Advanced Audit and Assurance (International) · Group audits

Auditing the Consolidation Process and Group Audit Evidence

Updated 11 October 2026 · Fact-checked

Auditing the consolidation means testing how the group financial statements are built from component figures. You check that components are complete and aligned to group policies, that adjustments, intragroup eliminations, unrealised profit and goodwill are correct, and that the evidence gathered is sufficient and appropriate for the group opinion.

Understand Consolidation Process and Group Audit Evidence

Group financial statements are not kept in a ledger. They are built each period from component financial information, usually on a consolidation spreadsheet. Because of this, the consolidation itself is a high-risk area. Errors can arise even when every component is audited well.

The group auditor has a responsibility for the group opinion. Under ISA 600 (Revised) you cannot pass this to component auditors. You must obtain sufficient appropriate evidence on the consolidation process as well as on the components. That means testing the adjustments made after the component figures are received.

The main areas are these:

Completeness of components: a parent must consolidate all subsidiaries it controls under IFRS 10. IFRS 10 para 4 exempts a parent that is itself a wholly or partly owned subsidiary from preparing consolidated financial statements if specified conditions are met. Separately, an investment entity measures its subsidiaries at fair value through profit or loss. Management cannot exclude a subsidiary by judgement. Associates and joint ventures are not consolidated. They are equity accounted under IAS 28. Check that each entity is included using the correct method.
Alignment: the same reporting date, the same accounting policies, and translation of foreign operations into the group presentation currency.
Intragroup eliminations: sales, purchases, balances, dividends and loans between group entities must be removed in full. Unrealised profit in closing inventory or transferred assets must be removed.
Goodwill and fair values: acquisition-date fair values of net assets, the consideration, any non-controlling interest and later impairment testing involve significant judgement.

Most of these areas involve management judgement or manual spreadsheet work. So the risk of misstatement and of management bias is higher. Your procedures should aim to show that the numbers agree to reliable sources, that the logic is right, and that the judgements are reasonable.

In the AAA exam you will be given a scenario and asked to list audit procedures or evaluate evidence. Link every procedure to a specific risk in the scenario. Generic lists score poorly.

Key rules to remember

Goodwill at acquisition (NCI at fair value or proportionate share of net assets): Goodwill = Consideration transferred + Non-controlling interest (at fair value or share of net assets) + Fair value of previously held interest − Fair value of identifiable net assets at acquisition; Use this to recompute goodwill when auditing. Check each input to evidence.
Unrealised profit in inventory (sale of goods within group): Unrealised profit = Intragroup goods still held at year end × Profit margin of the seller; Use margin on selling price, or convert mark-up: margin = mark-up ÷ (100% + mark-up).
Intragroup balances: Receivable in one entity = Payable in the other entity (after allowing for items in transit and currency differences); Differences must be reconciled and explained before elimination.
Group evidence rule: Group opinion supported only if evidence on the consolidation and components is sufficient and appropriate; Sufficiency is quantity. Appropriateness is relevance and reliability.

How to solve Consolidation Process and Group Audit Evidence questions

Use this method for any question asking for audit procedures or evidence on the consolidation.

1Read the requirement and note the exact area asked for: adjustments, intragroup items, goodwill, or evidence evaluation.
2Pick out the scenario facts that create risk, such as a new acquisition, different year ends, foreign subsidiaries, or manual spreadsheets.
3State the risk in one line, naming the assertion at stake, such as completeness, valuation or presentation.
4Write procedures that respond directly to that risk. Say what you will inspect, recompute, reperform or confirm, and against which source.
5Include the use of specialists or component auditors where the scenario points to them, and state what you will do to rely on their work.
6Evaluate the evidence: is it sufficient, is it reliable, and does it come from independent sources or from management?
7Conclude on the effect on the audit. Say what you will do if evidence is lacking, such as extending procedures or considering a modified opinion.
8Show professional skills: challenge management's judgement and communicate clearly.

Quickest way: Risk, procedure, source

When to use it: Use this when time is short and you need a clear, mark-earning answer in a few lines per point.

Write the area as a short heading: for example, goodwill.
Write: Risk: and the scenario fact behind it.
Write: Procedure: using an action verb, plus the document or source.
Add one sceptical challenge, such as testing management's assumptions or checking bias.
Move on. Aim for one risk-procedure pair per mark.

Common mistakes in Consolidation Process and Group Audit Evidence

Listing generic audit procedures such as inspect invoices without linking them to the consolidation.
Students recall standard lists from other topics and do not read the scenario closely.
Fix: Name the consolidation step, such as eliminating intragroup sales, and say which group records you will test.
Forgetting to test the consolidation adjustments and focusing only on component auditors' work.
Students assume the group audit is only about components.
Fix: Always include procedures on the spreadsheet: agree opening balances, check formulas and review journals posted at group level.
Treating unrealised profit as a profit on all intragroup sales.
Students confuse total intragroup sales with sales still in inventory at the year end.
Fix: Adjust only for goods still held by the buyer at the reporting date, and test the quantity held using the buyer's inventory records.
Accepting management's goodwill impairment assumptions without challenge.
Students describe the test but not the audit response to bias.
Fix: Compare forecasts with past performance, test discount rates with a valuation specialist, and run sensitivity analysis.
Saying evidence is sufficient without explaining why.
Students conclude without judging reliability or quantity.
Fix: State whether the evidence is external or internal, obtained directly or not, and whether it covers enough of the balance.
Ignoring differences in year end, policies or currency between components.
Students focus on arithmetic eliminations and overlook alignment.
Fix: Add procedures to check adjustments for policy alignment, and test exchange rates used against independent published rates.

