Auditing the consolidation and its adjustments
The evidence a group auditor needs over the consolidation process and its adjustments: eliminations, unrealised profit, goodwill and retranslation.
By Achekam · · 4 min read · For Accountants & audit firms in South Africa, Nigeria, Kenya
Every component in a group can be audited to a high standard and the group statements can still be wrong. The error sits in the step between: the consolidation, where intra-group balances are cancelled, profits on internal sales are stripped out, goodwill is calculated and foreign subsidiaries are translated. These adjustments exist only in the group accounts. Nobody at component level audits them, because nobody at component level makes them.
ISA 600 (Revised), as ACCA describes it, deals with the special considerations that apply to a group audit, including when component auditors are involved. The consolidation is where the group team earns its own evidence. This article covers what that evidence should be.
Group-wide controls over the consolidation
ACCA explains that the group auditor needs an understanding of the group-wide controls relevant to the consolidation process, such as the instructions management issues to components, and assesses their adequacy and operating effectiveness when planning procedures on the consolidation.
In a well-run group, those controls might include:
- a group reporting pack every component completes in the same format;
- a group chart of accounts and mapping that components cannot change;
- intra-group balance confirmations between components before year end;
- a review of the consolidation by someone other than the preparer.
In many groups in South Africa, Nigeria and Kenya, especially family-owned ones, the "process" is one spreadsheet maintained by one person in the parent's finance team. That is not a reason to refuse the engagement, but it shifts the work from relying on controls to substantive testing of every adjustment.
The IAASB says the revised standard aligns with ISQM 1, ISA 220 (Revised) and ISA 315 (Revised 2019). In practice that means the group team's understanding of the consolidation process is part of its risk assessment, not an afterthought at completion.
Intra-group eliminations and unrealised profit
ACCA lists the consolidation adjustments for which the group auditor gathers evidence. The first two are the most common source of error.
Cancellation of intra-group balances and transactions. Every receivable from a group company should have a matching payable; every intra-group sale a matching purchase. Test by:
- agreeing each component's intra-group balances to its audited reporting pack;
- matching the two sides and investigating differences, which are often cash or goods in transit or cut-off errors;
- checking that management fees, interest and dividends between components are eliminated in full.
Provision for unrealised profit. Where one component sells inventory to another at a margin and the buyer still holds it at year end, the group has not made that profit. Obtain the stock held by each buyer from group companies, the seller's margin, and recompute the provision.
Goodwill, fair value adjustments and impairment
ACCA's list also covers the calculation of goodwill and its impairment review, and fair value adjustments.
For acquisitions in the year, obtain the purchase agreement, the fair values assigned to the assets and liabilities acquired, and the goodwill calculation, and test each element. Fair value adjustments made on acquisition often need to be carried forward, for example extra depreciation on uplifted property, and a common error is to make them once and forget them in later years.
For goodwill from earlier acquisitions, test the annual impairment review as you would any estimate: the cash flow forecasts against budgets and recent results, the discount rate and the allocation of goodwill to the right units.
Retranslating foreign components
ACCA's list also includes retranslation of foreign-currency component financial statements. A South African parent with a Kenyan subsidiary, or a Nigerian group with operations in Ghana, must translate those components into the group's presentation currency.
Test the rates used against an independent source, recompute the translation of the statement of financial position and the income statement, and agree the translation difference to equity. Check that goodwill and fair value adjustments on a foreign subsidiary are treated consistently with the client's policy.
Consolidations prepared outside Achekam
Achekam has no engine that consolidates the accounts of a group of businesses. Where a client or the firm prepares group statements, the consolidation is done elsewhere, usually in a spreadsheet, and the auditor tests that workbook directly. Our article on consolidated statements without a consolidation engine covers how firms handle that.
What Achekam does support is the structure around the work. Staff can see clients grouped under their parent group with each group's entities, and create a group and add entities to it. In the Group Audit Control Tower, the team records components with their scope, materiality and component auditors and issues instructions; each component auditor works through a portal link to acknowledge, upload deliverables and report misstatements. The component auditors' reported misstatements are an input to the consolidation work: check that each one has been either corrected in the component figures or carried to the group's schedule of uncorrected items.
For a spreadsheet consolidation, test:
- that each component's figures agree to its audited or reviewed reporting pack;
- the formulas, especially totals and links between sheets;
- that every adjustment has support and is reversed or carried forward correctly;
- that the final figures agree to the group financial statements.
A consolidation checklist
- Group structure and components agree to legal records and to scoping. See group audit scoping.
- Group-wide controls understood and assessed.
- Component figures agree to reporting packs.
- Intra-group balances and transactions matched and eliminated.
- Unrealised profit on intra-group inventory recomputed.
- Goodwill, fair value adjustments and impairment tested.
- Foreign components retranslated at supported rates.
- Component misstatements accounted for at group level.
- Consolidation workbook formulas and links tested.
ACCA's technical article on group audits sets out the group auditor's responsibilities for the consolidation and for component work, and is a sound briefing before planning.
Ask for the consolidation workbook and the prior year's adjustments at the planning stage of your next group audit. Most consolidation errors are visible long before fieldwork, if someone looks.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
