence about component financials and consolidation to form an opinion on the group's statements.
The group engagement team leads the audit, working with component auditors who examine specific parts of the group. Clear communication between all parties is crucial. The team must understand the group structure, identify significant components, assess risks, and determine appropriate materiality levels for the group and its parts.
Group audit overview
- Group audits involve the audit of financial statements that include the financial information of more than one component, such as a parent company and its subsidiaries
- Group audits are becoming increasingly common as businesses expand globally and have more complex organizational structures
- The objectives of a are to obtain regarding the financial information of the components and the consolidation process to express an opinion on whether the group financial statements are prepared in accordance with the applicable financial
Definition of group audit
Top images from around the web for Definition of group audit
International Journal of Financial, Accounting, and Management View original
Is this image relevant?
Accounting: More than Numbers | OpenStax Intro to Business View original
Is this image relevant?
Why It Matters: Completing the Accounting Cycle | Financial Accounting View original
Is this image relevant?
International Journal of Financial, Accounting, and Management View original
Is this image relevant?
Accounting: More than Numbers | OpenStax Intro to Business View original
Is this image relevant?
1 of 3
Top images from around the web for Definition of group audit
International Journal of Financial, Accounting, and Management View original
Is this image relevant?
Accounting: More than Numbers | OpenStax Intro to Business View original
Is this image relevant?
Why It Matters: Completing the Accounting Cycle | Financial Accounting View original
Is this image relevant?
International Journal of Financial, Accounting, and Management View original
Is this image relevant?
Accounting: More than Numbers | OpenStax Intro to Business View original
Is this image relevant?
1 of 3
- A group audit is an audit of group financial statements, where the group financial statements include the financial information of more than one component
- Components can be entities or business activities for which separate financial information is prepared, such as subsidiaries, divisions, branches, or
- The group engagement team is responsible for the direction, supervision, and performance of the group audit engagement
Objectives of group audit
- The primary objective of a group audit is to express an opinion on whether the group financial statements as a whole are free from material misstatement, whether due to fraud or error
- To achieve this objective, the group engagement team needs to obtain sufficient appropriate audit evidence regarding the financial information of the components and the consolidation process
- The group engagement team also needs to communicate clearly with component auditors and evaluate their work to ensure it meets the requirements of the group audit
Scope of group audit
- The scope of a group audit is determined by the group engagement team based on their understanding of the group, its components, and the environments in which they operate
- The group engagement team should assess the risks of material misstatement at both the group financial statement level and the component level
- The scope of the group audit may include all components or only selected components based on factors such as significance, risk, and statutory requirements
Responsibilities in group audits
- In a group audit, various parties have specific responsibilities to ensure the audit is conducted effectively and efficiently
- The group engagement partner, component auditors, and those charged with governance each play a crucial role in the group audit process
- Clear communication and among these parties are essential for the success of the group audit
Group engagement partner
- The group engagement partner is responsible for the direction, supervision, and performance of the group audit engagement and for the auditor's report issued on behalf of the firm
- The group engagement partner should ensure that the engagement team, including component auditors, collectively have the appropriate competence and capabilities to perform the group audit
- The group engagement partner is also responsible for communicating with those charged with governance of the group regarding the planned scope and timing of the audit, significant findings, and other matters
Component auditors
- Component auditors are responsible for performing work on the financial information of components as requested by the group engagement team
- Component auditors should comply with the group engagement team's instructions and communicate matters relevant to the group engagement team's conclusion
- Component auditors should also inform the group engagement team of any instances of non-compliance with laws or regulations, fraud, or uncorrected misstatements that are not clearly trivial
Those charged with governance
- Those charged with governance of the group are responsible for overseeing the group financial reporting process and the work of the group engagement team
- The group engagement team should communicate with those charged with governance regarding the planned scope and timing of the audit, significant findings, and other matters
- Those charged with governance are also responsible for reviewing and approving the group financial statements and ensuring that appropriate actions are taken to address any issues raised by the group engagement team
Identifying components
- Identifying components is a critical step in planning and performing a group audit
- The group engagement team should obtain an understanding of the group structure and identify the components that are financially significant or pose significant risks
- The group engagement team should also consider the nature, size, and composition of the components when determining the scope of the group audit
Definition of component
- A component is an entity or business activity for which separate financial information is prepared that should be included in the group financial statements
- Components can be subsidiaries, divisions, branches, joint ventures, or other entities or business activities
- The group engagement team should consider the degree of autonomy and financial significance of each component when identifying components for the group audit
Significant components
- Significant components are those that are of individual financial significance to the group or that, due to their specific nature or circumstances, are likely to include significant risks of material misstatement of the group financial statements
- The group engagement team should perform, or request a to perform, an audit of the financial information of significant components using component materiality
- The group engagement team should also be involved in the risk assessment, planning, performance, and evaluation of the work performed by component auditors on significant components
