This is an effort to convince Audit committees overseeing a company which is a holding company, to act responsibly, in arriving at a conclusion that the group’s consolidated financial statements give a true and fair view. For this purpose, I would use the requirements of the Auditing standard on “Audits of Group Financial Statements (Including the Work of Component Auditors).”
Under this auditing standard a group auditor is responsible for providing the audit opinion on the group financial statements. Components of the group financial statements can include subsidiaries, associates, joint ventures, and branches. The components may be audited by the group auditor or by a different firm of auditors known as the ‘component auditors’.
The objective of the group auditor is to gather sufficient and appropriate evidence in order to reach an opinion on the consolidated financial statements. Some of the actions include;
#1. The group auditor should have a good understanding of the structure of the group, the significance (ie materiality) of each component of the group, the mechanics of the consolidation process, and the risk of material misstatement presented by each of the company’s financial statements.
#2. Get involved in the work of component auditors specially when it’s audited by a different firm of auditors. The group auditor cannot simply rely on another auditor’s opinion on the financial statements of the company. Because a material misstatement in the financial statements of a subsidiary could become a material misstatement in the financial statements of the group. The involvement would depend on the significance of the group company to the holding company opinion.
#3. For all companies within the group, regardless of materiality, the group auditor
should review a report of work done by the component auditor. This report of work done could be in the form of a memorandum of audit issues highlighted by the other auditor.
#4. Following this review, the group auditor will need to decide on the extent of any further actions which need to be taken, or any further work which needs to be carried out, in order to ensure that the financial statements are free from material misstatement, which may also include a review of relevant parts of the component auditor’s audit working papers. Where a company is material to the group financial statements, the group auditor should carry out further actions as mentioned in the Standard.
The group audit committee will have to support the group auditor to comply with these requirements as it’s incumbent on them to ensure compliance with Standards and Regulations as part of the audit committee governance framework. By assisting the group auditor to be involved in the components, the audit committee may get an update of how those audits are performed and have an understanding of the risks in those companies. This could be a way in which the group audit committee may have oversight over the activities of the components. The audit committee may also use the internal auditors to provide them an insight of the components’ risks and controls.
Group audits raise a variety of issues. The group structure can be complex and the existence of numerous components within the group means that there may be several firms of auditors involved. So it’s time that the holding company audit committees start discussions with the auditors and initiate a review process for the good of the group and for better Governance. Don’t be “penny wise and pound foolish!”