Consolidation Procedures

Audit procedures performed on detailed consolidation processes form an integral part of the performance of group audits. Auditors often neglect to document audit procedures performed on detailed consolidation processes. The group auditor must understand the controls that management has in place over the consolidation process. Thereafter, the group auditor must ensure that sufficient appropriate evidence is obtained and documented based on testing performed on the consolidation process.

Controls

The group auditor must evaluate overall management controls over the consolidation process and group overall controls, implemented by the group and consolidation adjustments. If management performs the consolidation internally, the auditor must consider the controls they have in place over the internal process. If management uses external consultants to perform the consolidation, the auditor must consider the controls they have in place over the work of the consultants, and the information supplied to the consultants to perform the consolidation. This must include overall controls by group management throughout the year, and at year end to monitor group reporting and the consolidation processes.

If group management has sound overall controls in place over the consolidation process, the group auditor can potentially audit more efficiently by testing the operating effectiveness of these controls. If control deficiencies are identified, it should be reported to management, so that the system may be improved. This will pave the way for future reliance on controls over the consolidation processes.

The understanding obtained of controls further provides a basis for assessing the risks of material misstatement, with respect to the consolidation process.

Evidence

The group auditor is responsible for the audit approach, specifically in respect of the auditing of consolidation procedures, which include procedures to verify completeness of entities to be incorporated in the consolidated financial statements, consolidation adjustments, adjustments for different accounting periods, and adjustments for different accounting frameworks.

When component auditors are involved in the audit of the components, the group auditor must determine the supervision and review necessary over the work performed by component auditors, and whether all relevant information communicated by the component auditor is incorporated in the group financial statements. This includes information related to the notes to the financial statements, e.g. related parties, going concern and subsequent events. Even where component auditors are not involved, the same principles need to be applied over audit teams.

Group instructions, and the subsequent responses by components need to be given throughout the audit to ensure that appropriate focus is directed at high-risk areas. Attention needs to be paid to:

• Risks communicated to and by components
• Evidence obtained by components
• Subsequent events communicated by components
• Issues that were experienced with consolidations by components.

Evaluating likelihood:

Further audit procedures on the consolidation process include:

• Verifying the journals reflected in the consolidation
• Evaluating the operating effectiveness of controls over the consolidation process and responding appropriately, if any controls are determined to be ineffective.

The consolidation process usually requires adjustments and reclassifications to amounts reported in the group financial statements, which may not be addressed by the normal controls over financial information, and may contain an increased risk of fraud. The group auditor must evaluate the appropriateness, completeness and accuracy of the adjustments and reclassifications, including:

• Addressing different financial year ends
• Addressing different applications of accounting policies
• Evaluating whether significant adjustments appropriately reflect the underlying events and transactions
• Determining whether the financial information of entities or business units was appropriately included in the group financial statements
• Determining whether significant adjustments are correctly calculated, processed and authorised
• Determining whether significant adjustments are properly supported and sufficiently documented
• Evaluating the reconciliation and elimination of intra-group transactions, unrealised profits, and intra-group account balances.

In summary

It is important that auditors consider controls over the consolidation process, perform the required procedures, and document work performed and evidence obtained. It must be evident from the audit working papers that the risk contained in consolidation adjustments and reclassifications is properly addressed.

LEAF can assist firms with performing thorough file reviews, providing practical advice, reviewing methodology design, designing audit working paper templates and providing staff training on the relevant requirements and procedures.

References

1. ISA 600 (Revised), Special considerations – Audits of group financial statements (including the work of component auditors).