Group audits, also known as the audits of the financial statements of a group, are essential processes that ensure the financial reliability and transparency of a group entity. They ensure that the consolidated financial statements present a true and fair view of the financial position, performance, and cash flows of the entire group. In the Netherlands, NV COS 600, “Special Considerations – Audits of Group Financial Statements,” is the applicable standard for group audits. In this blog article, we provide a detailed overview of the key elements of group audits according to NV COS 600.
The role of the group auditor
The group auditor plays a crucial role in group audits. This auditor is responsible for providing an audit opinion on the consolidated financial statements of the group. The consolidated financial statements include various components such as subsidiaries, associates, joint ventures, and branches. The group auditor may perform the audit for these components themselves or engage other audit firms to audit specific group components. However, the group auditor always remains responsible for the overall audit engagement at the group level and the audit opinion on the group’s financial statements.
Objectives of the auditor during a group audit
NV COS 600.8 sets out the objectives of the auditor during a group audit. Firstly, the auditor needs to determine whether they will act as the auditor of the group financial statements. If assuming this role, it is important to communicate clearly with the auditors of group components regarding the scope and timing of their work on financial information relating to the group components, as well as their findings. Additionally, obtaining sufficient and appropriate audit evidence regarding the financial information of the group components and the consolidation process is essential to express an opinion on whether the group financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.
Client and engagement acceptance
Before commencing the group audit, the group auditor must perform client and engagement acceptance procedures. This involves determining whether they can reasonably obtain sufficient and appropriate audit evidence regarding the consolidation process and the financial information of the group components to form an opinion. It is also important to gain an understanding of the group, its components, and the environment of the components to identify significant components. A significant component is one that is either individually financially significant to the group or likely to involve significant risks of material misstatements in the group’s financial statements due to specific circumstances.
Communication with auditors of group components
Effective communication with auditors of group components is essential during a group audit. NV COS 600.40 mandates that the group engagement team must timely communicate its requirements in the context of the group audit to the auditor of the group component. This includes explaining the work to be performed for the respective group component, the use to be made of that work, and the form and content of communication between the auditor of the group component and the group engagement team. The group auditor should also provide group instructions or audit instructions to the auditor of the group component. These instructions should include ethical requirements, materiality levels, significant risks, and related parties, among other things. It is important for the auditor of the group component to collaborate and provide information to the group auditor in a timely manner.
The audit process
The audit process of a group audit involves two phases: gathering sufficient and appropriate audit evidence and auditing the consolidation.
In gathering audit evidence, the group auditor needs to obtain a detailed understanding of the group structure, significant group components, the consolidation process, and risks of material misstatements. This includes determining audit strategies, planning audit procedures, and evaluating risks at the group and component levels. Specific audit procedures need to be performed for significant group components, such as auditing financial information, specific account balances, and transactions withsignificant risks.
The audit of the consolidation involves evaluating internal control measures at the group level that are relevant to the consolidation process. The group auditor must evaluate the classifications of group components, review disclosures in the consolidated financial statements, and examine specific consolidation adjustments. Gathering audit evidence also includes involvement in the work of auditors of group components and reviewing significant matters that have arisen.
Conclusion
Group audit is a complex and important process that ensures the reliability of the consolidated financial statements of a group. By complying with the guidelines of NV COS 600 and applying effective audit strategies, accountants can conduct a thorough group audit. It is essential to promote good communication and collaboration with auditors of group components and gather detailed audit evidence. With a good understanding of the role of the group auditor and the audit process, accountants can contribute to transparency and reliability within group entities.