Non-significant components
- Non-significant components are those that are not individually financially significant to the group and do not include significant risks of material misstatement of the group financial statements
- The group engagement team may perform analytical procedures at the group level for non-significant components to identify any unusual trends or transactions that may require further investigation
- The group engagement team may also perform, or request a component auditor to perform, specified audit procedures or a review of the financial information of non-significant components
Risk assessment procedures
- are performed by the group engagement team to identify and assess the risks of material misstatement of the group financial statements
- The group engagement team should obtain an understanding of the group, its components, and their environments, including group-wide controls, to identify and assess risks at both the group and component levels
- The risk assessment procedures should be performed at an early stage of the group audit to allow sufficient time for the group engagement team to communicate with component auditors and plan the appropriate audit responses
Understanding the group
- The group engagement team should obtain an understanding of the group organizational structure, business activities, and financial reporting process
- This understanding should include knowledge of the group's control environment, risk assessment process, information systems, and monitoring of controls relevant to the preparation of the group financial statements
- The group engagement team should also consider the consistency of accounting policies applied across the group and any changes in the group structure or business activities that may impact the group financial statements
Understanding components
- The group engagement team should obtain an understanding of the components, including their business activities, financial significance, and specific risks
- This understanding should include knowledge of the components' control environment, risk assessment process, information systems, and monitoring of controls relevant to the preparation of their financial information
- The group engagement team should also consider the extent to which components are subject to common controls or policies and the consistency of accounting policies applied by the components
Identifying significant risks
- The group engagement team should identify and assess the risks of material misstatement at both the group financial statement level and the assertion level for significant components
- Significant risks are those that require special audit consideration due to their nature or potential impact on the group financial statements
- Examples of significant risks in a group audit context may include complex transactions, related party transactions, or significant unusual transactions that occur across components
- The group engagement team should communicate significant risks to component auditors and determine the appropriate audit responses to address these risks
Materiality in group audits
- Materiality is a key concept in group audits, as it determines the scope and extent of audit procedures performed at both the group and component levels
- The group engagement team should determine materiality for the group financial statements as a whole and for each significant component
- The group engagement team should also consider the aggregation risk of misstatements across components that may be individually immaterial but collectively material to the group financial statements
Component materiality
- Component materiality is the materiality level set by the group engagement team for each significant component
- Component materiality should be lower than group materiality to reduce the risk that the aggregate of uncorrected and undetected misstatements across components exceeds group materiality
- The group engagement team should communicate component materiality to the component auditors and instruct them to use it in planning and performing their work
Component performance materiality
- Component performance materiality is the amount or amounts set by the component auditor at a level lower than component materiality to reduce the risk that the aggregate of uncorrected and undetected misstatements in the component financial information exceeds component materiality
- The component auditor should determine component performance materiality based on their understanding of the component and its environment, including the risks of material misstatement
- The component auditor should communicate component performance materiality to the group engagement team and use it in planning and performing their work
Aggregation risk
- Aggregation risk is the risk that the aggregate of uncorrected and undetected misstatements across components may exceed group materiality, even if the misstatements are individually immaterial at the component level
- The group engagement team should consider aggregation risk when determining component materiality and evaluating the sufficiency and appropriateness of audit evidence obtained from components
- The group engagement team may also perform additional procedures at the group level to address aggregation risk, such as analytical procedures or tests of consolidation adjustments and eliminations
Involvement with component auditors
- The group engagement team should be involved in the work performed by component auditors to ensure that it meets the requirements of the group audit
- The extent of the group engagement team's involvement depends on factors such as the significance of the component, the risks of material misstatement, and the competence and capabilities of the component auditor
- The group engagement team should communicate clearly with component auditors and review their work to evaluate its sufficiency and appropriateness for the group audit
Assessing competence and capabilities
- The group engagement team should assess the competence and capabilities of component auditors to determine the extent of involvement needed in their work
- This assessment may include consideration of the component auditor's professional qualifications, experience, and resources, as well as their understanding of the applicable financial reporting framework and auditing standards
- The group engagement team should also consider the component auditor's independence and any limitations on their ability to perform the requested work
Communication with component auditors
- The group engagement team should communicate clearly with component auditors regarding the scope and timing of their work, materiality levels, significant risks, and other relevant matters
- The communication should be timely and in writing to ensure a clear understanding of the group engagement team's expectations and requirements
- The group engagement team should also establish a process for ongoing communication with component auditors throughout the audit to discuss significant findings, issues, or changes in the planned scope of work
Reviewing component auditor work