Worked examples

Example 1

Your audit client, Meru Group, owns 75% of a subsidiary, Kora. Kora sold goods costing $60,000 to the parent for $90,000 during the year. At the year end, one third of these goods remain in the parent's inventory. Calculate the unrealised profit adjustment, the share borne by the non-controlling interest, and describe audit procedures on it.

Show the solution

Compute the profit on the intragroup sale: $90,000 − $60,000 = $30,000.
Compute the profit margin on selling price: $30,000 ÷ $90,000 = 33⅓%.
Compute the value of goods still held: $90,000 × 1/3 = $30,000.
Compute the unrealised profit: $30,000 × 33⅓% = $10,000. Check: one third of the total profit of $30,000 is $10,000.
Record the adjustment: Dr cost of sales $10,000, Cr inventory $10,000. This removes the profit from group inventory and group profit. The elimination of the $90,000 sale and purchase is a separate entry: Dr revenue $90,000, Cr cost of sales $90,000.
Kora is the seller, so this is an upstream sale. The $10,000 reduction in Kora's profit is shared with the non-controlling interest: 25% × $10,000 = $2,500 to the NCI and 75% × $10,000 = $7,500 to the parent.
Risk: the unrealised profit may be omitted or miscalculated, overstating group inventory and profit.
Procedure: obtain a schedule of intragroup sales and agree totals to both entities' ledgers, reconciling any differences.
Procedure: test the quantity of goods remaining by inspecting the parent's inventory records and observing the inventory count if timing allows.
Procedure: recompute the margin using Kora's cost records, and agree the adjustment to the consolidation journal.
Procedure: check that the journal reduces consolidated inventory by $10,000 and increases cost of sales by $10,000, and that the $2,500 NCI share is calculated from the 25% holding.

Answer: Unrealised profit is $10,000. It is eliminated by Dr cost of sales $10,000 and Cr inventory $10,000. Because Kora is the seller, the reduction in Kora's profit is shared with the non-controlling interest: $2,500 (25%) to the NCI and $7,500 (75%) to the parent.

Example 2

Meru Group acquired 80% of Dara during the year. The consideration was $5,000,000. The non-controlling interest was measured at fair value of $1,100,000. The fair value of Dara's identifiable net assets at acquisition was $5,600,000. Management states goodwill is $500,000. Recompute goodwill and explain the audit evidence you need.

Show the solution

Goodwill = consideration + non-controlling interest − fair value of net assets.
Calculate: $5,000,000 + $1,100,000 − $5,600,000 = $500,000.
The recomputation agrees with management's figure, so the arithmetic is correct.
The audit risk lies in the inputs, not the sum. Agree the consideration to the sale agreement and bank payment.
Test the fair value of net assets: obtain the acquisition-date valuation report, assess the competence and objectivity of the valuer, and use an auditor's expert for property or intangibles if needed.
Test the non-controlling interest fair value by checking the method and the share price or valuation inputs used.
Check that identifiable intangibles, such as customer relationships, were considered, since omitting them would overstate goodwill.
Review the impairment test of the cash-generating unit at year end: challenge forecasts and discount rate, and compare with actual results after acquisition.
Check that disclosures meet IFRS 3 and IAS 36 requirements.

Answer: Goodwill recomputes at $500,000. Sufficient appropriate evidence requires testing each input, especially fair values and the impairment assumptions, with sceptical challenge of management and use of an expert where needed.

Exam tips

Link each procedure to a named risk from the scenario. Marks are given for application, not for lists.
Use action verbs: recompute, agree, inspect, reperform, confirm. Avoid vague words like check or review alone.
When asked to evaluate evidence, comment on both sufficiency and appropriateness, and give a clear conclusion.
Show professional skills by challenging management judgements, especially goodwill and fair values, and write in clear, structured points.
Do the calculation first when numbers are given, then use the result to shape the procedures.

Practice questions from Group audits

Consolidation Process and Group Audit Evidence in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Consolidation Process and Group Audit Evidence: frequently asked questions

What is the group auditor's responsibility for the consolidation?

The group engagement partner is responsible for the group audit opinion. The group auditor must obtain sufficient appropriate evidence on the consolidation process, including adjustments and eliminations, as well as on component information.

How do you audit goodwill in a group audit?

Recompute goodwill and test each input: consideration, non-controlling interest and fair values of net assets. Then challenge the annual impairment test, including forecasts and discount rates, often with the help of an expert.

How do you audit intragroup transactions?

Obtain a schedule of intragroup items and agree it to both parties' records. Investigate differences, confirm full elimination, and recompute unrealised profit on goods or assets still held within the group.

Can the group auditor rely on component auditors for the consolidation adjustments?

Component auditors report on component information. Adjustments made at group level are usually tested by the group team, so you must perform or direct that work yourself.