AUDITS OF GROUP FINANCIAL STATEMENTS
By Larry L. Perry, CPA
CPA Firm Support Services, LLC
LEARNING OBJECTIVES
 To understand the requirements of AU-C Section 600, Special Considerations—
Audits of Group Financial Statements (Including the Work of Component
Auditors).
 To be able to design group audit strategies and plans.
 To determine required procedures when a group auditor takes responsibility for
component auditors’ work.
 To determine group auditors responsibilities when referring to component
auditors’ reports in a group audit report.
 To learn responsibilities of group audit partners for group audit procedures and
documentation, including communications to and from component auditors.
INTRODUCTION
AU-C Section 600, Special Considerations—Audits of Group Financial Statements
(Including the Work of Component Auditors) was effective, along with other Clarified
Auditing Standards, for periods ending after December 15, 2012. This standard applies
to audit engagements for group financial statements (previously addressed as
consolidated financial statements) in particular when part of the work is performed by
auditors other than the principal auditor. It also applies when one engagement team
performs the group and component audits, except for the sections applicable to
component auditors.
In this standard, the previous term principal auditor is referred to as the group
engagement partner, group engagement team or auditor of the group financial statements.
The group engagement team’s degree of involvement with and supervision of the
component auditor more clearly defined than in previous standards. In essence, the group
auditor is responsible for directing, supervising, performing and reporting on the group
audit. The group engagement team may choose to take responsibility for component
auditor’s work or refer to their reports in the group audit report.
These materials present an outline and summary of the typical procedures and activities
for an audit engagement with the requirements of AU-C 600, group audit procedures,
interfaced into applicable sections of the outline.
THE AUDIT PROCESS
A. Preplanning Phase
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1. Obtain and review the prior year’s permanent, tax, correspondence and current
files.
a. Become familiar with the prior period’s auditor’s report, financial statements
and footnotes. Beginning the preplanning phase by a review of prior period
statements and inputting current period adjusted or unadjusted information
can provide perspective that will facilitate inquiries of management to
underpin risk assessment procedures.
b. Determine that the reporting framework is appropriate given the nature, size,
and complexity of the client. The auditor is responsible for evaluating the
appropriateness of the applicable financial reporting framework, as well as the
application of its policies by management.
c. If a change to a special purpose framework, such as the AICPA’s Financial
Reporting Framework for Small- and Medium-Sized Entities, can save
financial statement preparation and audit time, consult with reporting entity
management and the user of the financials to determine if a special purpose
framework can appropriately present financial position and results of
operations of the entity.
d. Review the prior year’s risk assessment procedures, levels of assessed risk,
audit strategy and audit plan (program) to determine if there are opportunities
for changes that will save audit time charges in the current year. The auditor is
responsible for determining the most cost beneficial audit strategy and audit
plan given the business, environment and internal control of the reporting
entity. For audits of group financial statements, the current period’s risk
procedures will be affected by the determination of significant components
and the consolidation process.
e. Review the key forms, practice aids, working papers, and other documentation
in last year’s current file to determine any client documents, unnecessary
working papers or correspondence that can be eliminated this year. Consider
using a general ledger analysis worksheet instead of numerous other account
analyses.
f. Determine if it is possible to use the prior year’s control risk assessment in the
current year and if doing so can reduce the current year’s risk assessment
procedures and other substantive tests.
g. Read the internal control communication letter and investigate the current
status of significant deficiencies and material weaknesses and their affects on
the current year auditing procedures.
h. Prepare a list of procedures and activities that can be performed during interim
work, make staffing requests and schedule the interim work
i. Determine if specialists will be needed, e.g., IT experts, attorneys, valuation
experts, actuaries, etc.
j. Prepare a list of schedules and other assistance to request from client and
deliver at least 30 days before the engagement date.
k. Begin a Planning Document or prepare a separate memo documenting
procedures and findings.
Additional Group Audit Preplanning Procedures:
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 Determine significant components. A significant component is a component
identified by the group engagement team that has individual financial significance
to the group or that because of its nature or risks may cause significant risks of
material misstatement of the group financial statements. An illustration of the
determination process is included later in these materials.
 Determine work to be performed for significant and other components.
 Obtain an understanding of component auditors including:
 Component auditor’s compliance with independence standards and
professional competence.
 The involvement of the group engagement team in the component
auditor’s work.
