Changes Coming for Audits of Group Financial Statements

Statement on Auditing Standards No. 149, Special Considerations — Audits of Group Financial Statements (Including the Work of Component Auditors and Audits of Referred-to Auditors)

Organizations and auditors involved in group financial statement audits should begin preparing now for the implementation of Statement on Auditing Standards (SAS) No. 149, which will affect audit planning, execution, supervision, and communication among engagement teams.

SAS No. 149 is effective for audits of group financial statements for periods ending on or after December 15, 2026. It supersedes SAS No. 122, as amended, section 600, Special Considerations — Audits of Group Financial Statements (Including the Work of Component Auditors), and reflects the Auditing Standards Board’s broader effort to align U.S. auditing standards with international group audit standards. The standard defines group financial statements as those that include the financial information of more than one entity or business unit through a consolidation process.

What Is Changing

SAS No. 149 moves away from the prior “significant component” model and adopts a risk-based approach. The group auditor determines where and how to perform procedures based on the assessed risks of material misstatement to the group financial statements, using professional judgment to identify the components that require audit attention.

The standard is intended to address common group audit challenges, including insufficient group engagement team involvement, communication gaps with component auditors, and inconsistent approaches to component materiality and performance materiality. It also places renewed emphasis on aggregation risk — the possibility that uncorrected and undetected misstatements, in the aggregate, could exceed materiality for the group financial statements as a whole.

Under SAS No. 149, the group auditor is responsible for:

• Establishing the overall group audit strategy and group audit plan;
• Directing and supervising component auditors and reviewing their work; and
• Evaluating whether the audit evidence obtained is sufficient and appropriate to support the opinion on the group financial statements.

Component Auditor and Referred-to Auditor Clarifications

SAS No. 149 continues to allow two approaches when other auditors are involved:

• The group auditor is involved in the work of component auditors, who are part of the engagement team, and retains responsibility for the group audit opinion.
• The group auditor may make reference to the audit of a referred-to auditor in the auditor’s report on the group financial statements.

It’s made clear in SAS No. 149 that the component auditor is part of the engagement team. As a result, the group engagement partner is directly responsible for directing, supervising, and reviewing the component auditor’s work.

SAS No. 149 also introduces the term referred-to auditor, defined as an auditor who audits the financial statements of a component when the group engagement partner determines to make reference to that audit in the auditor’s report. A referred-to auditor is not considered part of the engagement team; however, the group engagement partner has specific responsibilities when using a referred-to auditor. These include confirming that the referred-to auditor understands and will comply with relevant ethical and independence requirements, evaluating the referred-to auditor’s competence and capabilities, and considering whether financial statements prepared under a different financial reporting framework have been appropriately adjusted to the framework used by the group.

Strengthening Communication and Documentation

SAS No. 149 emphasizes clear, two-way communication between the group auditor and component auditors. This includes communication about ethical requirements, the component auditor’s competence and capabilities, and the nature, timing, and extent of the group auditor’s involvement in the component auditor’s work.

The standard also expands documentation expectations. Group audit documentation should be sufficient for an experienced auditor with no prior connection to the audit to understand the procedures performed, evidence obtained, and conclusions reached on significant matters arising during the group audit.

For components where the group engagement team is involved in the work performed by a component auditor, the team must determine component materiality and consider component performance materiality in relation to aggregation risk, including whether misstatements across multiple components could collectively be material to the group financial statements.

Practical Application Considerations

SAS No. 149 applies to all group audits, regardless of size or complexity. However, the requirements are applied based on the nature and circumstances of the engagement. For example, certain requirements may not be relevant when the group auditor performs all procedures centrally or performs procedures at the components without using component auditors or making reference to a referred-to auditor.

The standard may also apply outside traditional group audits when engagement team members from another firm are involved, such as when another firm assists with a physical inventory observation or property and equipment inspection.

Consistent with existing AU-C section 600, equity-method investees are considered components and remain within the scope of SAS No. 149, along with consolidated subsidiaries and other components.

SAS No. 149 also addresses restrictions on access to people or information in a group audit and provides guidance for responding to those limitations.

Bottom Line

SAS No. 149 is designed to improve group audit quality by increasing group engagement team involvement, strengthening communication with component auditors, and promoting a more consistent approach to materiality and aggregation risk. Firms should assess upcoming group audits to ensure that the reporting approach selected is appropriate and consider updating relevant group audit templates and tools. Organizations subject to group audits should expect earlier and more detailed information requests, increased coordination between group and component teams, and greater focus on audit evidence that responds to identified risks across the group.

Questions

For questions about SAS No. 149, contact your auditor or share your question with the Audit & Assurance team at GRF CPAs & Advisors.