Joint audits, the consolidation process and group communication

Two firms sign one audit report and share the blame if it is wrong. That is a joint audit, and it often appears when a group buys a new subsidiary or a client is too large for one firm.

This topic covers joint audits, then returns to the group audit to look at the consolidation process, where numbers from many companies are combined into one set of statements, and at what the group auditor must record and tell management and the board.

May 2026 asked for the factors a firm should weigh before joining a joint audit and the benefits to the client. The consolidation checklist is a reliable source of marks in any group scenario, so learn both halves.

What a joint audit is

A joint audit means two or more audit firms are appointed to audit the financial statements of an entity and give a joint opinion. Joint audits can happen anywhere, but they are common in group audits. When a group buys a new subsidiary, it is not unusual to appoint the group’s auditors jointly with the subsidiary’s existing auditors for a time.

When joint audits occur

• The client is so large that it needs more than one firm.
• A group buys a large subsidiary, and the existing and new auditors work together while the group auditor learns the business.
• The law requires it. For example, listed companies that publish consolidated statements in France must use two auditors. The aim is to increase competition and reduce the dominance of the Big 4.
• Two medium-sized firms join to tender for an audit that would normally go to a Big 4 firm.

Background: In Nigeria, the Financial Reporting Council of Nigeria (FRC) Audit Regulations 2020 allow a joint audit of a public interest entity for a maximum of 15 years, compared with 10 years for a single firm. Where more than one firm carries out a statutory audit, the firms agree the results and give a joint report. If they disagree, each gives its opinion in a separate paragraph and states the reason.

A joint audit report is signed by all the engagement partners, each with an FRC registration number.

Advantages and disadvantages

Advantages

1. Capacity. The client may be so large that one firm cannot do the work.
2. Transition. After a large acquisition, the subsidiary’s old auditors pass on their knowledge, and the parent’s auditors learn the business faster.
3. Expertise. Two firms may bring more technical expertise than one.
4. Geographic cover. Together the firms may have offices in all the places where the components are located.
5. Competition. Two medium-sized firms can combine to compete with the Big 4.

Disadvantages

1. Cost. Two firms usually cost the client more than one.
2. Methods. The firms may use different audit methods, and it may be hard to agree whose to use.
3. Division of work. Agreeing who does what can be hard.
4. Control. Monitoring and controlling the work of two firms is harder.
5. Relationships. The firms may not work well together, and each may try to lead.
6. Liability. If there is a claim for negligence, it may be difficult to say which firm is responsible.
7. Extra cost from the involvement of several firms, as the syllabus repeats.

Performing a joint audit

Good communication is the key. The firms hold joint planning meetings and regular discussions at each key stage, and document them. A plan for a joint audit usually covers these steps.

1. Accept the engagement. Each firm checks that the other is independent and competent, because both give the opinion, and that there are no conflicts of interest.
2. Agree the terms. A joint engagement letter sets out the responsibilities of both firms and of management.
3. Agree a joint strategy. The firms agree how to coordinate their work, which may be hard if their methods differ.
4. Allocate the work. No firm should dominate, for example by doing 90% of the work. The split can be based on hours, relevant experience, the location of each firm in relation to the client, and the client’s business sectors.
5. Limit duplication. Ideally there is none, because it adds cost. Some overlap is reasonable, for example when both firms want to perform risk assessment procedures.
6. Review each other’s work. Both are responsible for the opinion, so each wants to review the other’s work, and the firms need a way to settle differences of opinion.
7. Document and report. Meetings and decisions are documented, and one joint report is signed by both.

Factors an audit firm considers before taking part

• The independence, competence and conflicts of the other firm.
• Agreement on a joint strategy and method of coordination.
• How the work will be split and reviewed, and how disagreements will be resolved.
• Professional clearance from the previous auditors, if any.
• Client identification and anti-money laundering procedures.
• Whether the fee is enough for the nature of the engagement without harming quality.
• Legal and regulatory compliance, and the financial reporting framework to be used, such as IFRS.
• Management’s acceptance of its responsibility for the statements and for suitable internal controls.
• Access to the information and people the audit needs.

Auditing the consolidation process

International Standard on Auditing (ISA) 600 requires the group auditor to understand the consolidation process, including the instructions management gives to components. That allows an assessment of the risks. The group auditor wants to confirm that information has moved fully and accurately from the components’ statements to the consolidated statements, and that the right consolidation adjustments have been made. The amount of detailed work depends on the risk.

The adjustments are made after the individual companies have prepared their statements. They include changes for consistent accounting policies, inter-group balances, profit in closing inventory from intra-group sales and goodwill impairment.

Documentation and communication

Documentation

As well as meeting ISA 230, the group auditor documents:

1. an analysis of components, identifying the significant ones;
2. the type of work done on the components’ financial information;
3. the extent of the group auditor’s involvement in the work of component auditors on significant components; and
4. written communications with component auditors about the group auditor’s requirements.

