This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members to understand their responsibilities regarding subsidiaries when auditing the group accounts and the implications on the auditor’s report where access to the financial information of subsidiaries is denied by the parent entity. In practice, where there are overseas subsidiaries in the group, these are the entities that tend to cause more difficulty for the group auditor.

Members may also wish to refer to the following related guidance and helpsheets:

• Auditing groups – a practical guide
• International Standards on Auditing (UK) (ISAs (UK))
• Audit reports – overview
• Audit reports - modified opinions, emphasis of matter and other matter paragraphs
• FRC Staff Guidance Note 02/2018 (SGN 02/2018) – Group Guidance

The group auditor is responsible for issuing an audit opinion on the consolidated financial statements, as well as the parent’s individual accounts. Therefore, the group auditor needs to ensure they have sufficient appropriate audit evidence to support an opinion that there are no material misstatements or omissions in the consolidated financial statements.

The group auditor must consider what amounts or omissions derived from a subsidiary are material (within a group context) to the group financial statements and obtain adequate audit evidence. The audit evidence can be obtained by the group auditor carrying out procedures directly on the subsidiary or by relying on work done by another auditor (a component auditor).

It is worth remembering that auditing the financial information of a subsidiary is not the same as the subsidiary having a statutory audit. Statutory audit requirements come from local law. Unless the group auditor is also engaged as the auditor of the subsidiary, they will not be issuing an auditor’s report on the subsidiary’s financial statements. If a subsidiary does not require an audit under local legislation, the group auditor will need to perform sufficient procedures over its financial information to the extent necessary to be able to provide an opinion on the group financial statements.

For further detailed guidance on auditing groups, see Auditing groups: a practical guide published by the Audit and Assurance Faculty.

ISA (UK) 600 (Revised November 2019) Special considerations – audits of group financial statements (including the work of component auditors) requires the group auditor to determine whether subsidiaries are significant components of the group or not, in order to determine the level of work required. Paragraph 9 defines a significant component as:

Regardless of whether a subsidiary is significant or not, the group auditor will need access to the financial information of the subsidiary and perform or be involved in the work required in accordance with paragraphs 26 – 31 of ISA (UK) 600. Financially significant components require an audit of their financial information using component materiality. Components that are significant due to risk of material misstatement either require an audit of their financial information using component materiality or audit procedures to be performed targeting specific risk areas. Analytical procedures must be performed on non-significant subsidiaries. If, after all of this, there is still insufficient evidence, further work must be performed.

Paragraphs 7 – 10 in FRC Staff Guidance Note 02/2018 (SGN 02/2018) – Group Guidance confirm that, where a component auditor performs work on a component’s financial information, the group auditor is required to evaluate and review that work. The amount of work the group auditor needs to perform largely depends on the significance and materiality of the subsidiary.

In some circumstances, management of the parent entity may refuse the group auditor access to the financial information of an unaudited subsidiary. This is more common where the subsidiary is located overseas.

If access to a subsidiary’s financial information is refused, this is a limitation of scope imposed by management. An assessment of the extent of this limitation and how material it is to the financial statements must be made. This assessment will determine whether the audit opinion needs to be modified and if so, whether a qualification or disclaimer of opinion needs to be issued. If the limitation is so pervasive as to potentially require a disclaimer of opinion, then consideration has to be given as to whether the auditor should not accept or withdraw from the audit appointment as appropriate. For further information on disclaimers of opinion, see Preparing an audit report with a disclaimer of opinion.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.