 Any regulatory environment requirements regarding auditor
oversight for components.
 Determine any additional sources of risk of misstatements in group financial
statements, such as:
 Risks related to the nature, size and complexity of the group entity.
 Risks related to the consolidation process for group financial
statements.
2. Hold preplanning meeting with the in-charge accountant and engagement leader
(partner, shareholder, sole practitioner), and other engagement personnel.
a. Discuss group changes in business, organization, accounting, internal control,
personnel and current events that may affect this year’s audit.
b. Discuss any effects of the current economic climate, any going concern issues
and the need for management to develop plans to overcome potential threats
to the continuing existence of the entity.
c. Discuss findings, questions and other issues from the review of the prior
year’s working papers (outlined above).
d. Schedule due dates, interim and year-end fieldwork and assign staff personnel.
e. Discuss fees, billing policies, budgets and other administrative issues.
f. Begin engagement leader participation memo documenting involvement and
supervision.
g. Complete Client Acceptance and Continuance Form for the group entity and
review similar documentation prepared by component auditors.
More Group Audit Preplanning Procedures:
 The group engagement team should obtain an understanding of the business
environments of the group and its components and identify those that are
significant.
 The group audit partner must evaluate whether sufficient audit evidence can be
obtained to report on the group financial statements.
 The group audit partner must consider the information on the Client Acceptance
and Continuance Forms for the group and component entities and determine that
sufficient evidence can be obtained to express an unqualified opinion on the group
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financial statements. Specific information that should be part of the group
engagement team’s understanding should include:
 The group legal and organizational structure for maintaining the
financial reporting system.
 The business activities of components which are significant to the
group, including industry, regulatory, economic and political
environments.
 The use of service organizations or service centers. Any reports of
auditors on service entities’ internal controls should be obtained. The
findings of service entity auditors should be considered when
designing group or component audit strategies and plans.
 Descriptions of group-wide controls, including those applied to the
consolidation process. Effective group wide controls, and tests of those
controls, may limit the amount of substantive testing of consolidation
documentation.
 Note: Assistance by the group auditor in the consolidation process
may be a non-attest service requiring procedures in Ethics
Interpretation 101-3.
 Component auditors not from the group engagement partner’s network
and the rationale for engaging more than one auditor. Quality of
component auditors’ work will affect the group risk assessment
procedures. In cases where the group engagement team is not familiar
with the quality of component auditor’s, more extensive involvement
in or review of their work may be necessary.
 Whether the group engagement team will have unrestricted access to
all management and governance persons of the group and components,
all financial information and component auditors and their audit
documentation.
 For continuing engagements, significant changes may affect the group
engagement team’s ability to gather sufficient evidence. Such changes
may include the group structure, business activities, management and
boards of governance members of the group or components, the
integrity or competence members of management or boards of
governance of the group or components, group-wide internal controls
and the applicable financial reporting framework.
3. Schedule time for the engagement leader to meet with the management or
governance person that engaged the CPA firm and to deliver and discuss the
engagement letter. Among other things, these matters should be discussed:
a. Reach an understanding about the nature of the group audit engagement, as
well as client and CPA firm responsibilities.
b. Discuss significant components and the group auditor’s plans to take
responsibility for the work of some or all of the component auditors’ work.
c. Discuss current issues affecting the group or component entities, including
any affects of the current economic climate
d. Make fraud inquiries.
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e.
f.
g.
h.
i.
Arrange for proper workspace for the group engagement team.
Arrange for client assistance.
Finalize dates for interim and year end fieldwork.
Discuss target dates.
Discuss range of audit fees and affects of variables (problems, no client
assistance, more than expected involvement with work of component auditors,
etc.).
j. Document discussions in partner participation memo or other audit
documentation.
Group Auditor Delivery and Discussion of the Engagement Letter:
 The group auditor must comply with requirements of AU-C Section 210, Terms of
Engagement. An engagement letter must be obtained for the group audit
engagement by the group audit partner and by component auditors. The terms of
the engagement must include:
 Identification of the applicable financial reporting network.
 Whether reference will be made to the work of component auditors or
the group auditors plan to take responsibility for their work.
4. If possible, prepare a rough draft or block out financial statements and footnotes.
Using an adjusted or unadjusted trial balance of accounts, preparing a rough draft of
the financial statements will facilitate audit planning procedures and, when
reporting entity personnel prepare the current period financial statements, provide
details for comparison with the draft of financial statements during the completion
phase of the audit.
