What Is a Group Audit and How Does It Work?

A group audit is the examination of consolidated financial statements, which combine the financial data of a parent company and its subsidiaries. The objective is to allow an auditor to issue a single audit opinion on the financial health of the entire group as one economic entity. This audit is necessary for companies with complex structures to provide investors and stakeholders with a reliable view of the group’s performance.

Determining the Scope and Key Participants

The foundation of a group audit rests on identifying its scope and participants. The term “group” refers to the parent entity along with all its components, such as a subsidiary or division, whose financial information is in the group’s financial statements. The audit is led by the “group engagement partner,” who has ultimate responsibility for the audit opinion and may be assisted by “component auditors” who examine specific components.

A primary task for the group engagement partner is to understand the group’s structure and determine which components are “significant.” This determination is guided by auditing standards like AU-C Section 600. For audits of financial statements for periods ending on or after December 15, 2026, a new standard, SAS No. 149, will introduce a more comprehensive risk-based methodology.

Under current standards, significance is established through financial size or by specific risks. A component is financially significant if its metrics, like assets or revenues, exceed a quantitative benchmark relative to the group, such as 15% of the consolidated total. A component may also be significant, regardless of size, if it contains material risks of misstatement, such as engaging in complex derivative trading or having a history of weak internal controls.

The distinction between significant and non-significant components directly shapes the audit plan. The group auditor is responsible for directing the overall audit, defining the scope of work for component auditors, and evaluating the evidence they gather.

Establishing Group Audit Materiality and Strategy

After identifying components, the next phase involves establishing financial thresholds and developing a strategy. This begins with setting “group materiality,” the maximum misstatement that can exist in the consolidated financial statements without affecting a user’s decisions. This figure is calculated by applying a percentage to a benchmark from the group’s financials, such as pre-tax income or total revenue.

With group materiality established, the group auditor determines “component materiality” for each component where audit work will be performed. Component materiality is always set lower than group materiality to create a buffer. This reduces the probability that the sum of uncorrected misstatements across all components will exceed the overall group materiality.

The group auditor also calculates a lower threshold known as “component performance materiality,” which is used by the component auditor to plan the extent of their detailed testing. The careful calibration of these materiality levels is a technical exercise designed to manage the risk of undetected errors aggregating to a material amount for the group.

The overall audit strategy is built upon a group-level risk assessment to identify risks of material misstatement, such as pressures to meet performance targets. The strategy then outlines the audit work required for different components based on their significance and risk profile. For components significant due to financial size, a full audit is performed. For those significant due to risk, tailored procedures are used. For non-significant components, the group auditor may perform analytical procedures or select a few for limited review.

Executing the Audit and Communication

Once the strategy is finalized, the execution phase begins. The group auditor communicates requirements to component auditors, typically through a “letter of instruction.” This letter outlines the work to be performed, the materiality thresholds to be used, significant risks to address, the timetable for completion, and the format for reporting findings.

The group auditor’s role is one of active involvement. The group engagement partner is required to be involved in the component auditor’s risk assessment and must review their audit documentation. This review evaluates the sufficiency and appropriateness of the audit evidence obtained by the component auditor.

This evaluation may include examining the component auditor’s work papers for key accounts or significant risks. If the work is deemed insufficient, the group auditor may request additional procedures or perform supplemental procedures themselves to gather the required evidence.

A continuous line of communication is maintained throughout the audit. Component auditors must report significant accounting, auditing, and financial reporting matters to the group engagement team promptly. This allows the group auditor to monitor progress and address emerging issues.

Consolidation and Reporting

The final stage involves aggregating results and forming an opinion. The group engagement team gathers all findings from component auditors, including summaries of misstatements. These are then aggregated and evaluated against group materiality to determine their collective impact on the consolidated financial statements.

A focus of this stage is auditing the group’s consolidation process. The team reviews management’s consolidation adjustments, verifying the elimination of intercompany transactions and checking calculations for items like goodwill and foreign currency translations to ensure compliance with financial reporting frameworks.

Based on all evidence, the group engagement partner concludes whether the consolidated financial statements are presented fairly. The partner must be satisfied that sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level before issuing an opinion.

The culmination of this process is the group audit report. The group engagement partner is responsible for the opinion and can either take sole responsibility for the entire audit or reference the work of a component auditor in the report, which impacts the report’s wording.