Do the group audit standards apply when one firm audits all of the entities comprising a consolidated whole?
You say, “confusing.” I say, “I agree.”
The confusion–at least for me–lies in the pre-clarity auditing standard, AU 543, Part of Audit Performed by Other Independent Auditors, which focused on who was performing the audit. The clarity standard, AU-C 600 Special Considerations — Audits of Group Financial Statements, focuses on what is being audited. The word group (as applied to the group audit standards) does not mean more than one auditor.
Regarding applicability (of the group audit standards), we look at the entities and business activities being audited rather than how many audit firms are involved. We used to focus on the interaction with other auditors; now we focus on the risks associated with the group financial statements.
Group Audit Standards When There is Only One Audit Firm
The AICPA’s Technical Questions and Answers (8800.24) says the following about the applicability of AU-C Section 600 (Audits of Group Financial Statements) when only one engagement team is involved:
Inquiry—Company X consolidates the operations of Entity A. The same group engagement team that audits Company X also audits Entity A. Because only one engagement team is involved, does AU-C section 600 apply? If so, what does AU-C Section 600 require that is not already covered by other auditing standards?
Reply—AU-C section 600 applies to all audits of group financial statements, which are financial statements that contain more than one component. In the circumstances when the same engagement team audits all components of the group, the considerations addressed in AU-C Section 600 that relate to component auditors are not relevant. However, considerations addressed in AU-C section 600, such as understanding the components; identifying components that are significant due to individual financial significance and the significant risk of material misstatement; determining component materiality; understanding the consolidation process; and addressing the risks, including aggregation risk, of material misstatement in the group financial statements; are relevant in all group audits.
What does this mean?
If your firm audits consolidated financial statements, then the group audit standards apply, and you do need to comply with certain provisions (even though your firm audits all entities included in the consolidation). Consequently, you have some additional documentation requirements. Your audit file should contain the following documentation:
- Your understanding of the components
- Your identification of significant components (due to financial significance or risk)
- Component materiality
- Your understanding of the consolidation process
- How you plan to address the identified risk of material misstatement (including aggregation risk)
Group Financial Statements
What are group financial statements? They are statements that include the financial information of more than one component.
Here are examples of components:
- Geographical locations
- Investments (equity method)
- Products or services
- Component units of a state or local government
You can see from these examples of components, the concept of group financial statements is broader than that of consolidated or combined financial statements.
The idea behind the group audit standards is to highlight the risk of material misstatement whether at the group level or a lower level. If for example, a component is not financially significant but it has particularly risky assets (e.g., derivatives), then the group audit standards direct our attention here.
Examples of When Group Audit Standards are Applicable
Here are examples of when the group audit standards are in play:
- Consolidated subsidiary
- Combined financial statements due to common control
- Investment accounted for using the equity method
- Consolidated affiliate (due to variable-interest considerations)
Notice we made no mention of other auditors in these examples. It is possible that another firm may audit a subsidiary (for example), but this factor is not the determinant of when the group audit standards apply.