ACCA AAA INT Syllabus D. Audit of Historical Financial Information - Horizontal groups - Notes 4 / 8
Horizontal groups of entities under common control increase audit risk as fraud is often hidden via complex group structures
Auditors need to understand and confirm the economic purpose of entities within business empires
Difficulties faced by auditors include:
failing to detect related party transactions and control relationships;
not understanding the substance of transactions with entities under common control
excessively creative tax planning
the implications of transfer pricing (eg failure to identify profits unrealised at the business empire level)
a lack of access to relevant confidential information held by others
relying on representations made in good faith by those whom the auditors believe manage the company when control rests elsewhere
Audit work is inevitably increased if an auditor is put upon inquiry to investigate dubious transactions and arrangements.
However, the complexity of business empires across multiple jurisdictions with different auditors may deter auditors from liaising with other auditors (especially where legal or professional confidentiality considerations prevent this)