CPA Exam AUD: Group Audits and Component Auditors
Understand group audit requirements for the CPA AUD exam. Learn about the group auditor responsibilities, component materiality, and reference to component auditors.
Group Audits and Component Auditors: CPA Exam Guide
Group audits involve the audit of group financial statements that include the financial information of more than one component. AU-C Section 600 (Special Considerations - Audits of Group Financial Statements) establishes the requirements for the group engagement partner and the group engagement team when component auditors are involved. This topic tests the candidate's understanding of responsibility allocation, communication, and reporting in multi-auditor engagements.
Key Definitions
The group engagement partner is the partner responsible for the group audit engagement and the group auditor's report. The group engagement team consists of the group engagement partner and other individuals who direct the group audit. A component is an entity or business activity for which financial information is prepared that should be included in the group financial statements. A component auditor is an auditor who performs work on the financial information of a component for purposes of the group audit. Component auditors may be from the same firm or a different firm.
Determining Component Significance
The group engagement team must identify components and determine their significance to the group financial statements. A component may be significant due to its individual financial significance to the group (for example, a subsidiary representing 20% of group revenue) or because it includes significant risks of material misstatement of the group financial statements. Components that are individually financially significant typically require a full audit of their financial information using component materiality. Components with significant risks require targeted audit procedures addressing those specific risks. Nonsignificant components may require analytical procedures at the group level.
Component Materiality
Component materiality is set by the group engagement team and must be lower than group materiality. This is because when aggregating misstatements across all components, the total uncorrected misstatements should not exceed group materiality. The group engagement team establishes component materiality for each component based on professional judgment, considering the component's significance and the risks associated with it. Different components may have different materiality levels.
Evaluating Component Auditors
The group engagement partner must evaluate whether the group engagement team will be able to be sufficiently involved in the work of the component auditor. This evaluation considers the component auditor's understanding of and compliance with ethical requirements, including independence. It also considers the component auditor's professional competence and whether the regulatory environment in which the component auditor practices includes active oversight. If the group engagement partner concludes that the component auditor's work cannot be used, the group engagement team must perform additional procedures on the financial information of that component.
Communication Requirements
Effective communication between the group engagement team and component auditors is essential. The group engagement team must communicate to the component auditor a list of related parties and other relevant information, the component materiality and threshold for reporting misstatements, identified significant risks of material misstatement that are relevant to the component, and the work to be performed and the form and content of the component auditor's communication with the group engagement team. The component auditor must communicate to the group engagement team matters relevant to the group auditor's conclusion, including identified misstatements, indicators of possible management bias, descriptions of any significant deficiencies or material weaknesses, and other significant matters.
Involvement in the Work of Component Auditors
The group engagement partner must be sufficiently involved in the work of component auditors throughout the engagement. For significant components, this involvement may include visiting the component auditor, reviewing the component auditor's overall audit strategy and audit plan, performing risk assessment procedures to identify significant risks at the component level, designing and performing further audit procedures on significant risks, and reviewing the component auditor's documentation of identified significant risks.
Making Reference to Component Auditors in the Group Audit Report
Under AICPA standards, the group engagement partner must decide whether to make reference to the component auditor in the group auditor's report. If the group engagement partner decides to make reference, the report is modified to indicate the portion of the financial statements audited by the component auditor (expressed in terms of percentage or dollar amounts of total assets, revenues, or other appropriate criteria). Making reference divides responsibility between the group auditor and the component auditor.
Under PCAOB standards, the group auditor may also make reference to component auditors, with similar disclosure of the portion of the financial statements audited by the component auditor. If the group engagement partner decides not to make reference, the group engagement partner assumes responsibility for the component auditor's work and does not refer to the component auditor in the report.
Consolidation Process
The group engagement team must evaluate the appropriateness of the consolidation process, including whether all components have been included, whether accounting policies are consistent, and whether intercompany transactions have been properly eliminated. The group engagement team also performs analytical procedures on the consolidated financial statements and evaluates the adequacy of disclosures.
Exam Tips for Group Audits
- Component materiality must be lower than group materiality.
- The group engagement partner decides whether to make reference to component auditors.
- Making reference divides responsibility; not making reference means the group auditor assumes full responsibility.
- The group engagement team must evaluate the competence and independence of component auditors.
- Communication between the group team and component auditors must include materiality, risks, and scope of work.
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