• The auditor requires detailed accounting knowledge to enable him report on the group financial statements.
  • It is the principal auditors who reports on whether in his opinion the group accounts give a true and fair view of the state of affairs as at the year end as well as the results of the operations as it concerns the group.
  • The principal auditor is charged with the responsibility of reporting on the accounts of the enterprise when they include the financial information of one or more components audited by other auditors.

Rights of the Principal Auditors

  • Right of access to the holding companies books of accounts and other supporting documents
  • Right to require information and explanations considered reasonable from the auditors of other companies.
  • Rights to require the parent company to take reasonable steps in order to obtain reasonable information concerning the affairs of the subsidiary companies.

Consideration before adoption of the work of other auditors

– The principal auditor should decide on how to take into account the work carried out by other auditors.  The procedures adopted will be determined by the amounts derived from the financial statements of the components the level of risk that the auditors are willing to accept that the financial statements do not contain material errors.  In this regard he should consider the following

  • Materiality of the portion of financial statements which they do not audit
  • The degree of their knowledge regarding the business of the components.
  • The ability to perform additional procedures to enable them act as the principal auditors
  • The risk of material misstatement in the financial statements of the components audited by other auditors.

– The principal auditor should obtain sufficient and appropriate evidence that the work of auditors is adequate. To achieve this the principal auditors should inform other auditors at the planning stage of the use they intend to make on the work performed by other auditors and make necessary arrangements for the co-ordination of their audit efforts.  The principal auditor is therefore required to inform other auditors of:

  • Areas that require special consideration eg the key risk areas in the control environment
  • Procedures for identification of intercompany transactions which should be disclosed
  • Procedures for notifying the principal auditors of unusual circumstances or operations
  • The timetable for the completion of the audit
  • The independence requirements to enable them report objectively
  • The relevant accounting and auditing requirements to be followed when they are performing their work.

Procedures used by the Principal Auditor to evaluate the work of other Auditors

  • Discussions with other auditors about the audit procedures adopted
  • Review of the written summary of these procedures by use of checklists or questionnaires
  • Review of the audit working papers collected for the purpose of the audit.
  • Assessment of professional competence eg consider their significance findings whether they are adequate.

 Special Consideration of Planning and Controlling the group Audit

  • The auditors are required to report to the members of the company on the accounts examined by them including the group accounts which should be prepared in accordance with the Companies Act requirement
  • At the planning stage the holding Company Auditor (Principal Auditor) will need to consider.
  1. The Clients Procedure for preparing the group Financial Statements Including
    • The clients group accounting policies
    • The standard accounting formats i.e specification of the layout of financial statements of each subsidiary so as to facilitate consolidation.
    • The clients timetable for the presentation of financial statements of individual components.
  2. The auditors own timetable – this will involve
  • Audit staffing
  • Liaison with auditors of the subsidiaries and associate companies
  • Anticipated problem areas eg the audit of foreign subsidiaries

Duties of the Auditors (Principal Auditors)

  • The auditors of the holding company are not relieved of their responsibility for expressing an opinion on the group accounts where the accounts contain the amounts which may be material relating to other companies of which they have not acted as the auditors.
  • Equally this responsibility is not discharged by the acceptance of the accounts of other companies even if they have been independently audited by the secondary auditors. It therefore shows that the primary auditors have the ultimate responsibility to express a fair opinion on the financial statements of the group.
  • The auditors are entitled to take into account the work done and the report of the secondary auditors. They are required to conduct further procedures as they consider necessary to satisfy themselves that with the inclusion of the figures which they have not audited the group accounts give the true and fair view.  This applies where the results to be incorporated are those of the subsidiaries or associate companies.

The work of the Primary or Principal Auditors

The main matters that the primary auditors should examine before reliance on the accounts not audited by them include:-

  1. Accounting Policies – The primary auditor should ensure that there are uniform accounting policies adopted throughout the group
  2. Availability of information – He should ensure there is sufficient information available to enable the accounts to show the true and fair view.
  • The scope of the work of the Secondary Auditors – The principal auditor must consider whether:-
    • All the material aspects of the underlying accounts have been subjected to the audit examination
    • If there are any reasons why they cannot rely on the work of the Secondary auditors
    • The auditors must also consider any qualification in the Secondary auditors

report when drafting their own report

  1. Materiality – the principal auditors must consider the materiality of the amounts involved when deciding on the extent of their enquiries


– It is normal practice for the auditors of the holding company to send

the questionnaires to the auditors of the subsidiaries.  This will be

designed to provide the following types of information.