General Group Planning Activities:
The group engagement team must determine the extent of the involvement with
component auditors’ work when they assume responsibility for component auditors’
work. Issuing a standard report requires the group engagement team to be involved in the
component auditors’ work. Otherwise, the group auditor should make reference to the
component auditors’ reports in its report on the group financial statements. These
materials focus primarily on circumstances when the group auditor plans to take
responsibility for the component auditors’ work and issue a standard group audit report.
For significant components, assuming responsibility for component auditors’ work under
this clarified standard requires the group auditor to be involved in the risk assessment
procedures for the component and to be informed of relevant subsequent events of the
component. Additional procedures may include:
 Making client acceptance and continuance decisions.
 Expanding the group engagement team’s risk assessment process.
 Determining materiality levels for both the group and component financial
statements.
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 Developing the group audit strategy considering the results of risk assessment
procedures at the group and component levels and pervasive group internal
controls over financial reporting systems and the consolidation process.
 Selecting significant components and their financial statement classifications to
be subjected to auditing procedures.
 Making and documenting communications between the group engagement team
and component auditors.
 Evaluating audit evidence obtained from the group and component audits to form
an opinion on the financial statements.
B. Ordinary Steps in Audit Planning:
1. Complete or update basic documentation necessary to demonstrate an
understanding of the group entity’s business and environment, including internal
control including.
a. Client Acceptance and Continuance Form
b. General Ledger Analysis Worksheet documenting unusual matters
c. Internal control flowcharts, Internal Control Questionnaire and systems
walk-through memo or other documentation
d. Documentation of any and all inquiries of management or client personnel
2. Assess control risk by group financial statement classifications, combine with
inherent risk documentation, and assess level of risk of material misstatement for
material financial statement classifications.
3. Use assessed risk at financial statement level from factors documented on a Client
Acceptance and Continuance Form and other documentation to establish planning
materiality, tolerable misstatement (performance materiality), and the lower limit
for individually significant items at the financial statement level.
4. Use assessed risk of material misstatement at the assertion (financial statement
classification) level to establish tolerable misstatement (performance materiality)
and the lower limit for individually significant items at the financial statement
classification level.
5. Develop and document the audit strategy for material financial statement
classifications.
6. Design a sampling or non-sampling plan using materiality levels for financial
statement classifications.
7. Document planning activities and decisions in a Planning Document (illustrated
later in these materials) or other documentation.
8. Hold a meeting with in-charge accountant, engagement leader and other members
of the group engagement team to discuss planning results, brainstorm and finalize
the group audit strategy.
9. Tailor the audit plan (program) based on the results of risk assessment procedures.
10. Make work assignments and provide necessary training for staff personnel.
11. Hold a planning and brainstorming meeting with all group engagement personnel.
12. Prepare engagement letter and communication with persons charged with group
entity governance.
Specific Group Audit Planning Procedures:
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 The group engagement team must develop a group audit strategy and audit plan
(program), including the determination of the extent to which the work of
component auditors will be used. The group audit partner is responsible for the
review of the group and components’ audit strategies and audit plans.
 Key members of the group engagement team, and component auditors as
considered necessary, are required to brainstorm and discuss risks of material
misstatement due to error or fraud. These discussions may include:
 Knowledge of components, their environments, business risks and
group-wide controls.
 Potential risks of material misstatements due to error or fraud at the
group and component levels.
 Any biased practices by group or component management.
 Incentives or pressures the may cause any member of management,
boards of governance or other group or component employees to
commit or rationalize committing fraud.
 The risks group or component management may override controls.
 Uniformity of accounting policies used by components and how any
differences are identified and adjusted.
 Any frauds or non-compliance with laws or regulations.
 The group audit strategy should include the determination of materiality levels for
the group financial statements.
 Component materiality should be determined and documented taking into account
all component units, the aggregate of which should normally be less than group
materiality levels.
 The group auditor is required to design appropriate responses to risks of material
misstatement due to error or fraud at the group level and to determine such
responses are designed at the component level as are necessary.
 A Planning Document (illustrated later) should be prepared summarizing
decision-making for the group audit and the involvement with the work of the
component auditors.
