Group Audits

A group audit arises when an entity prepares consolidated (group) financial statements that include one or more components (subsidiaries, joint ventures, associates, divisions, branches). ISA 600 (Revised) establishes the group engagement partner's responsibilities.

Key terminology:

• Group: The parent entity and all entities whose financial information is included in the consolidated FS (subsidiaries, associates, JVs)
• Component: An entity or business activity for which separate financial information is prepared for inclusion in the group FS (e.g., a subsidiary, a branch, a division, a joint venture)
• Group engagement partner: The partner in the audit firm responsible for the group audit engagement, the group audit opinion, and overall quality
• Group engagement team: Partners and staff from the group audit firm who establish the group audit strategy and plan, communicate with component auditors, evaluate their work, and form the group opinion
• Component auditor: An auditor who performs work on a component's financial information for the group audit — may be from the same firm (a different office), a network firm, or a non-network firm

Core principle: The group engagement partner is responsible for the direction, supervision, and performance of the group audit. They must be sufficiently and appropriately involved throughout the audit — particularly in assessing risks, scoping components, evaluating component auditor work, and forming the group opinion. The group engagement partner cannot delegate this responsibility.

Before involving a component auditor, the group engagement team must evaluate whether they can be relied upon. ISA 600 (Revised) requires an assessment of:

1. Competence:

• Does the component auditor have the necessary skills, resources, and experience to perform the work?
• Are they familiar with the applicable financial reporting framework (e.g., IFRS)?
• Do they have knowledge of the component's industry and regulatory environment?
• Evidence: professional qualifications, membership of relevant professional bodies, quality inspection results, references

2. Independence and ethical requirements:

• Does the component auditor comply with ethical requirements relevant to the group audit — particularly independence?
• Are there any relationships between the component auditor and the component that could compromise independence?
• The group engagement team obtains a confirmation of independence from the component auditor

3. The regulatory environment:

• Does the component auditor operate in a jurisdiction where audit quality oversight exists?
• Are there any legal or regulatory restrictions on the group engagement team's access to the component auditor's working papers?
• If restrictions exist, the group engagement team must consider whether sufficient appropriate evidence can still be obtained

If the group engagement team concludes that the component auditor's competence or independence is insufficient: They must obtain sufficient evidence without using that component auditor — either by performing the work themselves or by involving another component auditor.

The group engagement team must determine the type and extent of work to be performed on each component. This depends on whether the component is classified as significant or non-significant.

Significant components:

A component is significant if:

• It is of individual financial significance to the group — typically meaning it represents a significant percentage of group revenue, assets, or profit (e.g., >15-20% of a key benchmark). These components require a full-scope audit (a complete audit of the component's financial information using component materiality).
• It includes significant risks of material misstatement to the group FS — even if the component is not individually large, it may have complex transactions, unusual events, or areas requiring significant judgement. These components require an audit of the specific account balances, transactions, or disclosures that give rise to the significant risk (a targeted or specified procedures approach).

Non-significant components:

• Components that are not individually significant to the group
• The group engagement team performs analytical procedures at the group level on non-significant components
• However, the group engagement team must ensure that sufficient evidence is obtained overall. If the aggregate of non-significant components is material to the group, additional procedures may be needed — selecting some non-significant components for: review procedures, specific audit procedures, or a full audit (to provide a level of coverage across the group)

Determining the scope:

Component materiality is set by the group engagement team for each component that is subject to a full audit or targeted procedures. It is used by the component auditor to plan and perform the audit of the component.

Key principles:

• Component materiality must be lower than group materiality — to reduce the risk that the aggregate of uncorrected misstatements across all components exceeds group materiality
• Different components may have different materiality levels — a larger, more significant component may have a higher component materiality (closer to group materiality) than a smaller component
• Component materiality need NOT be a proportionate allocation of group materiality (e.g., group materiality of £1m with 10 components does not mean each gets £100k) — it is based on the auditor's judgement
• The sum of component materiality levels will typically exceed group materiality — this is expected and acceptable, because the probability that all components simultaneously have misstatements up to their materiality level is low
• The component auditor also sets a threshold for communicating misstatements to the group engagement team — this is set by the group team and must be lower than component materiality (so the group team is aware of all potentially significant misstatements)

Example: Group materiality is £500,000. A subsidiary representing 40% of group revenue might have component materiality of £350,000. A smaller subsidiary representing 8% of group revenue might have component materiality of £150,000. The sum (£500,000) exceeds group materiality — but this is expected.

