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

There are multiple problems with group audits that make them especially challenging for the auditor. These problems are as follows:

Failures by component auditors. A major concern is the risk of not detecting a misstatement in 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.
Risk of running over budget. A group audit usually requires an unusually large amount of time to complete, given the number of entities involved and the need for tight coordination with component auditors. This can cause an audit to go well over budget.
Responsibility of the group auditor. The group auditor is responsible for the consolidated financial statements of the client, even though a large part of the audit work may have been conducted by component auditors. This means that the group auditor is taking on a significant legal risk if something goes wrong.
Risk of overlooking significant components. When there are many entities involved in a group audit, it is possible for the group auditor to overlook a significant subsidiary when performing a risk assessment. If so, this increases the risk of a material misstatement in the client’s consolidated financial statements.

Given these concerns, it should be no surprise that audit firms typically charge high fees to their clients when asked to conduct a group audit.

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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.