C. Performance Phase:
1. Perform the maximum amount of interim work that is practical before the
reporting date. Some examples follow at both the group and component levels.
a. Risk assessment procedures
b. Reading minutes from meetings of boards of governance
c. Substantive tests for property, plant and equipment, debt and expenses
d. Interim analytical procedures including scanning the general ledger
e. Cycle counts of perpetual inventories
f. Receivables confirmations
g. Loan files exams--banks
h. Site inspections--contractors
i. Planning activities, including completing or replicating core documentation
j. Oversee client working paper preparation
k. Assemble or prepare basic audit documentation
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l. Other work
2. Perform highly-effective analytical procedures whenever possible that can
generate evidence for evaluating all financial statement assertions for accounts
such as sales and revenues, certain salaries and wages, payroll taxes, depreciation,
interest income and expense, etc.
3. Perform tests of balances procedures in the group audit program and prepare
appropriate audit documentation to demonstrate compliance with applicable
quality control and auditing standards..
Additional Group Audit Performance Procedures
 The group auditor is required to design and respond to identified risks of material
misstatement from analytical, risk assessment and tests of balances procedures,
including those resulting from the consolidation process.
 Tests of the group internal controls over the consolidation process on a groupwide basis will normally be required as part of the risk assessment procedures.
 Consolidating adjustments and reclassifications should be evaluated for
appropriateness, completeness and accuracy, including any adjustments of
accounting policies or principles in the applicable reporting framework for
components that are not consistent with the framework used by the group entity.
D. General Audit Completion (Wrap-Up) Procedures:
1. Complete in-charge accountant’s review of assistant’s work as soon as it is
completed and clear review points as soon as possible.
2. Plan to clear open items early (do not leave items to last minute).
3. Complete or review the consolidation process.
4. Draft audit report, financial statements and footnotes (finalize if client prepares).
5. Prepare a list to facilitate engagement leader’s final review.
a. Identify any significant issues not discussed with the leader and their
resolution.
b. Identify specific documentation prepared by the in-charge that needs the
leader’s review.
Additional Group Audit Completion Procedures:
 Review results of component auditor’s work and determine sufficiency of
evidence obtained and conclusions reached.
 Obtain component auditor’s confirmation letters.
 Make final review of group financial statements.
 Prepare group audit report.
6. The group in-charge accountant should schedule the leader’s review (and all
other required reviews) in the field whenever possible (otherwise schedule staff
time to complete in-office wrap-up and review).
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7. After the group engagement leader’s (partner’s) final review of working papers,
audit report and financial statements and footnotes, review points and open items
should be cleared as soon as possible.
8. The group in-charge accountant should prepare the group internal control
communication letter and obtain the engagement leader’s (partner’s) review.
9. Obtain client’s approval of a draft of the group financial statements, present a
draft of the group internal control communication letter and get the group entity
management representation letter signed.
10. Meet and communicate with persons charged with group governance.
11. Perform the group administrative wrap-up procedures, including:
a. Furnishing clients with proposed adjustments, discussing their content
and documenting client responses.
b. Obtaining all signed correspondence.
c. Making sure all review notes and open items lists are cleared and
destroyed.
d. Preparing a list of time savings issues for next year.
e. Preparing, reviewing and issuing all necessary tax returns.
f. Completing final time accumulation schedules and comparing with
budgets (if required by firm policy).
12. Hold post-engagement training meeting with group engagement personnel.
13. Complete final quality control procedures, document report release date and lock
or secure audit documentation.
14. Evaluate the CPA firm’s client service.
15. Identify, discuss, and communicate to the group or component entities any
additional services that could help them accomplish their operational objectives.
KEY ISSUES RELATED TO GROUP AUDITS
Selecting Significant Components
Risk of material misstatement in the group financial statements increases due to the
significance of individual components. Professional judgment will be applied in each
engagement circumstance to determine significant components.
Considering the potential volume of assets, liabilities, revenues, expenditures, net income
of cash flows in the group financial statements, the group engagement team may
determine percentages that indicate which components are significant. components.
Based on the group auditor’s understanding of the business, environment and internal
control of the components, a component may likely include significant risks of material
misstatement in the group financial statements. A smaller component, for example, may
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have non-controlling interests that are owned by related parties thereby raising the risk of
misstatement in significant related party transactions.
Following is an illustration of an entity and its majority-owned components as an
example of determination of significant components.