The group engagement partner must be sufficiently and appropriately involved in the work performed by component auditors. The level of involvement depends on the significance of the component and the assessed risks.

For significant components (full audit):

• The group engagement team should be involved in the risk assessment at the component level (discuss significant risks with the component auditor)
• Review the component auditor's documentation of significant risks and responses
• Consider whether to visit the component auditor — particularly if the component is in a different jurisdiction or audited by a non-network firm
• Review the component auditor's conclusions and evaluate whether sufficient appropriate evidence has been obtained
• Discuss significant matters with the component auditor and, where necessary, with component management

For non-significant components:

• Less involvement is needed — the group engagement team may rely on group-level analytical procedures and their understanding of the component
• However, if a non-significant component is selected for additional work, the group team should provide appropriate instructions and review the results

Events or conditions at component level:

• The component auditor must communicate to the group team any significant matters: fraud or suspected fraud, going concern issues, significant deficiencies in internal controls, non-compliance with laws/regulations, uncorrected misstatements above the communication threshold, and any limitations on the component auditor's work

The group engagement team must obtain sufficient appropriate evidence regarding the consolidation process — the preparation of the group financial statements from the components' financial information.

Audit procedures on the consolidation:

• Evaluate whether all components required to be included have been included (scope completeness)
• Evaluate the appropriateness of adjustments made during consolidation: elimination of intra-group transactions and balances (trading, dividends, loans, unrealised profit on inter-company transfers), fair value adjustments at acquisition, goodwill calculation and impairment testing, NCI calculations
• Evaluate consistency of accounting policies — are all components using the same accounting policies? If not, have appropriate adjustments been made?
• Evaluate consistency of reporting periods — do all components have the same year-end? If not (e.g., a subsidiary with a different year-end), are the adjustments for intervening events appropriate?
• Test the mathematical accuracy of the consolidation workings
• Evaluate whether management's accounting estimates at the group level (goodwill impairment, fair value adjustments, deferred tax on consolidation adjustments) are reasonable
• Evaluate the adequacy of disclosures in the group FS (related parties, segment information, subsidiary details)

Communication with component auditors:

ISA 600 (Revised) requires two-way communication between the group engagement team and component auditors:

From the group team TO the component auditor (instructions):

• The scope of work to be performed (full audit, targeted procedures, specified procedures)
• Component materiality and the threshold for communicating misstatements
• Significant risks identified by the group team that are relevant to the component
• Independence requirements and a request for confirmation
• Reporting requirements: the form and content of the component auditor's communication to the group team
• Ethical requirements applicable to the group audit
• The group audit timeline (reporting deadlines)

From the component auditor TO the group team (reporting back):

• Confirmation of independence
• Identification of significant risks at the component level
• Misstatements identified (above the communication threshold)
• Significant deficiencies in internal controls
• Indicators of fraud or non-compliance with laws/regulations
• Going concern issues
• Overall conclusions and the proposed component audit report (if applicable)
• Any limitations on the component auditor's work

Documentation:

• The group engagement team must document: the analysis of components (significant vs non-significant), the nature, timing, and extent of work performed on each, the evaluation of component auditors, the instructions issued, the key communications, and the evaluation of conclusions
• Component auditor working papers are generally retained by the component auditor — but the group engagement team must have access to them (subject to legal/regulatory restrictions)

The group engagement partner forms the opinion on the group financial statements as a whole. Key considerations:

• Has sufficient appropriate evidence been obtained from all components (significant and non-significant) to form the group opinion?
• Have all uncorrected misstatements (from components and the consolidation) been evaluated — both individually and in aggregate?
• Have all significant matters communicated by component auditors been appropriately addressed?
• Is the consolidation correct (eliminations, adjustments, disclosures)?

Modification of the group opinion:

• If a component auditor's report is modified (qualified, adverse, or disclaimer), the group engagement partner must consider the significance of the matter to the group FS. If it is material to the group: the group opinion should also be modified.
• If the group engagement team is unable to obtain sufficient evidence about a component (e.g., access restrictions, inability to evaluate the component auditor): this is a scope limitation. If material: qualified opinion. If material and pervasive: disclaimer of opinion.
• The group audit report does NOT reference component auditors — the group engagement partner takes sole responsibility for the group opinion (unlike some jurisdictions where the group auditor may "refer to" component auditors).