Group audit or audit of group financial statements is the process of evaluation of the group’s financial statements which include all the components’ financial information. The components’ financial information comes from the components of the group structure, which can be separate entities or business activities, which are controlled by the group company.
A component can be a subsidiary, an associate, a joint venture, or just a branch of the group company. Since the component is a separate entity from the group, it may be audited by the group’s auditors or different auditors which are usually referred to as “component auditors”.
In the group audit process, auditors need to consider various issues before deciding to accept as group auditors of the company. The first one is that auditors need to consider, whether they can obtain sufficient and appropriate audit evidence in order to form the basis of opinion, before accepting the engagement.
This is due to the group’s financial statements that auditors need to examine include all its components. So, auditors will need to regard the components’ financial information and the overall consolidated process of financial statements as well in the evidence gathering.
Second, group audit will be inevitable require the access to component auditors and their work and management of the components. If any significant restriction is placed on auditors by the parent company, auditors need to reject the engagement from the beginning.
Third, the group auditors may need to rely on the work of the third party which is referred to as components auditors. However, they must understand the work done and conclusion evidence obtained by components auditors. Lastly, auditors might not be competent enough in forming the group audit opinion. In this case, the engagement should not be accepted.
Materiality for Group Audit
In the group audit, materiality level is required to be set in both group financial statements and its components. Group auditors need to determine 4 different types of materiality, including group materiality, lower materiality, performance materiality, and component materiality.
|Materiality for Group Audit|
It is set by auditors using their professional judgment for the group financial statements so that auditors can develop an overall audit strategy for the group audit process.
Lower materiality level
It is the materiality auditors may set lower than group materiality for specific transactions and balances, if relevant.
It is the material auditors set at the lowest so that they can make sure that small errors or omissions adding up do not exceed the materiality of the whole financial statements.
It is the material auditors set for the component, in which it is used in developing an overall audit strategy of the component’s audit for the consolidation purpose.
The materiality for components must be set lower than the group materiality in order to minimize the risk of error or fraud of several components adding up together exceeding materiality of the group. Different components may have different levels of materiality.
Group auditors need to obtain an understanding of the consolidation process and group-wide controls, which are the controls related to the financial reporting process of financial information provided by components. If group auditors need to those controls together with substantive tests, they may do it themselves or request components auditor to do it.
In the consolidation process, the group auditors need to properly plan the audit procedures including:
- Verify to make sure financial information extracted from the components are accurate
- Evaluate if the components are proper classified e.g. as subsidiaries or associates.
- Properly verify the components that have different year-end to the group whether they have reported the same year-end to the group for consolidated purposes.
- Review all disclosure requirements and make sure all necessary disclosures have been made on group financial statements, such as related party transactions and minority interests
- Evaluate completeness and accuracy of consolidated adjustment and make sure they are appropriately done in accordance with applicable accounting standards
Group Audit Opinion
Group audit opinion will be given after group auditors obtained sufficient and appropriate audit evidence. However, there are usually two separate opinions that are provided in group audit, in which one is on the financial statements of the parent company and another one is on the group’s financial statements. This is due to the parent company of the group normally publishes both individual financial statements and group financial statements in the same written document.
In our opinion, the financial statements of ABC Ltd (“the Company”) and its subsidiaries (“the Group”) give a true and fair view of the financial position of the Group and of the Company as at 31 December 2019, and of their financial performance and their cash flows for the year then ended in accordance with …
Although it looks like only one opinion, it actually contains two separate opinions, in which one is for “the Company” and another is for “the Group”.