ENTITY
REVENUES INCOME
BEFORE
TAX
FIXED
ASSETS
ABCCONTRACTOR/
PARENT
RM PAVING
$50,000,000 $4,000,000
CASH,
SIGNIFICANT
RECEIVABLES, COMPONENT
INVENTORY,
CONTRACTS
COSTS
$1,000,000
$5,000,000
NA
$15,000,000 $2,000,000
$4,000,000
$2,000,000
YES
MOUNTAIN
BUILDERS
CHEAP
SUPPLIER
RELATED
PARTY
EQUIPMENT
LESSOR
TOTALS
$20,000,000 $3,000,000
$1,000,000
$3,000,000
YES
$9,000,000
$500,000
$500,000
$1,000,000
NO
$3,000,000
$200,000 $15,000,000
$500,000
YES
$97,000,000 $9,700,000 $21,500,000
$11,500,000
Hypothetical Reasoning for Selecting Significant Components in the Illustration:
Assume the group engagement team decides that components with revenues or total
assets in excess of 10% of the respective totals are significant components in the group
financial statements for ABC Contractor. For most audits, total revenues or total assets
are the bases for determination of audit planning materiality and, for a contractor entity,
both totals will be important in planning the audit of group financial statements.
This criterion leaves only the Cheap Supplier as a non-significant component. However,
if ABC receives special pricing due to a related-party relationship, it could be a
significant component. In addition, the Equipment Lessor is a related party and the
possibility of preferential lease arrangements may present a significant risk of material
misstatement to the group financial statements.
Additional factors that may be considered in selecting significant components include:
 Newly formed or acquired components may ordinarily be selected because of the
auditor not having prior experience with the component.
 Components with significant changes in organization or operations that may
indicate higher risks.
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 Components not using common information processing systems and applying
group-wide internal control policies that may have a higher risk of misstatement.
 Components with unusual fluctuations in analytical procedures that compare data
among years.
 The individual financial significance of components and the possible effects of
their risks on the group financial statements.
 Legal or regulatory requirements for an audit of a component.
Work to be Performed for Components
When the group auditor is taking responsibility for the work of component auditors, the
nature, extent and timing of the group auditor’s procedures for auditing components
depends on the assessed level of risk of material misstatement and the determination of
related materiality levels at the component level. The group auditor’s work may,
depending on component risks, be performed by reviewing and assessing the adequacy of
the work of component auditors or may require re-performance of risk assessment and/or
other procedures when the group auditor is not satisfied with the component auditor’s
work. For significant components likely to include significant risks, the following would
be required:
 Generally accepted auditing standards would be applied, including development
of an audit strategy and an audit plan.
 Material financial statement classifications, transactions classes and disclosures
relating to the significant risks would be subjected to appropriate procedures.
 Audit responses would be prepared and specific procedures would be performed
for the significant risks.
For components that aren’t significant, at a minimum, these procedures would be
performed:
 Basic analytical procedures, including comparisons among years of account
balances and ratios developed from the balances.
 For account balances, transactions classes and disclosures that have high assessed
levels of risk of material misstatements, and appropriate audit evidence is not
available from component auditors, either the group or component auditor may
need to perform additional auditing procedures.
Specific Involvement in Work Performed by Component Auditors
When the auditor of group financial statements is assuming responsibility for a
component auditor’s work, the group engagement team must be involved in the
component auditor’s risk assessment process. This normally would include:
 Understanding the business activities of the component that are significant to the
group.
 Discussing the component’s risks of material misstatement due to error or fraud
and the audit strategy and audit plan with the component auditor.
 Reviewing and evaluating the component auditor’s documentation and
conclusions regarding the risk assessment process and the significant identified
risks.
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 Evaluating the appropriateness of the component auditor’s responses to
significant identified risks and whether the group auditor should be involved in
further audit procedures.
Communication to and from a Component Auditor
The group auditor is responsible for communicating its requirements to component
auditors. This communication should include:
 The component auditor’s commitment to cooperate with the group engagement
team and the work to be performed by the component auditor.
 Specific ethical requirements applicable to the group audit, particularly
independence issues.
 Identification of all related parties known to the group engagement team and a
request for the component auditor to communicate any additional related parties
not known to the group engagement team.
 Risks of material misstatements in the group financial statements identified by the
group engagement team that may affect the work of the component auditor.
 Specific instructions for reviewing subsequent events.
 Findings of the group auditor’s tests of controls that are applicable to all
components and additional tests of controls to be performed by the component
auditor.
