The situation
A European manufacturing group acquired a UK subsidiary as part of a cross-border expansion. The UK entity had turnover of £8 million, 30 employees, and a March year end. The parent company’s group auditor was a mid-tier firm in Germany with no UK office.
The parent’s consolidation deadline was six weeks after the UK year end. The group auditor needed a UK-registered auditor to perform the subsidiary audit and issue a reporting package under ISA 600 (group audit) requirements. They also needed the UK auditor to respond to group audit instructions covering specific risk areas identified by the parent.
The subsidiary had been trading for less than two years. There were no prior-year audited accounts to work from – only management accounts prepared by a local bookkeeper.
What they needed
- A UK statutory audit completed within six weeks of the year end
- ISA 600 group reporting package for the German group auditor
- Opening balance verification despite no prior-year audit
- Transfer pricing review on intercompany management charges from the parent
- Communication in English with the UK finance team and in written form with the German group auditor
What we did
We started planning before the year end. The group auditor sent us their instructions in February, setting out the materiality levels, specific risk areas (revenue cut-off, intercompany balances, and stock valuation), and the reporting package template we needed to complete.
Because there was no prior-year audit, we needed to verify opening balances under ISA 510. We reviewed the management accounts, tested key opening balance sheet items (fixed assets, trade debtors, stock), and confirmed bank balances directly with the company’s UK bank. This added two days to the fieldwork but was unavoidable.
The intercompany management charges were significant – over £600,000 charged by the parent for group services. We reviewed the management charge agreement, tested whether the charges were at arm’s length, and confirmed the transfer pricing documentation was adequate for HMRC purposes.
Stock was held at two UK sites. We attended year-end counts at both locations, tested the valuation methodology (standard costing with variance analysis), and verified the foreign exchange treatment on raw materials purchased in euros.
The outcome
The audit was completed in five weeks – one week ahead of the group deadline. We issued an unqualified statutory audit opinion and delivered the ISA 600 reporting package to the German group auditor on schedule.
- The group auditor confirmed our work met their requirements without requesting additional procedures
- We identified a £45,000 cut-off error on December sales invoices that had been recorded in the wrong period – corrected before the group reporting
- The transfer pricing documentation was adequate but we recommended updating the benchmarking study, which was three years old
- We established a working relationship with the UK finance team and agreed a year-two audit timetable that gave both sides more preparation time
What the client said
“Finding a UK auditor who could work to our group timetable and communicate directly with our German team was the main challenge. Audit Group handled both without any friction. The reporting package was exactly what our group auditor needed.”
Group Financial Controller, European manufacturing group
