Consolidation remains one of the most common areas of weakness in group audit file reviews. Often seen as a simple mechanical process, the consolidation is a core part of the group audit and often results in documentation gaps, missed eliminations and ethical risks. In this blog, we highlight the key issues we see and how firms can strengthen their approach.
Incomplete consolidation journals and missed eliminations
A recurring issue we see in group audit files is incomplete or poorly supported consolidation adjustments. We often see consolidation spreadsheets with journals posted, but little evidence explaining how those journals were derived or reviewed. In addition, consolidation workings can often be strengthened by extending them to support key numerical disclosures in the financial statements, such as tax reconciliations and directors’ remuneration disclosures, which are frequently calculated incorrectly or without a clear audit trail back to underlying component information.
Other common problems include intercompany balances not fully eliminated, unrealised profits in inventory overlooked or acquisition accounting adjustments not clearly documented. In particular, purchase price allocation (PPA) workings on acquisitions often lack sufficient detail, with little evidence to show how fair values have been determined or supported.
The consolidation should be treated as an audit area in its own right. There should be clear evidence of reconciliation from component trial balances to the consolidated totals, documentation explaining the purpose of each material adjustment and evidence of appropriate review and challenge.
Lack of a clear top-down group approach
Another common finding is that the group file does not clearly demonstrate a top-down approach. Where subsidiary audits are performed on separate files, the group file must still show how the group engagement team formed its overall conclusion.
We often see references to component files without a clear summary of key findings, materiality levels or identified risks. The group file should document how component auditor work was evaluated and how misstatements were assessed at group level.
A reviewer should be able to understand how the group audit opinion was reached by looking at the group file alone.
Ethical risks when firms prepare the consolidation
A further area of concern arises where the audit firm prepares the consolidation workings or posts consolidation journals. This creates a potential self-review threat and, in some cases, a risk of assuming management responsibility.
Where firms are involved in preparing consolidation adjustments, it is essential that safeguards are clearly documented.
Management must retain overall responsibility for the preparation and approval of the consolidation, including the underlying assumptions and adjustments made. The audit team should not make management decisions or determine key accounting judgements (such as the goodwill amortisation policy). Where the firm assists with preparing the consolidation, there should be clear separation between preparation and audit roles, and the work should be subject to appropriate review. Without these safeguards, independence may be compromised and findings are likely to come up on file reviews.
Consolidation should not be treated as an administrative step at the end of the audit. It is a high-risk area that requires proper planning, testing and documentation. Incomplete eliminations, weak reconciliation back to component audits and insufficient group-level conclusions are issues we regularly encounter.
Strengthening documentation around consolidation adjustments, clearly evidencing the top-down group approach and addressing ethical considerations where the firm assists with preparation will significantly improve group audit file quality.
How can Mercia help?
Our audit file review and cold file review services regularly assess group audits and provide practical, improvement-focused feedback. We also offer group audit training and access to our technical query service to help firms navigate consolidation issues with confidence.
If you would like to discuss how we can support your firm, please get in touch with the Mercia technical team.
If you are looking for further information on similar topics, please visit our Audit Quality hub.