 Written representation letter from management of the component.
 Documentation requirements.
 Significant matters affecting financial statements and footnotes.
 Notification of unusual events, frauds and other matters relevant to the group
auditor’s conclusions on the group audit.
The component auditor’s communication of matters to the group auditor, including
whether applicable ethical requirements have been met, identification of the financial
information on which it is reporting and its overall findings, conclusions or opinion (an
illustrative letter is in Exhibit B of AU-C 600). This should include:
 The component auditor’s compliance with requirements of the group engagement
team.
 Non-compliance with laws or regulations at the component or group level that
could cause a material misstatement of group financial statements.
 Significant risks of material misstatements to group financial statements identified
in component financial statements and the component’s audit responses.
 Corrected and uncorrected misstatements in the component’s financial statements.
 Any management bias in the application of accounting estimates or principles.
 Significant deficiencies and material weaknesses in the component’s internal
control.
 Other significant audit findings or issues or matters that may be relevant to the
group audit.
The group engagement partner must decide that all requirements of generally accepted
auditing standards have been met by a component auditor to make reference to a
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component auditor in the group audit report, even when not taking responsibility for the
component auditor’s work. The component auditor should communicate to the group
audit partner it has met the requirement of the applicable audit standards.
Evaluation of Audit Evidence
The group auditor is required to obtain sufficient, competent evidence on which to base
an opinion on group financial statements. This includes the audit procedures performed
during the consolidation process, the work performed by the group engagement team and
the work performed by component auditors.
The group engagement partner has the responsibility to evaluate the effects of any
uncorrected misstatements and any unobtainable audit evidence identified by the group or
component auditors.
Communications with Group Management and Those Charged with Governance
Communications required by the group auditor include:
 Material weaknesses and significant deficiencies in internal control that are
relevant to the group in accordance with AU-C Section 265, Communicating
Internal Control Related Matters Identified in an Audit.
 Identification of a fraud, or that one may exist, identified by the group
engagement team or a component auditor.
 For component auditors that express an audit opinion on the financial statements
of a component, the group engagement team should request group management to
inform component management of any matter that may be significant to financial
statements of the component. If group management refuses, the group
engagement team should discuss the matter with persons charged with group
governance.
 Specific communications of the group engagement team with persons charged
with group governance, in addition to other requirements in audit standards,
include:
During engagement planning:
 The nature and extent of work to be performed on component financial
information, including the basis for the decision to make reference to
component auditors’ work instead of taking responsibility for it.
 The group engagement team’s involvement in component auditor’s work
for significant components.
During engagement completion:
 Any concerns the group engagement team has about the quality of a
component auditor’s work.
 Any limitations or restrictions on the group audit.
 Any suspected or actual fraud involving group or component management
or others with significant involvement in group-wide controls or material
misstatements due to fraud.
Subsequent Events
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Whenever audits of financial statements are being performed either by group auditors or
component auditors, procedures should be performed to identify events occurring
between the reporting date and the date of the group auditor’s report that may require
adjustment or disclosure in group financial statements.
Required Documentation
Documentation required to be included by the group engagement team includes:
 A summary of components identifying those that are significant and the nature
and extent of work performed their financial information. The group engagement
team will use this documentation to determine that sufficient evidence has been
collected for the group audit.
 Components’ financial statements and audit reports for which reference is made
in the group audit report and/or when the group auditor takes responsibility for
component auditors’ work.
 Written communications of the group engagement team’s requirements for
component auditors and component auditors’ confirmation of compliance with
those requirements.
 Other practice aids and working papers normally included in audit documentation.
Other common group auditor documentation would normally include:
Correspondence:
Group Audit Engagement Letter
Communication to Component Auditors
Confirmation from Component Auditors
Request for Lawyer Letter
Group Management Representation Letter
Group Communications of Significant Deficiencies and Material Weaknesses
Communication with Those Charged with Group Governance—Planning Phase
Communication with Those Charged with Group Governance—Completion Phase
Practice Aids:
Group Engagement Acceptance and/or Continuance Form
Group Materiality Computation Worksheet
Group Planning Document
General Ledger Analysis Worksheet or Exception Report from Data Extraction Software
Financial Reporting System Flowcharts or Other Documentation
Internal Control Questionnaires
Systems Walkthrough Documentation
Internal Control Deficiency Worksheet
Risk of Material Misstatements Form and Linking Working Paper
Sampling Analysis Worksheet (for design of sampling and non-sampling plans)
Group Analytical Procedures Documentation
Test of Controls Program (if determined necessary)
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Confirmation Control Worksheet
Confirmation Statistics Worksheet
Group Error Analysis (Audit Differences) Form
Group Audit Programs
Planning Document
Client: _________________________________________________________________
Engagement Date: _______________________________________________________
Instructions:
This document should be completed by the group engagement in-charge accountant and
reviewed by the group engagement leader (partner, sole proprietor) before engagement
personnel begin fieldwork. It should describe engagement procedures accomplished
and/or planned for both the group and component audits. It may contain cross-references
to other planning documentation as applicable.
