Do you audit financial statements that contain subsidiaries or equity method investments? Then the group audit standards apply, even if you audit all components. Peer reviewers are looking for the required group audit documentation, and they, in many cases, are not seeing what they should.
Audits of Group Financial Statements (AU-C 600) provides guidance for group audits. This article gives an overview of those standards.
When is AU-C 600 Applicable?
AU-C 600 applies whenever there is an audit of group financial statements (meaning financial statements that include the financial information of more than one component). A component is an entity or business activity whose financial statements are required to be included in the group financial statements under the applicable reporting framework (e.g., U.S. GAAP).
AU-C 600 does apply even if a firm audits all of the components that comprise consolidated financial statements.
What is a Component?
A component includes:
- Joint venture
- Division of a company
- Geographic or functional activity (e.g., program in a not-for-profit organization)
- Equity-method investment
Why the Group Audit Standard?
When there are multiple components audited by different firms, the risk of error–specifically, an incorrect opinion–increases. AU-C 600 decreases this risk by providing the group audit firm with guidance for group audit situations. Here are a couple of examples where the group audit standards are in play.
Consider, for example, a group audit in which a significant unaudited subsidiary is located in California, but the parent company is in Georgia. Since the subsidiary is not audited, the group auditor does not have the option to reference another audit firm (see below). Nevertheless, he has to obtain audit evidence to support the group audit opinion. The group auditor might direct a California-based audit firm to perform certain audit procedures and provide the results. These procedures provide audit evidence for the group audit opinion.
Likewise, if the California subsidiary is audited, AU-C 600 provides the group auditor with the ability to get the information necessary to render an appropriate audit opinion. In this instance, the component auditor issues an opinion on the California subsidiary, and the group auditor can rely on that work. There is no need for the group auditor to request certain procedures of the California audit team. The group audit firm communicates with the component audit firm concerning issues such as materiality, competence, and independence.
The Auditing Standards Board created AU-C 600 to give the group audit firm and partner the resources and information to get things right.
When multiple firms audit various components, the group auditor can assume responsibility for the related audits or he can reference the component audit firm in his audit opinion.
The Big Decision: Referencing Another Audit Firm
While AU-C 600 applies to group audits when the same firm audits all components, it also applies when the group auditor does not audit a component–for example, the group audit firm audits the parent company and another audit firm audits a subsidiary (a component).
If reference is made, the auditing standards state:
- The auditor’s report on the group financial statements should clearly indicate that the component was not audited by the auditor of the group financial statements but was audited by the component auditor.
- The group auditor’s report should also communicate the magnitude of the component audited by the component auditor.
If reference is not made, then the group audit firm is responsible for the full audit and related audit evidence.
The group auditor has the option to name or not name the component audit firm. Typically the group audit firm will not name the component audit firm, but will reference the other firm with opinion language such as “those statements were audited by other auditors.”
Requirements for Referencing a Component Auditor
The group auditor can make reference to the component auditor only if the following is true:
- The component auditor must meet independence requirements
- The group audit team must not have serious concerns about whether the component auditors will understand and comply with ethical requirements (including independence)
- The group audit team must not have serious concerns about the component audit team’s professional competence
- The component financial statements must be presented using the same financial reporting framework as the group financial statements
- The component auditor must audit the component in accordance with GAAS (or when required, PCAOB standards)
- The component auditor’s report must not be restricted as to use
Requirements to Communicate with Component Auditor
Regardless of whether reference is made, the group audit team should obtain an understanding of the following:
- Whether a component auditor understands and will comply with the ethical requirements that are relevant to the group audit and, in particular, is independent
- A component auditor’s professional competence
- The extent, if any, to which the group engagement team will be able to be involved in the work of the component auditor
- Whether the group engagement team will be able to obtain information affecting the consolidation process from a component auditor
- Whether a component auditor operates in a regulatory environment that actively oversees auditors
The group audit standards are in the crosshairs of peer reviews, so make sure your audit documentation (especially your planning documents) is appropriate.