Communication with group management

The group auditor tells group management on a timely basis about:

• material weaknesses in the design or operation of group-wide controls;
• material weaknesses significant to the group that the group auditor found at components;
• material weaknesses significant to the group that component auditors found and reported; and
• any fraud or suspected fraud found by the group or component auditors.

Communication with those charged with governance of the group

In addition to ISA 260 matters, the group auditor tells those charged with governance:

• the type of work to be done on the components’ financial information;
• its planned involvement in the work of component auditors;
• concerns about the quality of a component auditor’s work;
• limitations on the group audit, such as no access to information; and
• fraud or suspected fraud involving group management, component management or employees with significant roles in group-wide controls, where it resulted in a material misstatement of the group statements.

The rules in more depth

Why unrealised profit is removed

A group cannot make a profit by selling to itself. If one group company sells goods to another and the goods are still in inventory at the year end, the profit on the sale has not been earned from outsiders. The consolidation removes it from profit and from inventory. The auditor checks the sales values, the margin and the proportion left in inventory.

Deferred consideration and goodwill

If the price of a subsidiary is paid partly later, the later payment is discounted to present value and included in the cost. The discount then unwinds as a finance cost. Goodwill is the cost plus the non-controlling interest minus the fair value of the net assets acquired, and is tested for impairment each year, not amortised.

Group audit reports and joint audits

In a joint audit all firms sign. In a group audit with component auditors, the group auditor signs alone. The exam often tests whether you can tell these two apart, and the common weakness is mixing up the responsibilities.

Worked example: intra-group sales and a part-deferred acquisition

Scenario. Kestrel Holdings Ltd buys 80% of Falcon Ltd on 1 January 2025. It pays ₦120 million in cash at once and ₦60 million in two years. The discount rate is 10%. The fair value of Falcon’s net assets is ₦150 million. During 2025 Kestrel sells goods that cost ₦8 million to Falcon for ₦10 million, and 40% of them remain in Falcon’s inventory at 31 December 2025.

Step 1: the cost of the acquisition. The present value of the deferred payment is ₦60 million ÷ 1.10² = ₦60 million ÷ 1.21 = ₦49.6 million. The cost of the investment is ₦120 million + ₦49.6 million = ₦169.6 million. The auditor recalculates the present value and checks the rate used.

Step 2: the unwinding. In the first year the discount unwinds by ₦49.6 million × 10% = ₦5.0 million, charged as a finance cost. The auditor checks that it is recorded.

Step 3: goodwill. If the non-controlling interest is measured at its share of net assets, it is 20% × ₦150 million = ₦30 million. Goodwill is ₦169.6 million + ₦30 million − ₦150 million = ₦49.6 million. The auditor checks the fair values and the calculation, and considers whether goodwill is impaired.

Step 4: unrealised profit. Kestrel’s profit margin on the sale is (₦10 million − ₦8 million) ÷ ₦10 million = 20%. Falcon still holds 40% × ₦10 million = ₦4 million of the goods at transfer price. Unrealised profit is ₦4 million × 20% = ₦0.8 million. The consolidation removes ₦0.8 million from group profit and from inventory. The auditor checks the margin, the proportion unsold and the entry.

Step 5: the balances. The auditor confirms the inter-company receivable and payable on the sale, reconciles any difference and checks that the balances are eliminated.

How to score full marks

• Say which type of audit it is. Joint, shared or group. The answer depends on who signs.
• Give both sides of a joint audit. A question on benefits wants benefits only, and one on factors wants the matters to agree and check.
• Tie the consolidation checklist to the facts. If the case has an acquisition in the year, deal with fair values, goodwill and deferred consideration first.
• Remember the communication lists. Management gets weaknesses and fraud. Those charged with governance also get limitations and concerns about component work.
• Use numbers when you can. A short present value or unrealised profit calculation shows the audit check.

Common mistakes in the exam

• Treating a group audit with component auditors as a joint audit.
• Saying that one firm must be the senior firm in a joint audit. The syllabus says it should not dominate, and the report is signed by all.
• Listing disadvantages when the question asks for benefits to the client.
• Forgetting to eliminate unrealised profit and inter-company balances.
• Forgetting the impairment test on goodwill.
• Leaving out the comfort letter when a subsidiary makes losses and the group supports it.

Quick revision

• Joint audit: two or more firms, one joint opinion, all sign. Shared: one firm signs. Group: group auditor alone.
• Benefits: capacity, transition, expertise, geography, competition.
• Drawbacks: cost, methods, division of work, control, relationships, liability.
• Before joining: independence, competence, strategy, allocation, review, clearance, anti-money laundering, fee, law, framework, management responsibility, access.
• Consolidation: clerical accuracy, status of investments, changes in group, adjustments, loss-making investments, related parties, subsequent events, reporting.
• Document components, work, involvement and communications. Tell management and those charged with governance.

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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