I.
Group Engagement Administration:
A. Delivery of Group Engagement Letter:
The engagement letter is one of the primary tools for obtaining client
understanding of their responsibilities and auditors’ responsibilities. A
good understanding before the engagement begins will prevent
misunderstandings from arising later. To accomplish this, the group
engagement leader should deliver the letter and discuss its contents with
the group CEO and/or representative member of the board of group
governance. The letter should indicate the components for which the
group auditor is taking audit responsibility and the component auditors’
reports to which it will refer in the group audit report.
Discussion of the letter with the party or parties engaging the CPA firm
should be one of the primary sources for discovering potential
misstatements, fraud or illegal acts, as well as other information relevant
to the group audit. The group audit partner should determine that
component auditor partners have delivered and discussed their
engagement letters with responsible management persons, even if the
group auditor is not taking responsibility for the component auditor’s
work.
B. Use of Client Assistance or Paraprofessionals:
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Client assistance should be used to the maximum extent possible on every
engagement. When client personnel are unavailable, consider using firm
paraprofessionals to perform accounting services and clerical work in
connection with the engagement.
C. Planning for Proper Workspace:
The group engagement leader has the responsibility to arrange adequate
workspace before the fieldwork begins. Poor lighting, lack of adequate
heat or air conditioning, desks or tables that are too small, or work
locations that are not near client accounting personnel are examples of
situations that hinder the efficient completion of an engagement.
D. Assignment of Staff Personnel:
Assigning the right people to engagements ensures high quality and helps
complete the engagements in the minimum amount of time. SQCS No. 8,
effective January 1, 2012, requires CPA firm documentation of this
element of quality control. Personnel should be assigned to engagements
and tasks that are commensurate with their experience and capabilities.
When persons assigned don’t have experience and capabilities
commensurate with engagement risks, more and more frequent
supervision is required from the engagement leader. A primary audit
response to risk at the financial statement level required by audit and
quality control standards is to assign experienced staff persons to the highrisk area or provide more supervision to lesser experienced persons.
When the group auditor is taking responsibility for component auditor’s
work, the component auditor should confirm compliance with this element
of quality control and required audit standard, and that appropriate
documentation has been included in its engagement documentation files.
E. Target Dates:
Timely engagement completion involves setting target dates during
planning. These target dates should be entered in the firm’s staff
scheduling system.
Communications to component auditors should include target dates for the
group auditor’s involvement when taking responsibility for the component
auditor’s work, as well as dates financial information is required by the
group auditor from all components
F. Use of Specialists:
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Consider using outside specialists whenever any auditing procedures
outside the firm’s expertise are expected to be performed. Such
circumstances may include actuarial computations for pension funds,
questions of law, observations of inventories of products or materials,
required tests of client accounting software, and complex accounting and
auditing problem situations.
When the auditor outsources any services in connection with an
engagement, the engagement letter should contain a paragraph notifying
the client. The auditor is also required to obtain a confidentiality
agreement from the person or organization performing outsourced
services.
When group audit specialists are engaged to perform work that will also
be applicable to components, the group auditor’s communication to
component auditors should discuss the selection of the specialists and their
processes.
G. Electronic Auditing Opportunities:
Trial balance and financial statement preparation software, electronic
practice aids, file container software, spreadsheets, word processing
software, document scanners, data extraction software (such as Idea,
Monarch or ACL) and “cloud” services should be used to create
efficiencies on the group and component audit engagements. List the
specific, planned applications for discussion among the group engagement
team and for communication to component auditors.
H Audit Budgets:
Prepare a group audit budget based on circumstances, not fees, during
engagement planning. Summarize the budget here for discussion among
the group engagement team. Include a separate section for involvement in
the work of component auditors.
