Group Audits 1 of 3 ‒ Consolidations

Group audits represent some of the most risky audits to undertake, as most public interest audits comprise the audit of groups of companies. However, the standards and audit principles relevant to group audits do not always receive the detailed attention they deserve. This article addresses ONLY audit procedures relating to the consolidation process, and needs to be read in conjunction with parts 2 and 3 to reach an understanding of group audits as a whole.

Professional requirements

The International Standards on Auditing (ISAs) apply to group audits. ISA 600 Special considerations – Audits of group financial statements (including the work of component auditors) deals with special considerations that apply to group audits.

Reference to “the consolidation process” includes the recognition, measurement and disclosure of the financial information of the components in the group financial statements.

Risk assessment

Sources of information from which to assess risk of misstatement at group level include:
• The consolidation process and controls relevant to it
• Controls evaluation for design and implementation
• Component auditor communication regarding consolidation
• Preliminary analytic review .

Risk assessment appears to be overlooked by group auditors, in general, as the assumption is made that risk assessment is already performed at component level. Group audits represent a separate audit and responsibility for the audit opinion at group level taken by the group auditor.

Consolidation process

Requirements regarding auditing the consolidation process are limited to basic principles of obtaining sufficient and appropriate audit evidence.

The audit procedures relating to the consolidation process as set out in ISA 600 are as follows:
• Obtain an understanding of the consolidation process, including instructions given to components by management. Instructions include:
o The accounting policies to be applied
o Statutory and other disclosure requirements applicable to the group financial statements, such as:

  1. The identification and reporting of segments
  2. Related party relationships and transactions
  3. Intra-group transactions and unrealised profits
  4. Intra-group account balances

o A reporting timetable.

Considerations regarding instructions may include:
• The clarity and practicality of the instructions for completing the reporting package
• Whether the instructions:
o Adequately describe the characteristics of the applicable financial reporting framework
o Provide for disclosures that are sufficient to comply with the requirements of the applicable financial reporting framework, for example, disclosure of related party relationships and transactions, and segment information
o Provide for the identification of consolidation adjustments, for example, intra-group transactions and unrealised profits, and intra-group account balances
o Provide for the approval of the financial information by component management.

Should the nature, timing, and extent of work on the consolidation process be based on an expectation that group-wide controls are operating effectively, or if substantive procedures alone do not provide sufficient evidence at the assertion level, then the operating efficiency of group-wide controls shall be tested.

Assess risks arising from the consolidation process. Design and perform further audit procedures.

Evaluate the appropriateness, completeness and accuracy of consolidation adjustments and reclassifications. Evaluate whether any fraud risk factors, or indicators of possible management bias exist.
• Procedures may include testing adjustments for:
o Appropriate reflection of events and transactions
o Correct calculation
o Proper support and documentation
o Reconciliation and elimination of intra-group transactions.

The group engagement team will evaluate whether sufficient, appropriate audit evidence has been obtained from the audit procedures performed on the consolidation process.

In summary

Audit procedures on the consolidation process are generally very limited, and do not reflect careful consideration of risks, fraud risks, circumstances in the group and the proper evaluation of evidence obtained. LEAF can assist firms by performing thorough file reviews, providing practical advice and training staff on the relevant requirements.


1. IAASB: International Standard on Auditing 600 (ISA 600), Special considerations – Audits of group financial statements (Including the work of component auditors)

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