Group Financial Statements

Question 1

Describe the responsibilities of the group engagement partner and the group engagement team to obtain an understanding of the component auditor(s).

Answer 1

They should obtain an understanding of (1) the component auditor’s independence and professional competence; (2) the extent to which the group engagement team will be involved in the work of the component auditor; and (3) whether the group engagement team will be able to obtain information about the consolidation process from the component auditor(s).

Question 2

When the group engagement partner decides to assume responsibility for the component auditor’s work, what is the effect on the auditor’s report?

Answer 2

Under these circumstances, there should be no reference to the component auditor in the auditor’s report.

Question 3

When the group engagement partner decides to reference the component auditor’s work, what is the effect on the auditor’s report?

Answer 3

Introductory paragraph and management responsibility section: No effect. Auditor’s responsibility section: First sentence is modified to identify the component audited by other auditors and the magnitude of the financial statements involved. Opinion paragraph: Modified to say “In our opinion, based on our audit and the report of the other auditors . . .”

Question 4

Describe the two primary responsibilities of the group engagement partner.

Answer 4

1. )Supervision and performance of the group audit engagement in compliance with professional standards and applicable regulatory requirements
2. )Determining whether the auditor’s report is appropriate in the circumstances

Question 5

What do AICPA professional standards identify as the auditor’s objectives when auditing group financial statements?

Answer 5

The auditor’s objectives are to determine (1) whether to act as the auditor of the group financial statements and, if so, whether to reference the component auditor(s); (2) to communicate clearly with the component auditor(s); and (3) to obtain sufficient appropriate audit evidence about the financial statements of the component(s) and the consolidation process.

Question 6

What is meant by the term “significant component”?

Answer 6

A component identified by the group engagement team that (1) is of individual financial significance to the group; or (2) due to its specific nature, is likely to include significant risks of material misstatement of the group financial statements.

Question 7

What is meant by the term “component” in connection with group financial statements?

Answer 7

An entity for which group or component management prepares financial information that is required by the applicable financial reporting framework to be included in the group financial statements

Question 8

When the auditor of the group financial statements assumes responsibility for the component auditor’s work on a significant component, what is the responsibility of the group engagement team to be involved in the work of the component auditor?

Answer 8

The auditor should (1) discuss with the component auditor the significance of the component to the group and the susceptibility of the component to material misstatement; and (2) review the component auditor’s documentation of identified significant risks of material misstatement to the group financial statements.

Question 9

What is meant by the term “component auditor”?

Answer 9

An auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit. A component auditor may be (1) part of the group engagement partner’s firm, (2) a network-affiliated firm, or (3) another unrelated firm.

Question 10

What is meant by the term “group financial statements”?

Answer 10

Financial statements that include the financial information of more than one component. This term also refers to combined financial statements aggregating the financial information prepared by components that are under common control.

Question 11

Identify the three requirements that determine whether a reference to component auditors is permitted.

Answer 11

1. )The component’s financial statements must use the same framework as the group.
2. )The component auditor has complied with generally acceptable auditing standards (GAAS) (or Public Company Accounting Oversight Board standards, as applicable).
3. )The component auditor has issued an audit report on the component’s financial statements (and that report is not restricted as to use).