II.
Group Technical Audit Planning Decisions:
A. Describe the process for selecting significant components.
Cross-reference this section to a separate memorandum or other
documentation summarizing organizational, operational and financial
information for all components. Summarize the components determined
to be significant and whether the group engagement team will take
responsibility for component auditors’ work or, instead, refer to
component auditors in the group audit report.
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B. Risk of misstatement at the group financial statement level:
Use of Group Statements:
Describe high-risk uses of statements.
Potential for Group Going-Concern Problems:
Describe continued losses, high debt and external situations that
threaten the continued existence of the group or any of its
components.
Integrity of Group Management:
Discuss specific information that could cast doubt on group or
component management’s integrity.
Evaluate the risk of material misstatement at the group and component
financial statement levels and document the subjective impact on audit
responses and engagement procedures.
C. Document the group and components’ risk of misstatements evaluation at
the assertion level (financial statement classification level for smaller
entities), and the impact on the group and components’ audit strategy by
major financial statement classification. This and other sections may be
cross-referenced to other documentation.
D. Group Materiality Judgments:
Present a summary of the tolerable misstatement (performance materiality)
and lower limit for individually significant items calculations and
document group engagement team reasoning for group and component
financial statements materiality levels.
E. Group Sampling and Non-Sampling Decisions:
Describe the reasons for making decisions to sample or not sample at the
group and component levels. If decisions are made to sample, explain the
rationale for sample size calculations.
F. Group Audit Strategies:
Describe the general group audit strategy including detailed substantive
tests of balances, risk assessment procedures, tests of controls and/or
extensive analytical procedures. Cross-reference this section to other
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group audit documentation for specific audit strategies at the group and
component financial statement classification levels.
G. Nature of Group Audit Procedures:
Summarize the nature and extent of work for significant components and
components to be referred to in the group audit report. Describe the nature,
extent and timing of tests of balances procedures and analytical procedures
for material financial statement classifications or cross-reference to other
documentation describing planned procedures for material financial
statement classifications at the group and component levels.
H. Significant Time-Savings Opportunities:
Describe here the opportunities to save time on the group and/or
component audits not discussed elsewhere.
I.
Group Engagement Team Meeting:
Summarize the significant potential risks of misstatement at the group and
component levels due to error or fraud, planned audit responses and other
matters discussed at the group engagement team meeting. All group
engagement personnel, including partners or sole practitioners, are
required to attend this meeting. Matters discussed affecting the work of
component auditors should be communicated to them.
J. Planned Involvement with Component Auditors
Summarize here, if not present above, the extent of involvement in the
work of component auditors when the group engagement team plans to
take responsibility for their work and/or when component auditors reports
will be referred to in the group audit report. This should include both
administrative and technical activities similar to those summarized above
for the group audit. This planned involvement should be part of the group
engagement team’s communication to component auditors.
I. Potential Risks of Misstatement due to Errors or Fraud and Audit
Responses—Group Audit:
From risk assessment procedures:
Document potential risks of misstatement discovered during the risk
assessment procedures and the planned audit responses.
From scanning the general ledger account activity and performing
other analytical procedures:
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Document unusual matters, variances or other potential risks, and record
the planned audit responses here.
Factors discovered throughout the engagement, along with audit
responses and their results:
From inquiries of management personnel:
From inquiries of staff personnel:
From communication with persons charged with governance:
From performing fieldwork and other auditing procedures:
From performing subsequent events procedures:
J. Potential Risks of Misstatement due to Errors or Fraud and Audit
Responses—Component Audits
Summarize the same information from involvement with the work of
component auditors as presented above for group audits.
Prepared by:________________________________Date:_________________________
Reviewed by:_______________________________ Date:_________________________
CONCLUSION
The requirements for group audits apply when the group auditor audits both the group
and component financial statements, when the group auditor takes responsibility for
component auditors’ work, or when the group auditor refers to component auditors’
reports in the group audit report. All requirements of the Clarified Auditing Standards
are applicable to group audits. Group auditors must document compliance all applicable
quality control and auditing standards in engagement files. Finally, the group audit
partner is the pinnacle of quality control for a group audit, as well as the group
engagement team member that has the responsibility for determining that all necessary
procedures have been performed and that an acceptable level of error remains in the
financial statements at the date they are available for issue.
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