Audits of group financial statements: implications for governments.

• Author: Blann, Stephen W.
• Position: Best Practices

In August 2011, the Auditing Standards Board of the American Institute of Certified Public Accountants released Statements on Auditing Standards: Clarification and Recodification, also known as the Clarity Project. These new auditing standards are effective for financial audits of periods ending on or after December 15, 2012. While the AICPA's stated objective for this project was to simply reorganize auditing standards generally accepted in the United States (the GAAS) to more closely align with their international counterparts, certain substantive changes were also made. One of the more significant of these changes is found in AU-C Section 600, Audits of Group Financial Statements (Including the Work of Component Auditors).

Much of the impetus behind the new group audit standards was in response to situations such as those faced by multinational corporations with widely spread out divisions being separately audited in various countries. In those cases, a single auditor has to opine on the consolidated financial statements of the entire entity, and there is a clear need for detailed guidance on how to work with audit evidence gathered from disparate locations. However, the standards may also apply to the audits of state and local governments, where the landscape is quite different.

WHAT ARE "GROUP FINANCIAL STATEMENTS"?

GAAS define group financial statements as "financial statements that include the financial information of more than one component." A component is defined as "an entity or business activity 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." (1)

Immediately, we can see that the group audit standards have introduced some new terminology that is very similar to terms with special meanings to governmental entities. For example, the auditing term component should not be confused with the governmental accounting term component unit. Further, the auditing term business activity, which is used in the definition of a component, should not be confused with the governmental accounting term business-type activity.

So what is a component? According to the AICPA's Audit Guide State and Local Governments:

In applying the definition of a component in a governmental audit, it is helpful to consider the intent of AU-C section 600, which is to manage the aggregation risk inherent in the preparation of group...