  • Accounting Policies adopted
  • Accounting details needed for consolidation but not available from the published accounts
  • Information relevant to the group accounts but not for the subsidiaries own accounts

Problems of Auditing a Foreign Subsidiary

  • The accounting techniques for consolidation of a foreign subsidiary where the financial information of such subsidiary are stated in another currency. This will require determination of the currency exchange rates.
  • The geographical location of the subsidiary. If the auditing firm has an office in the country in which the subsidiary operates then the audit client will probably choose the principal auditor as the auditor of the subsidiary to due to the required logistics.
  • The consolidation of the subsidiary into the groups accounts. In addition to the problem of the subsidiary company being audited by another firm of auditors.  The parent company will need to consider the following:
  1. Whether the local audit is different in scope to that of the foreign company. In such event, the holding company may require the local auditors to carry out further work.
  2. Whether different accounting policies have been used to comply with the local regulations
  • Language, problems may arise in both the examination of financial statements of the foreign subsidiary and the co-ordination with the local auditors. A provision should be made to anticipate and resolve this problem.
  1. The translation of the amounts in the foreign currency financial statements will be required

Important Aspects in the Audit of the Group Accounts

  • Engagement letter – the Auditors of the parent company are also auditors of the component companies hence separate letters are unnecessary. If one letter is sent by the principal auditors, it should identify the components of which they are appointed as auditors. The directors of the parent company should be requested to forward the letters to the B.O.Ds of the components concerned.  Each board should be requested to confirm that the terms of engagement letter are accepted.
  • Control Environment and System – The assessment of control environment and systems will involve evaluation of:
    • Organizational structure of the group
    • The level of involvement of the parent company in the components operations
    • The degree of autonomy in the management by the parent company
    • Information systems installed and the nature of the information provided centrally on regular basis
    • The role of internal audit in the review of the components operations
  • Subsequent Events – When planning reliance on other auditors work, the principal auditor should satisfy himself that the other auditors have performed appropriate procedures relating to the subsequent events in the period upto the date of the principals auditors report.
  • Management representations – The principal auditors where appropriate should obtain representations relating to the specific matters in respect of the group financial statements and the parent companies operations. They should obtain representatives as follows:
  • From the management of the parent company because of their level of involvement in the management of the group.
  • They can also obtain representations material to the group operations from the management of the subsidiary companies
  • Reports to the Management or Directors – Reports of the subsidiary undertakings should be notified to the management of the subsidiary company. However, permission is required from the directors or management of the parent company in order to disclose the contents of any report to the directors or management of the parent company. Where there are weaknesses in ICS, the principal auditor should report to the management so that measures for improvement are undertaken



The Auditor will be particularly concerned of the following areas

  • Accounting policies
  • Consolidation adjustments
  • Accounting periods
  • Changes in the composition of the group
  • The loss making subsidiaries
  • Foreign subsidiaries
  • Restrictions on the distributions of profits
  • Contingencies and post Balance Sheet events
  1. Accounting Policies

– In order for the group accounts to present the true and fairview, they should be based on the consistent accounting policies. Where practicable, all the group companies should adopt uniform policies.  However, there will be situations where this is not always possible in overseas subsidiary may follow different accounting policies because of the local, legal and accounting requirements. In such cases;

  1. Appropriate consolidation adjustments should be made purely for the purpose of preparing the group accounts. No comment will be needed in the group accounts since the group financial statements give the true and fair view of the position of the group.
  2. In exceptional cases consolidation adjustments will be impracticable or undesirable perhaps because of the possible adverse consequences. In such cases the following should be disclosed.
    1. Different accounting policies adopted
    2. An indication of the amounts of assets and liabilities involved. If possible some indication of the effects on the group profits and assets values in using those different policies.
  • The reasons for the different treatment
  1. Consolidation Adjustments

– Certain types of adjustments are required purely for the purpose of preparing the group accounts and these will include:

  1. Adjustments required because certain subsidiary companies have based their financial statements on accounting policies different from those of the rest of the group
  2. Adjustments for the unrealized intercompany profits on the transfer of inventory and the fixed assets
  3. Adjustments for the intercompany management charges
  4. Adjustments for the items in transit eg Cash, Stocks

This is an area of particular importance to the group auditor.  He will need to make sure that he has the necessary information to ensure that all such adjustments are reflected in the group accounts

  1. Accounting Periods

– If the financial year of the subsidiary undertaking included in the consolidation differs from that of the parent company, the group account shall be made from the accounts of the subsidiary undertaking for its financial year last ending before the financial year end of the parent company so long as the difference in the period does not exceed 3 months. Such accounts can also be made from the interim accounts prepared by the subsidiary company operations as at the end of the parent companies financial year.