- The group engagement team should review the work performed by component auditors to evaluate its sufficiency and appropriateness for the group audit
- The review may include discussions with component auditors, review of their audit documentation, and re-performance of some of their work
- The group engagement team should document the nature, timing, and extent of their involvement with component auditors, including any significant findings or issues identified during the review process
- If the group engagement team has concerns about the quality or reliability of the component auditor's work, they should perform additional procedures or consider the impact on the group audit opinion
Consolidation process
- The consolidation process involves combining the financial information of the components into the group financial statements and making appropriate adjustments and eliminations
- The group engagement team should obtain an understanding of the consolidation process, including the instructions issued by group management to components, to identify and assess the risks of material misstatement
- The group engagement team should also perform audit procedures on the consolidation process to obtain sufficient appropriate audit evidence that the process is complete and accurate
Consolidation adjustments and eliminations
- Consolidation adjustments and eliminations are entries made to remove the effects of intragroup transactions, balances, and unrealized profits or losses
- The group engagement team should test the completeness and accuracy of consolidation adjustments and eliminations by tracing them to supporting documentation and recalculating them as necessary
- The group engagement team should also evaluate whether the consolidation adjustments and eliminations are in accordance with the applicable financial reporting framework and consistently applied across periods
Subsequent events
- Subsequent events are events that occur between the date of the component financial information and the date of the auditor's report on the group financial statements
- The group engagement team should perform procedures to identify subsequent events that may require adjustment or disclosure in the group financial statements
- The group engagement team should also inquire of component auditors about any subsequent events identified at the component level and evaluate their impact on the group financial statements
Evaluating sufficiency and appropriateness of audit evidence
- The group engagement team should evaluate whether sufficient appropriate audit evidence has been obtained from the work performed on components and the consolidation process to support the group audit opinion
- This evaluation should consider the significance of the components, the risks of material misstatement, the results of the work performed by component auditors, and the group engagement team's involvement in that work
- If the group engagement team concludes that sufficient appropriate audit evidence has not been obtained, they should perform additional procedures or consider the impact on the group audit opinion
Reporting considerations
- The group engagement team is responsible for forming and expressing an opinion on the group financial statements based on the audit evidence obtained
- The group engagement team should consider the impact of any significant findings, issues, or limitations on the group audit opinion and communicate them to group management and those charged with governance
- The group engagement team should also consider the appropriate form and content of the auditor's report on the group financial statements in accordance with the applicable auditing standards
Impact on group audit opinion
- If the group engagement team concludes that there is a material misstatement in the group financial statements or is unable to obtain sufficient appropriate audit evidence, they should modify the group audit opinion accordingly
- The type of modification (qualified, adverse, or disclaimer) depends on the nature and significance of the misstatement or limitation on scope
- The group engagement team should also consider the impact of any modifications to component auditor opinions on the group audit opinion
Communication with group management
- The group engagement team should communicate significant findings, issues, and recommendations to group management on a timely basis
- This communication may include observations on the group's financial reporting process, internal controls, or other matters that could improve the efficiency or effectiveness of the group audit
- The group engagement team should also discuss any significant difficulties encountered during the audit, such as limitations on scope or access to information, and how they were resolved
Communication with those charged with governance
- The group engagement team should communicate significant findings, issues, and matters related to the group audit to those charged with governance of the group
- This communication should include an overview of the planned scope and timing of the group audit, significant risks identified, and the results of the work performed on components and the consolidation process
- The group engagement team should also communicate any significant deficiencies in internal control identified during the group audit and any other matters required by auditing standards or agreed upon with those charged with governance
Key Terms to Review (18)
Audit communication: Audit communication refers to the process through which auditors share important information and findings with various stakeholders, including management, those charged with governance, and other relevant parties. Effective audit communication ensures that all parties are informed about the audit's progress, results, and any significant issues identified during the audit process, which is particularly important in group audits involving multiple component auditors.
Audit sampling: Audit sampling is the process of selecting a representative subset of items from a larger population for the purpose of drawing conclusions about that population during an audit. It allows auditors to evaluate financial information efficiently without examining every transaction or account, making it an essential tool in managing risk and ensuring compliance with relevant standards.
Component Auditor: A component auditor is an auditor who is responsible for auditing a specific component of a group financial statement, typically focusing on a subsidiary or division. They play a critical role in group audits, as their work contributes to the overall opinion on the consolidated financial statements, ensuring that each part of the organization complies with relevant accounting standards and regulations.
Component Management: Component management refers to the process of overseeing and coordinating the various parts or components of a group audit, particularly when multiple entities or locations are involved. This concept is crucial as it ensures that auditors effectively assess the financial information provided by each component and maintain a high level of audit quality across the entire group.
