To find out if the implementation of an auditing standard has been particularly tricky, look at the number of questions the American Institute of Certified Public Accountants (AICPA) has to address as part of its Technical Practice Aids. Technical Inquiry Service (TIS) Section 8800, Audits of Group Financial Statements and Work of Others, has been updated four times (November 2012, February 2013, March 2013, and June 2013), with a total of 43 questions and answers. An Auditing Interpretation Q&A in AU-C 9600 was also issued in April 2014, as was an Audit Risk Alert, Understanding the Responsibilities of Auditors for Audits of Group Financial Statements. The Audit Risk Alert includes a Q&A and was issued in 2013. The Risk Alert has 172 paragraphs, while the original guidance had only 52 paragraphs in the "Requirements" section. Needless to say, this standard had a bumpy implementation.
While the Auditing Standards Board's Clarity Project was primarily a reformatting of existing standards, some areas received significant substantive edits. AU-C 600, Special Considerations --Audits of Group Financial Statements was one of those sections. The convergence with the International Auditing and Assurance Standards Board (IAASB)'s ISA 600 led to many changes, particularly in the scope of the standard.
Terminology is a key player in some of these implementation issues. In order to understand how to properly perform procedures for a group audit, a definition of "group audit" must be established.
"Group financial statements" is a good place to start. AU-C 600 defines group financial statements as "financial statements that include the financial information of more than one component." This is a major change from AU Section 543, Part of Audit Performed by Other Independent Auditors. The term "group audit" makes no reference to "other auditors." The key element in AU-C 600 is having more than one "component." This term is not to be confused with the governmental term, "component unit."
So how did the AICPA define "component"? A component is "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." "Component unit" and "component" can be easily confused, but once again, there is no mention of other auditors in AU-C 600, as there was in the former AU Section 553. The key to the definition of a component was that separate information was being combined to form the group. This was a new concept to the auditing standards, so the AICPA used several explanatory paragraphs to make sure it was understood.
Unlike a clearly defined rule, the guidance uses a principles-based approach that depends largely on how an individual entity is structured. The examples that are listed include "parent and one or more subsidiaries," "investees accounted for by the equity or cost method of accounting," and "head of one or more divisions or branches." Accordingly, these scenarios include business activities (or separate entities) where the accounting is performed separately for each component and then combined to form a "group." However, the explanatory information doesn't stop there; it also says that a group can be identified by the combining of "function, process, product or service ... or geographic locations." To qualify as a group audit, separate financial information needs to be included in the group financial statements. While AU 543 primarily focused on "other auditors," AU-C 600 focuses on combining information.
AU-C 600 eventually brings in the concept of "other auditors," referring to them as "component auditors." A component auditor is defined as "an auditor who performs work on the financial information of a component that will be used as audit evidence for the group audit." Once again, unlike AU 543, the definition is expanded to include a "group engagement partner's firm, a network firm of the...