  • Particular care should be taken in the case of the group companies where there are significant trading relationships between them
  • The financial statements should relate to the same periods and be made upto the same date. If this is not done, it is difficult to see how the group accounts could give the true and fair view unless all significant transactions were adjusted.  The window dressing transactions between the group members would distort the view given by the group accounts.
  1. Changes in the composition of the Group

– The auditor should ensure that adequate disclosures are made as follows:

  1. The effective date of acquisition or disposal
  2. The consolidated financial statements which should contain sufficient information regarding the purchase of shares to enable the shareholders to appreciate the effect on the consolidated results.
  • The treatment of goodwill on the purchase of the subsidiary. It is important to consider the fair value of the assets acquired
  1. Loss making subsidiary

– This is critical area and the auditor may need to consider the following aspects:

  1. If a subsidiary Company continues to make losses, the directors may consider that there has been a permanent fall in the value of the holding companies investments. This could involve:
    • In the separate accounts of the holding company writing down the cost of investment in the subsidiary below the cost.
    • In the group accounts writing down the goodwill on consolidation through consolidated income statement. The auditor will need to satisfy himself that the writing down is adequate.
  2. If the subsidiary company is making losses on such a scale that it is almost insolvent, the holding company may be guaranteeing, loans, overdrafts, at the normal course of operations. If the policy of the holding company is to continue to support rather than to abandon the subsidiary, the company is likely to be included within the consolidation

The auditor will need to examine the extent of the support of the holding company, the subsidiary company cashflow projections and the extent of disclosure of guarantees in the group financial statements.

  1. Restrictions on the Distributions

– There may be significant restrictions on the ability of the parent company to distribute the group retained profits because of the statutory, contractual or exchange control restrictions.  The extent of these restrictions should be indicated.  The difficulty experienced is that a group with a subsidiary operating in large number of overseas companies is likely to be affected by a variety of restrictions some of which may be relatively short term in nature. These restrictions would include:

  1. Profits which have been appropriated to the statutory reserves because of the legal requirement in a particular company
  2. Profits capitalized by the subsidiary company
  3. Post acquisition profits of the subsidiary company applied against the pre-acquisition losses
  4. Local exchange control restrictions
  5. Local restriction preventing distribution of prior period retained earnings
  6. Contingencies and post balance sheet events
  7. Contingencies

– Its common for the holding company to guarantee loans and overdrafts of the subsidiary and associate companies.  The auditor should ensure there is disclosure of the transactions and events in the financial statements

  1. Post Balance Sheet Events

– In large group of companies, there may have been significant acquisitions and disposals of subsidiary between the balance sheet date and the date on which the financial statements are approved by the directors.  The auditor should ensure that there is adequate disclosure of non-adjusting events.  An appropriate method of disclosure might be a memorandum proforma consolidation balance sheet indicating what the year end balance sheet would have looked like, if it had reflected the post balance sheet acquisitions or disposals


– It is important for the auditor to check the consolidation adjustments which should be recorded as follows:-

  1. Permanent consolidation adjustments – this should be recorded in the permanent audit file for reference in the future years
  2. Current year consolidation adjustments – this includes the intergroup sales, unrealized profits in stocks. These adjustments should be made consistent with the accounting policy adopted. This should be recorded in the consolidation working papers.

Audit steps in the Consolidation Process

  • Check the transfers from the audited accounts of each subsidiary or associate companies to the consolidation schedules
  • Check that the adjustments made on the consolidation are appropriate and consistent with that of the previous periods. This involves
    • Recording of the dates, the cost of acquisition of subsidiaries and the assets acquired
    • Calculation of the goodwill and pre-acquisition reserves arising on the consolidation
    • Preparing the overall reconciliation of the movements on the reserves and non controlling interest.
  • Check for the acquisitions made to ascertain
  • Whether acquisition or mergers accounting has been appropriately used
  • The dates used on acquisition is appropriate
  • The treatment of the results for investments acquired in the year
  • Where acquisition accounting has been used, the fair value of acquired assets and liabilities is reasonable.
  • The goodwill has been correctly calculated and if it is impaired, the amount of impairment loss should be reasonable.
  • Check for the disposal made and ascertain the appropriateness of the date of disposal. He should check:
  • Whether the results of investment has been included in the financial statements upto the date of disposal and whether the figures are reasonable.
  • Ensure authority was obtained for the disposal of investments. The auditor should read the minutes of the B.O.D
  • Consider whether the previous treatment of existing subsidiary or associate company is still correct. The auditor should evaluate the level of influence and the degree of support on the components operations.
  • The auditor should verify the arithmetic accuracy of the consolidation workings. He should review the consolidated accounts for compliance with the companies act, Accounting Standards and the relevant regulations. Care will be needed when:
  • The group companies do not have same accounting periods
  • The accounting policies of the group members are not consistent or similar to that of the parent company because the foreign subsidiaries operate under different rules
  • The foreign currency translations to be used for the foreign subsidiaries
  • The subsidiaries operations are not the same as those of the parent company
  • How the loss making subsidiaries are to be accounted for
  • The treatment of restrictions on the distribution of profits in the subsidiary undertakings

