Multiple Auditors

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Type: 
Best Practice
Background: 

It is not uncommon for a government to incorporate within its financial statements information from an entity or business activity that is separately audited (for example, a component unit or a fund that releases its own separate financial statements that are audited by other auditors). Authoritative auditing standards describe such situations as group audits, the government’s own auditor is described as the group auditor, and other auditors are described as component auditors. Special care is needed to avoid delays in the issuance of financial statements, additional costs, or even a modified opinion in situations involving group audits

Recommendation: 

The GFOA recommends that governments take the following steps to ensure and facilitate the effective, efficient, and timely performance of group audits:

1. Determine whether the government is involved in a group audit. A group audit would include any situation in which a portion of a government’s financial report is audited by other auditors, regardless of whether it is legally separate (e.g., a water fund that is audited separately, but legally a part of the government). Conversely, a group audit would not include a situation where another auditor is responsible only for information that is disclosed in the notes to the financial statements.

2. Ensure that the group auditor and the component auditor(s) communicate early and appropriately. To issue an opinion on the government’s financial statements the group auditor must:

  • Understand the group, its components, and their environments,
  • Communicate with the component auditor and understand the work performed, 
  • Consider how the component audits will be incorporated into the group audit, 
  • Evaluate the independence and professional competence of the component auditor, and 
  • Determine whether the group auditor will be able to rely on the component auditor’s work.

The group auditor can only accomplish these tasks if there is effective communication among all parties concerned. Accordingly, the government should arrange for an initial meeting before the start of the group audit comprising: 1) representatives of the government; 2) the group auditor; 3) representatives of each separately audited component; and 4) the component auditors. That initial pre-audit meeting should:

  • Achieve and document an understanding of the responsibilities of each of the parties and how each will carry out those responsibilities;
  • Reach and document agreement on:
    • The types of situations that would require the group auditor to review the working papers of component auditors, and if so, how access to those working papers would be obtained;
    • How the group auditor would obtain the access necessary to perform any additional procedures needed if the group auditor determined that it could not rely on the work of a component auditor, and if so, who would be responsible for any additional costs;
    • A timeline for ongoing communication between the group auditor and component auditors at appropriate benchmarks including at least one or more face-to-face meeting between the group auditor and component auditors;
  • Document that there is an understanding that the government whose group financial statements are being audited will receive a summary of ongoing communications between the group auditor and component auditors; and

3. Determine how subsequent events will be addressed. The group auditor must consider events that may have occurred in the period between the separate component audits and the government’s audit. Component auditors typically are in a much better position to evaluate such subsequent events for their components. Accordingly, the government should require, whenever possible, that audit contracts of components specifically address audit responsibilities for subsequent events. Specifically the component’s audit contract, whenever possible, should state that the component is included in the government’s financial statements  and that the component’s auditors will perform all procedures and communications with the government and the group auditor required by applicable professional standards, including performing subsequent event procedures up to the date of the group auditor’s report. If such a provision cannot be included in component audit contracts, the government should make arrangements in advance for the timing and method to be used for updating subsequent event disclosures through the date of the group financial statements.

Committee: 
Accounting, Auditing, and Financial Reporting
Notes: 

This best practice was previously titled Coordinating the Work of Multiple Auditors.

Approved by GFOA's Executive Board: 
September 2014