A multinational client has a London subsidiary audited by a UK firm, a pension actuary engaged by management, and a 10-person internal audit department. Three different rulebooks govern whether (and how) you can lean on their work, and mixing them up loses easy points on the exam.
The exam tests three distinct standards (AU-C 600, AU-C 610, and AU-C 620), and the lines between them are precisely where candidates lose points.
A group audit involves financial statements that include components: subsidiaries, divisions, branches, joint ventures, or equity-method investees. The group engagement partner has overall responsibility for the group audit opinion. The component auditor audits financial information of a component for use in the group audit.
HIGH-FREQUENCY: Three concepts dominate group-audit questions: significant components, group materiality, and the reference decision.
Significant components. A component is significant if individually of financial significance to the group (typically 15%+ of assets, revenue, or pre-tax profit) OR likely to include significant risks of material misstatement.
Common mistakes
- Confusing reference with no reference. Reference divides responsibility; no reference means full responsibility. Trap answer: "the group auditor is always responsible for the component auditor's work" (only true under no reference).
- Allowing direct assistance for issuer audits. Prohibited under PCAOB standards. AU-C 610's direct-assistance path is nonissuer only. Trap: "permitted because the internal auditors are competent and objective."
- Skipping the systematic-and-disciplined-approach test. Candidates remember objectivity and competence but forget the third threshold. All three are required. A function with strong objectivity and competence but ad-hoc methodology fails.
Bottom line
- AU-C 600 (group audits): group engagement partner owns the opinion and decides reference vs. no reference. Reference divides responsibility; no reference means full responsibility.
- A component is significant if individually 15% or more of a group measure or likely to include significant risks; significance drives the type of work.
- Component materiality must be lower than group materiality, typically 50 to 75%, so aggregation does not exceed the group threshold.
- AU-C 610 (internal audit): two paths, using their work or direct assistance under your supervision. Direct assistance is nonissuer only and prohibited for issuer audits under PCAOB.
Exam shortcut
When the stem mentions another auditor on a subsidiary, run three checks: (1) is the component significant, (2) what materiality applies, (3) is the group auditor making reference. Reference = divided responsibility. No reference = group auditor owns it all. For internal audit reliance, screen the function against the three thresholds (objectivity, competence, systematic approach). Pass all three or stop. Then ask what is being tested.
The full lesson (about 4,230 words, 28 min read) adds 7 worked examples, all 7 common mistakes, a self-check, free in the app.
Learning objectives
- II.F1
Browse all free CPA AUD lessons or jump into free CPA AUD practice questions.