Reporting on the Group Accounts

– The principal auditors should not refer in their report as to the names of other auditors since they cannot delegate the responsibility of their opinion.  The principal auditor can qualify a report in respect of the group but this does not affect the individual companies.

In the event of any restrictions, in the scope of the audit on the group financial statements the principal auditor should consider qualifying the audit report eg due to uncertainty that give rise to the limitation in the scope of work a disclaimer opinion will be given depending on the auditor’s assessment of materiality.

Ref: June 05 Question 4(b)

(i). Factors that the Principal Auditor should consider before he relies on the work of the Auditors in the subsidiary company

  • He must ensure that uniform accounting policies have been used in the preparation of periodic financial statements. Where there are changes in the policies, they should be adequately explained and disclosed.
  • The directors of the parent company should have sufficient control over the subsidiary undertakings to enable them secure all the information needed about the items that require disclosures and consolidation adjustments
  • The principal auditor should be satisfied that all the material aspects of the subsidiaries accounts have been audited and given appropriate opinion to show their financial position.
  • The relationship of the subsidiary auditors with the directors of the component company. The Auditors should be independent in their work without the influence of the management. Where independence is affected, this will constitute limitation in the scope of audit
  • The integrity of the auditors who audit the information of the components. If in the past the auditors have provided all the information and explanation required by the previous auditors then the principal auditor can rely on their work.
  • The competence of the auditors. This is evaluated on the ability of such auditors to collect sufficient and reliable working papers which are adequately documented to support their findings.
  • The assessment of the control environment of the subsidiary company. The principal auditor should be satisfied that adequate controls exist in the components operations to record the information to the level of completeness.  In particular, they should assess the role of internal audit function in the review of the components procedures and controls.

(ii) Matters to consider in deciding whether to qualify the Audit report of the parent company accounts given the audit on the subsidiary company is qualified.

  • In forming an opinion on the group financial statements the principal auditor should consider the materiality of the financial information of components which he does not audit on the overall position of the group. Where such information is material, then it will have an impact on the group financial position and this will require adequate disclosures in the accounts.
  • Qualification in the group financial statements will be necessary where material subsidiary financial statements are qualified. However, the auditor should obtain the necessary schedules of the details on the matters in respect of which the audit report was qualified and apply his own reasonable procedures to determine the degree of materiality on the overall position of the group.
  • On evaluation of the findings of his procedures, if the matter is material to the subsidiary’s operations but immaterial to the group context, no further action is to be taken even if there is a qualification in the subsidiary’s account. However, where the matter is material to the subsidiary and the group financial position, then the principal auditor should carry on the qualification to the audit report of the group.  He should express except for opinion for the report issued.


– This is where two or more audit firms or auditors are held responsible for the audit assignment and jointly produce an audit report for the clients.

Reasons for the Joint Audits

  • Take overs – the holding company may insist that their auditors act jointly with those of the new subsidiary auditors.
  • Location Problems – A company operating from the widely dispersed locations may find it convenient to work with joint auditors.
  • Political problems – The overseas subsidiary may need to employ the local auditors to satisfy the laws of the country in which they operate. The local auditors will have work jointly with those of the holding company.
    • It is vital to consider/assess the experience and standards of other auditors or firms before acting jointly i.e evaluation of the audit techniques to be used, the quality of the working papers to be collected, experience in similar jobs
    • Joint audit assignments should be explained in the similar terms to each set of auditors. However, separate letters are required to be sent to the auditors where other services are to be provided
    • Once the joint position has been agreed upon, the work is divided in respect of the location expertise required and performed on rotational basis to ensure that each firm gets the complete view of the whole enterprise
    • In joint appointments the firms take the full respect of their joint report hence they must ensure that the audit work is perfomed to the required level of objectivity.

Advantages of Joint Audits

  • Completion of the audit tasks faster
  • Economy of the work. e use of the skills available at the lowest cost
  • Better training of the staff because of shared experiences
  • The expertise possessed by different firms is able to fit well in joint audits
  • They create better understanding amongst the professionals involved in the assignment
  • It enables to service clients of large size where it is not possible to use one firm.


