What is a Group Audit?

A group audit involves the audit of group financial statements. Group financial statements are financial statements that include the financial information for more than one component. A component is an entity or business activity for which financial information is separately prepared, and which is included in the group financial statements. A component is most commonly a subsidiary, but it may also be a function, process, product, service, or geographical location, or even an investment accounted for under the equity method. These types of audits are needed because larger corporations frequently operate through a cluster of legal entities, all of which must be consolidated. A group audit is conducted by the auditor of the parent company.

Problems with Group Audits

A potential problem for the group engagement partner is that the risk of not detecting a misstatement extends down into the work conducted by component auditors. Thus, the auditor of a subsidiary company might not detect a major misstatement that causes a material misstatement of the group financial statements. Reducing this risk calls for the use of risk assessment procedures and additional audit procedures to be performed by component auditors.

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How to Conduct an Audit Engagement

Subsequent Events Procedures

When the auditor’s report on the group financial statements will refer to the work of a component auditor, the group engagement team will need to conduct additional procedures to ensure that subsequent events occurring between the date of the component auditor’s report and the date of the auditor’s report on the group financial statements are properly identified and dealt with. The following activities would be of assistance:

Issue a request to the component auditor to report on any subsequent events through the date of the auditor’s report on the group financial statements.
Peruse any available interim financial information issued by the component.
Make inquires of group management.
Peruse the minutes of any board meetings held subsequent to the date of the financial statements.
Examine the client’s operating budgets.