Coordination: Coordination refers to the process of organizing and harmonizing the efforts of different auditors involved in a group audit to ensure that the overall audit objectives are met efficiently and effectively. This involves clear communication, sharing of information, and establishing roles among component auditors, which is essential for a cohesive audit strategy and reliable financial reporting across various entities within a group.
Cultural differences: Cultural differences refer to the variations in customs, beliefs, values, and behaviors that exist between different societies or groups. These differences can significantly impact how people communicate, conduct business, and interpret various situations, making it essential to understand them in global interactions. Recognizing and respecting these cultural variances helps facilitate smoother collaborations, especially when organizations or professionals from diverse backgrounds work together or engage in international transactions.
Group audit: A group audit is an examination of financial statements that encompasses multiple entities, typically a parent company and its subsidiaries. This type of audit aims to provide a consolidated view of the financial position and performance of the entire group, ensuring compliance with relevant accounting standards and regulations. It involves coordinating work among different auditors for each component entity to form an overall opinion on the financial statements.
IFRS: International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB) that provide a global framework for financial reporting. These standards aim to bring consistency, transparency, and comparability to financial statements across different countries and industries, making it easier for investors and stakeholders to understand and analyze financial information.
Inconsistencies: Inconsistencies refer to the lack of uniformity or agreement in financial statements and audit findings, particularly when different auditors or components of an audit provide varying results or interpretations. This is critical in group audits where multiple component auditors assess different parts of an entity, leading to potential discrepancies in financial reporting. Such inconsistencies can raise concerns about the reliability of the overall financial statements and may require further investigation or adjustments.
Interdependence: Interdependence refers to the mutual reliance between individuals, groups, or entities, where the actions of one party affect and are affected by the actions of others. In the context of audits, interdependence is crucial because component auditors depend on the group auditor for oversight and integration of financial information across different entities, ensuring that the overall audit opinion reflects a true and fair view of the financial statements.
ISA 600: ISA 600 refers to the International Standard on Auditing that provides guidance on the audit of group financial statements, including the responsibilities of both the group auditor and component auditors. This standard ensures that the audit process for groups is coherent and that the group auditor obtains sufficient appropriate audit evidence regarding the financial information of the components within the group, promoting accuracy and reliability in financial reporting.
Joint Ventures: A joint venture is a business arrangement where two or more parties come together to undertake a specific project or business activity, sharing resources, risks, and profits. This collaborative approach allows companies to leverage each other’s strengths and market knowledge, while also creating a separate legal entity for the venture that can operate independently. Joint ventures can be particularly beneficial in international markets, where local expertise is crucial for success.
Lead Auditor: A lead auditor is the individual responsible for planning, conducting, and overseeing an audit engagement, ensuring compliance with applicable standards and regulations. This role is crucial as the lead auditor coordinates the work of other auditors, often referred to as component auditors, while also being accountable for the overall quality of the audit, particularly in group audits where multiple entities are involved.
Materiality considerations: Materiality considerations refer to the importance of information or events in the context of financial reporting, determining whether they could influence the decisions of users of financial statements. This concept is essential as it helps auditors and accountants decide what information needs to be disclosed or emphasized in financial reports, ensuring transparency and relevance for stakeholders.
Reporting framework: A reporting framework is a structured set of guidelines and standards used for financial reporting, ensuring consistency and transparency in the preparation of financial statements. This framework helps entities determine how to present their financial information, which is especially critical in group audits where multiple component auditors may be involved. The use of a robust reporting framework supports reliable financial analysis and enhances the comparability of financial statements across different entities and jurisdictions.
Risk assessment procedures: Risk assessment procedures are systematic processes used to identify and evaluate potential risks that may affect the accuracy and reliability of financial statements. These procedures are crucial in guiding auditors in determining the extent of their audit work, allowing them to focus on areas with a higher likelihood of misstatement or error. By understanding risks, auditors can design their audit strategies more effectively to mitigate those risks and ensure compliance with applicable standards.
Subsidiaries: Subsidiaries are companies that are controlled by another company, known as the parent company or holding company. They operate independently but are financially and operationally linked to the parent company, which holds a majority stake in the subsidiary. This relationship is important for group audits, as it necessitates collaboration between auditors to ensure the accuracy and compliance of financial statements across different entities.
Sufficient appropriate audit evidence: Sufficient appropriate audit evidence refers to the information that auditors gather to form a basis for their audit opinion, ensuring that it is adequate in quantity and quality. This concept is crucial in establishing the reliability of the audit findings and ensuring that they can support the conclusions drawn about the financial statements of the entity being audited.