AU-C 600.37 requires two numbers for every component where the group auditor or a component auditor will perform procedures on disaggregated information. Component performance materiality must be lower than group performance materiality. The threshold for reporting misstatements to the group auditor must not exceed the amount regarded as clearly trivial to the group financial statements. Paragraph .38 requires the group auditor to communicate both amounts to the component auditor. This post builds both numbers for a four-part group and shows how the scope of work is chosen.
The text cited is the AU-C 600 issued with SAS No. 149, which the AICPA states is effective for audits of group financial statements for periods ending on or after December 15, 2026. For the full framework, see our AU-C 600 group audit guide and the AU-C 600 standards page.
Why must component materiality be lower?
AU-C 600.16 defines aggregation risk as the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. Paragraph .A20 explains that it exists in every audit but matters most in a group audit, because procedures are more likely to be performed on balances that are disaggregated across components, and aggregation risk increases as the number of components tested separately increases.
If every component used group performance materiality, each component could carry undetected misstatement up to that amount, and the sum across components would exceed what the group tolerates. Setting component performance materiality lower is how the group auditor reduces that probability to an appropriately low level.
What does the standard say about how to set it?
- Paragraph .A128: the amount may differ for each component, need not be an arithmetical portion of group performance materiality, and the aggregate of component amounts may exceed group performance materiality.
- Paragraph .A131: it is not a simple mechanical calculation. Factors include how much the information is disaggregated across components, and expectations about the nature, frequency and magnitude of misstatements, including risks unique to the component and misstatements found there in prior audits.
- Paragraph .A132: the amount can be closer to group performance materiality when aggregation risk is lower, for example when one component is a substantial portion of the group.
- Paragraph .A133: when procedures are done on a significant balance as a single population, not disaggregated, group performance materiality can be used.
- Paragraph .A134: when a component has its own required audit, the performance materiality used there ordinarily can be expected to be lower than group performance materiality, so it is acceptable for group purposes.
- Paragraph .A129: no component performance materiality is required for a component audited by a referred-to auditor when the report refers to that audit.
Worked example
A manufacturer reports consolidated revenue of $60.0 million. The engagement team sets group materiality at $600,000 and group performance materiality at $450,000, using the materiality guidance and the method in our performance materiality example. It sets the amount regarded as clearly trivial to the group financial statements at $30,000.
| Component | Revenue | Share | What stands out |
|---|---|---|---|
| A, parent and main plant | $31.2M | 52% | Inventory, revenue, estimates |
| B, distribution subsidiary | $12.0M | 20% | Rebates and customer credits |
| C, foreign subsidiary | $9.0M | 15% | Currency translation, unusual transactions |
| D, twelve retail branches | $7.8M | 13% | Same system, common controls, books kept at a shared service center |
Step 1: component performance materiality
| Component | Component PM | As % of group PM | Reason |
|---|---|---|---|
| A | $360,000 | 80% | One large component, so less disaggregation (A132) |
| B | $270,000 | 60% | Moderate disaggregation, rebate estimates |
| C | $225,000 | 50% | Risks unique to the component, thin controls history (A131) |
| D | none | n/a | Tested centrally at group PM of $450,000 (A133, A138) |
The three component amounts sum to $855,000, which is more than group performance materiality of $450,000. Paragraph .A128 permits that. The amounts are planning levels, and uncorrected misstatements from every component are evaluated together against group materiality of $600,000 by the group engagement partner under paragraph .70.
For contrast, if components A, B and C all used $450,000, the three together would allow $1,350,000 of undetected misstatement, more than twice group materiality. That is the exposure paragraph .37a is meant to prevent.
Step 2: the communication threshold
Paragraph .37b sets $30,000 as the ceiling. The group auditor may set a lower amount. Here A and B use $30,000. C uses $15,000 because its prior-year audit found more misstatements than expected, and paragraph .A160 notes that a higher-than-expected number of misstatements may indicate higher risk of undetected misstatement. Paragraph .A135 explains that the threshold is the amount below which misstatements need not be accumulated because their accumulation clearly would not have a material effect on the group financial statements.
Both numbers go to each component auditor in the instructions (paragraph .38). Our post on component auditor instructions and communications lists the other items in that package.
How is scope chosen, if not by size alone?
Paragraph .39 makes the group auditor responsible for the nature, timing and extent of further audit procedures, including which components get procedures. AU-C 600 as issued by SAS 149 has no test of the form "components above a percentage of revenue are significant and receive a full audit." Paragraph .A145 lists the scopes instead: procedures on the entire financial information of the component, procedures on one or more classes of transactions, balances or disclosures, or specific procedures.
| Component | Scope | Basis in the standard |
|---|---|---|
| A | Procedures on entire financial information | Evidence needed on a significant proportion of the information to respond to group risks (A148) |
| B | Revenue, rebates and receivables only | Specific balances address the risks (A149) |
| C | Specific procedures on currency translation and the unusual transactions | Group auditor designs, component auditor performs (A150) |
| D | Procedures performed centrally, with analytics at an aggregated level and rotation of branches selected | Homogeneous, common controls (A138, A139, A143, A144, A151) |
Branch D shows paragraphs .A142 to .A144: a large number of components that are individually immaterial but material in the aggregate may be tested centrally, and where selected components are tested, an element of unpredictability in selection helps address fraud risk.
Revenue share is still a reasonableness check. Components A, B and C together are 87% of revenue, and a scope that left half of that untested would raise questions. The documented basis is the assessed risks, though.
What stays with the group team regardless of scope?
Paragraph .40 puts the consolidation process on the group auditor: whether all entities are included, the consolidation adjustments and reclassifications, indicators of management bias, and fraud risks arising from consolidation. Paragraph .44 requires the group auditor to evaluate the design and performance of further procedures a component auditor determines for areas of higher assessed risk. Paragraph .47e requires the component auditor to report corrected and uncorrected misstatements above the threshold.
Is there a PCAOB counterpart?
Yes. AS 2105.10 covers multi-location engagements. For the audit of consolidated statements of a company with multiple locations or business units, the auditor determines tolerable misstatement for the individual locations or units at an amount that reduces to an appropriately low level the probability that the total of uncorrected and undetected misstatements would result in material misstatement of the consolidated statements. Tolerable misstatement at an individual location should be less than the materiality level for the financial statements as a whole. The AU-C 600 version is expressed against performance materiality and adds the separate communication threshold.
What goes in the file?
- Group materiality, group performance materiality and the clearly trivial amount, with the basis.
- Each component performance materiality and the reasons, referencing the factors in .A131.
- The communication threshold per component.
- The scope for each component and the risks it responds to.
- Evidence the amounts were communicated to component auditors.
- A schedule that accumulates uncorrected misstatements across components against group materiality, with the evaluation tied to AU-C 450.
Sources
- AICPA, AU-C Section 600, Special Considerations, Audits of Group Financial Statements (Including the Work of Component Auditors and Audits of Referred-to Auditors), as issued by SAS No. 149 (paragraphs .16, .37 to .40, .44, .47, .70 and .A20, .A128 to .A135, .A138 to .A151, .A160): https://www.aicpa-cima.com/resources/landing/aicpa-professional-standards
- PCAOB, AS 2105, Consideration of Materiality in Planning and Performing an Audit (paragraph .10, multi-location engagements): https://pcaobus.org/oversight/standards/auditing-standards/details/AS2105
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