Understanding the U.S. Standards for Group Audits: What You Need to Know

The AICPA issued a new auditing standard, AU-C Section 600, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors), in 2012 to clarify the auditing standards and to provide additional guidance for audits of group financial statements when part of the work is performed by other auditors. The standard was effective for audit periods ending on or after December 15, 2012. 

This article will discuss some of the highlights and requirements of the standard.

Engagement Responsibility, Acceptance and Continuance

The term “principal auditor” is now replaced with “group engagement partner” or “group engagement team” and the term “component auditor” is used to describe an auditor who performs work on financial information for a component of the engagement (typically a subsidiary, joint venture, branch or variable interest entity) that will be used as audit evidence for the overall group audit.

The group engagement partner is responsible for the “direction, supervision, and performance of the group engagement”. During the planning stages of the engagement, the group engagement partner needs to assess whether sufficient audit evidence can be obtained to issue an audit opinion for the group audit. Further determination is necessary to evaluate how the evidence will be obtained – through the work of the group engagement team or by using component auditors. There are many factors that impact this decision. From this assessment, the group engagement partner will be able to develop an overall group audit strategy or decide to not accept the engagement.

Overall Audit Strategy

The group audit strategy should be established by the group engagement team. This includes addressing the following factors:

1. Understanding the group and various underlying components (such as subsidiary, joint venture, branch or variable interest entity)
2. Understanding the entity-wide controls
3. Understanding the entity’s consolidation process
4. Establishing and assessing risks and how the team and the overall audit strategy will address those risks
5. Determining materiality limits at both the group level and the component level
6. Determining what components of the overall audit will be tested and by whom
7. Establishing the communication requirements for component auditors

Once the overall audit strategy is in place, the group engagement partner should be able to conclude that there is sufficient and appropriate audit evidence which will establish the basis for forming an opinion on the group financial statements.

Understanding and Involvement with Component Auditors

The group engagement team is required to gain an understanding of the component auditor’s qualifications in each of the following areas:

1. Does the component auditor understand and will comply with the ethical and independence requirements?
2. Is the component auditor professionally competent to complete the work?
3. How will the group engagement team obtain evidence from the component auditors and how will they be involved in the work of the component auditor?
4. Does the component auditor operate in a regulatory environment that actively oversees auditors (PCAOB)?

Once these procedures have been performed, the group engagement partner will need to determine either (1) to assume responsibility for the work of the component auditor or (2) to make reference to the component auditor in the audit report of the group financial statements. 

If the group engagement partner decides to assume responsibility for the work of the component auditor, the group engagement team needs to be “sufficiently” involved in the component auditor’s work to assume responsibility for their work. Procedures will need to be defined to meet this requirement.

Also keep in mind that the group audit engagement partner may not make reference to a component auditor unless the component auditor (1) has performed the audit in accordance with U.S. GAAP, (2) issued an unrestricted auditor report on the component financial statements and (3) prepared the financial statement using the same financial reporting framework of that of the group financial statements (typically U.S. GAAP)… although there are some exceptions to this last rule.

Communication Related to the Overall Audit Engagement and Component Auditors

The group engagement team needs to communicate its requirements to component auditors.  These requirements include communicating:

1. The scope and work to be performed by the component auditor
2. Ethical and independence requirements
3. List of related parties within the group
4. Group and component materiality levels
5. Significant identified audit risks and
6. The due dates, form and content of deliverables and other communication items to be received from the component auditor.

The level of communication is significantly greater when the group engagement team is assuming responsibility for the work of a component auditor. The group engagement team needs to evaluate each component auditor’s communication and the adequacy of their work before they render the group audit opinion.

How is this standard similar or different from International Standards on Auditing (ISA)?

This new U.S. standard is very similar and consistent with the requirements within international standards (ISA 600) with the exception that the international standards do not permit a group engagement partner to reference a component auditor’s work within the group auditor’s financial statement report. International standards require the group engagement partner to take responsibility for the work of the component auditors.

How can Meaden & Moore help?

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For more information, check out: 5 Questions to Ask When Selecting an Audit Firm

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