  • Joint auditors carry out the responsibility together hence the negligence of one of them may earn them a bad name.
  • There can be duplication of audit work where there is no clear terms of reference
  • There are difficulties to get an agreement on the working for the report
  • It increases the other auditors liability if no agreement is reached on the information to be contained in the report
  • It can prove costly due to high audit fees involved
  • One firms audit techniques will be known to the others which will be used to compete them in business
  • Lack of control where the other firm may have different auditing standards which are unsatisfactory.


  • The enterprise have different types of branch networks eg some are mere outlets for selling the products hence they are fully dependent on the head office for their operations. However, other branches are autonomous hence operate independently.
  • The independent branches are big in size and require detailed audit work. The auditors main concern is to distinguish between dependent and independent branches to be able to determine the extent of auditors involvement.  This will enable the auditors to plan their audit appropriately.
  • The nature of the branches affects the auditors differently eg
    1. More work is required to be done for independent branches in terms of the manpower and time.
    2. Significant branches face more risks hence the operations may have significant impacts in terms of these challenges
    3. The major branches also need to provide relevant information to the head office for the reporting purposes
    4. The operations of the main branches are dependent on the integrity and competence of the branch officials from which the auditors may require relevant representations

Control Aspects of the Branches

  • The effective operations of the branches depends on the enterprise control environment as a whole i.e the integrity, values, competence and the philosophy of the directors and the top management of enterprise. The branches should be operated based on the documented policies and procedures of the entire enterprise which are consistent to enable them focus on the enterprise objectives
  • There should be clear plan of the organization that is indicated by the org chart which reflect the authority and responsibility relationships.
  • Where the control environment is to be strong, there will be frequent visits by the internal auditors to be able to appraise the branch operations and make appropriate recommendations for the improvement of such operations.

Auditors Procedures

  • The auditor procedures with respect to the branches will normally depend on the nature of the branches ie whether they are dependent or independent branches
  • Where the auditor is involved with a dependent branch he may only be interested in two significant issues.
    1. The nature of the accounts prepared by the branch which may include the branch stock accounts, branch m/up account, branch debtors account, branch creditors account and the memorandum trading account which is used for balancing the branch accounts.
    2. The Auditor is interested in the nature of controls in such branches to facilitate the efficiency of the operations. Such controls include: Segregation of duties, authorization procedures, supervision of staff and proper maintenance of the branch records.
  • For independent branches, the auditors have a wider responsibility to ensure a number of procedures are carried out and these will include:
    1. Planning the branch visits by initially arranging to allocate the staff and draw the time budget for the branch audits
    2. During the visits to the branches, the auditor should evaluate the effectiveness of the ICS and whether such systems can be relied upon
  • The auditor should also review the branch accounting systems to establish whether such systems are achieving the required objectives of the organization. Such a system will maintain the various accounts which include the normal books of account to be able to produce the trading income statement and the statement of financial position.
  1. The branches also maintain the branch stock account and the branch current account which is of interest to the auditor because it is used for inter branch transactions and must always be reconciled periodically.
  • The auditor will also be interested in the various control accounts maintained at the branches for the debtors and creditors.
  • Where the branches have weak ICS the auditor should adopt a vouching or substantive testing which will involve the detailed tests on the transactions and balances.
  • The auditor should carry out verification of assets at the branches by estimating the accuracy of the cost/values of assets and liabilities presented in the accounts
  • The auditor should perform analytical procedures on the various branch accounts eg computation of the ratios i.e profit margin, stock turnover, asset turnover for the different periods to estimate the reasonableness of the items.
  • Obtain representations from the branch officials or management on matters relating to the asset values and contingencies reported.

Reporting on the Branches

  • Where the ICS of the branch is strong and effective, and the branch accounts have been properly accounted for, the auditor may not have any significant issue to report on in relation to the financial statements of the client.
  • Where a major fraud has been discovered at the branch affecting the accounts presented, it should be discussed with the responsible persons at the branches and at the head office for the purposes of relevant actions to be taken eg adjustments to the accounts or necessary disclosures in the financial statements.
  • Where the effect of the fraud is not appropriately reflected n the accounts, this may constitute the subject of qualification on the auditors report.
  • Where other matters eg the going concern problems may be affecting the branch, this should be discussed with the directors to confirm whether they have any mitigation plan or whether such matters will be properly reflected in the financial statements of the whole enterprise.
  • Where the branch, does not keep proper books of accounts and hence there is insufficient information being supplied to the head office for decision making purpose, this may be the subject of the auditors qualification of the accounts presented.



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