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Clarified Auditing Standards: Audits of Group Financial Statements – Part 1

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Oct 1st 2015
CPA Firm Support Services, LLC
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AU-C Section 600, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors), was effective, along with other clarified auditing standards, for periods ending after Dec. 15, 2012. This standard applies to audit engagements for group financial statements (previously addressed as consolidated financial statements); in particular, when part of the work is performed by auditors other than the principal auditor. It also applies when one engagement team performs the group and component audits, except for the sections applicable to component auditors.

In this standard, the previous term “principal auditor” is referred to as the group engagement partner, group engagement team, or auditor of the group financial statements. The group engagement team's degree of involvement with and supervision of the component auditor is more clearly defined than in previous standards. In essence, the group auditor is responsible for directing, supervising, performing, and reporting on the group audit. The group engagement team may choose to take responsibility for the component auditor's work or refer to their reports in the group audit report.

This multipart article presents a summary of the typical procedures and activities for an audit engagement with the requirements of AU-C Section 600, interfaced into applicable sections of the article. Part 1 will begin with a discussion of pre-engagement planning activities.

Definitions
The following terms are important for understanding this standard:

Component. An entity or business activity required by the applicable financial reporting framework to be included in the group financial statements.

Component auditor. An auditor who audits the financial information of a component.

Component materiality. The materiality levels for a component entity that is determined by the group engagement team.

Group. The financial information of all components forms a group.

Group audit opinion. The opinion expressed by a group auditor on the group financial statements.

Group engagement partner. The partner or other person in the group audit firm who is responsible for the group audit engagement performance and the report on the group financial statements.

Group engagement team. All partners and engagement personnel who establish the overall group audit strategy, communicate with component auditors, perform work on the consolidation process, and evaluate the conclusions drawn from the audit evidence.

Group-wide controls. Internal controls designed, implemented, and maintained by group management personnel over group financial reporting.

Significant component. A component that is financially significant to the group or that is likely to include significant risks of material misstatement in the group financial statements.

Basic Group Audit Preplanning Procedures
The following are four basic group audit preplanning procedures under the standard:

1. Determine significant components. A significant component is a component identified by the group engagement team that has individual financial significance to the group, or that because of its nature or risks, may cause significant risks of material misstatement of the group financial statements. An illustration of the determination process will be included in another part of this article.

2. Determine work to be performed for significant and other components.

3. Obtain an understanding of component auditors, including:

  • Component auditor's compliance with independence standards and professional competence.
  • The involvement of the group engagement team in the component auditor's work.
  • Any regulatory environment requirements regarding auditor oversight for components.

4. Determine any additional sources of risk of misstatements in group financial statements, such as:

  • Risks related to the nature, size, and complexity of the group entity.
  • Risks related to the consolidation process for group financial statements.

Other pre-engagement planning procedures will be discussed in part 2 of this article.

More Information
These eBook resources, without CPE credit, can be obtained from my website:

  • Small Audits Made Easy and Profitable
  • Performing Auditing Tests of Balances Procedures
  • Staff Training Series for Entry-Level Accountants, New In-Charge Accountants and Engagement Leaders
  • Key Accounting Issues for Non-Profit Organizations
  • A Practical Potpourri of Time Savings on Audits
  • The Financial Reporting Framework for Small- and Medium-Sized Entities

My exclusive presentation of webcasts on CPEcredit.com and self-study courses covering various applications of auditing standards can be accessed by clicking the appropriate box on the left side of my home page, www.cpafirmsupport.com. Registered users on my website receive a 20 percent discount on CPE materials presented by myself and numerous other authors on a variety of professional topics.

My assistance in CPA firm quality-control consulting, audit planning, and peer-review preparation can be obtained by sending an email using the “Contact Us” tab on my home page.

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