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Clarified Auditing Standards: Audits of Group Financial Statements – Part 2

Oct 8th 2015
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Part 1 of this article discussed key definitions that are important for understanding AU-C Section 600,Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors). It also discussed several group audit pre-engagement planning procedures.

Part 2 of this article discusses even more group audit pre-engagement planning procedures.

1.The group engagement team should obtain an understanding of the business environments of the group and its components, and identify those that are significant.

2. The group audit partner must evaluate whether sufficient audit evidence can be obtained to report on the group financial statements.

3. The group audit partner must consider the information on the Client Acceptance and Continuance Forms for the group and component entities, and determine that sufficient evidence can be obtained to express an unqualified opinion on the group financial statements. Specific information that should be part of the group engagement team's understanding include:

  • The group legal and organizational structure for maintaining the financial reporting system.
  • The business activities of components that are significant to the group, including industry, regulatory, economic, and political environments.
  • The use of service organizations or service centers. Any reports of auditors on service entities' internal controls should be obtained. The findings of service-entity auditors should be considered when designing group or component audit strategies and plans.
  • Descriptions of groupwide controls, including those applied to the consolidation process. Effective groupwide controls, and tests of those controls, may limit the amount of substantive testing of consolidation documentation. (Note: Assistance by the group auditor in the consolidation process may be a nonattest service requiring procedures in the AICPA Code of Professional Conduct, Section 1.295.)
  • Component auditors not from the group engagement partner's network and the rationale for engaging more than one auditor. Quality of the component auditors' work will affect the group risk assessment procedures. In cases where the group engagement team is not familiar with the quality of the component auditors' work, more extensive involvement in or review of their work may be necessary.
  • Whether the group engagement team will have unrestricted access to all management and governance persons of the group and components, all financial information, and component auditors and their audit documentation.
  • For continuing engagements, significant changes may affect the group engagement team's ability to gather sufficient evidence. Such changes may include the group structure, business activities, management, and boards of governance members of the group or components, the integrity or competence members of management or boards of governance of the group or components, groupwide internal controls, and the applicable financial reporting framework.

Schedule time for the engagement leader to meet with the management or governance person who engaged the CPA firm and to deliver and discuss the engagement letter. Among other things, reach an understanding about the nature of the group audit engagement, as well as client and CPA firm responsibilities.

Group Auditor Delivery and Discussion of the Engagement Letter
The group auditor must comply with requirements of AU-C Section 210, Terms of Engagement. An engagement letter must be obtained for the group audit engagement by the group audit partner and by component auditors. The terms of the engagement for the group audit must include:

  • Identification of the applicable financial reporting network.
  • Whether reference will be made to the work of component auditors, or the group auditors plan to take responsibility for their work.

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

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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.

Related article:

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


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