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Non-coterminous year ends, inconsistent accounting policies and subsidiary audit exemption

ISA 600 does not cover everything that creates problems for auditors. The following areas pose particular challenges for auditors and need to be dealt with carefully: non-coterminous year-ends; aligning inconsistent accounting policies; and subsidiary audit exemption and the audit of balances.

Generally, groups of companies will try and align their components’ year ends to make the consolidation process simpler, however, this isn’t always possible. Where the parent company is listed or has an earlier filing deadline than the component, group auditors may be required to sign their opinion on the group financial statements before the component audits have been completed, which involves risks to group auditors. This risk can be minimised if group auditors seek the completion of work on significant components at the same time as the group audit, although even that can be difficult in practice. There are also risks to component auditors if they are asked to report before they have completed their work.

Aligning inconsistent accounting policies also poses a challenge. It may be possible for group management to ask component management to complete a reporting package in accordance with a group accounting manual which provides detailed guidance on the policies to be adopted. This avoids the problem of local management not being skilled in the GAAP used to prepare the group financial statements. However, this may not always be possible.