International auditing

what do businesses need to know?

When choosing where to base headquarters and international operations, businesses must consider factors like market size, government stability, tax rates, available talent, financing, incentives, as well as lifestyle and educational opportunities for staff. The UK has traditionally been a popular headquarters choice due to its strong legal framework, skilled workforce, and business-friendly environment.

Brexit and COVID-19 led many companies to restructure, with increased company registrations in the UK and reciprocal establishment of subsidiaries by UK businesses in the EU and vice versa. The UK-EU Trade and Cooperation Agreement supports ongoing trade between the regions.

While the UK once mainly attracted overseas companies selling goods, there is now a trend toward technology and R&D-focused businesses. Despite global changes such as rising protectionism and new tariffs, the UK remains a leading option for international headquarters, prompting firms to continually reassess their strategies.

What are the practicalities and challenges of international group audits?

Although the fundamentals of a company audit remain the same across domestic and international business, there are additional factors to consider when operating across borders. In fact, international businesses may be considered as a distinct sub-sector within the broader field of auditing.

Whilst many of the core issues involved are the same, such as revenue recognition, accounting estimates, laws and regulations, and going concern, there are other factors that make auditing UK subsidiaries more complex, such as:

Language barriers
Differing time zones
Regulatory environments
Different accounting standards
More intricate ownership structures (sometimes involving private equity)
Additional management layers (increasing the risk of management override)

Effective communication is paramount in group audits, especially given the diversity of management and shareholder groups. Shareholder engagement and providing shareholders with opportunities to discuss audit and assurance matters have been central themes in the Government’s consultation on ‘Restoring trust in audit and corporate governance.’

Company directors and auditors have a responsibility to clarify their expectations and requirements, to ensure audit and assurance procedures are appropriately tailored.

How has the revised ISA 600 impacted group audits?

The revised ISA 600 standard has introduced significant changes to the conduct of group audits, emphasising a comprehensive understanding of the group’s structure, operations, and risk profile. Group auditors must exercise greater professional scepticism, evaluate the competence and independence of component auditors, and ensure sufficient audit evidence from all components, regardless of firm affiliation.

The standard requires auditors to move beyond a checklist approach, adopting risk-based assessments and maintaining strong oversight of component auditors as part of the engagement team. Effective communication and thorough documentation are essential, and if review of component auditors’ work is inadequate, alternative procedures must be used; in some jurisdictions, authorities must be notified.

These measures are designed to maintain audit quality and ensure reliable group audit opinions, strong documentation and clear communication to meet regulatory and stakeholder expectations.

Would you expect the group and sub-auditor to be from the same firm in an international audit?

There is no requirement for the same firm to be both group and subsidiary auditor, the right approach depends on the group’s objectives. While larger companies often assume the same firm will act, especially if they have an international presence, there are benefits to having a different auditor.

These benefits include:

A new perspective from the subsidiary auditor which can enhance scepticism and challenge, leading to a higher-quality audit,
Access to sector specialisms for the business in that jurisdiction,
The potential for cost benefits e.g. the subsidiary may not want to pay the same fees for audit as the group, and therefore may find a more cost-effective, regional solution,
The assurance that the auditor is a suitable fit for the size and nature of the subsidiary, rather than being tailored to the needs of a much larger group such as an FTSE 100 company,
Appointing an auditor with proximity to the subsidiary’s business increases the ability of identifying issues specific to that entity.

ISA 600 requires the group auditor to evaluate and review the work of any subsidiary auditors. If this is not possible, the group auditor must undertake alternative procedures and notify the Financial Reporting Council (FRC). Similar requirements may apply in other jurisdictions.

How do audit regulations and reporting standards affect international group audits?

Audit and accounting standards, including international frameworks like IFRS (which are adopted by many countries) and country-specific standards such as UK GAAP, can complicate consolidated reporting for international groups. Differences in audit requirements and accounting treatments across jurisdictions must be understood and addressed, particularly when subsidiaries operate under varying standards. For example, some US subsidiaries may not require formal audits, so group auditors would need to perform additional work to ensure group accounts are accurate.

UK subsidiaries whose parent prepares IFRS accounts often use FRS 101 to align reporting, reducing disclosure requirements while maintaining consistency. This approach helps streamline consolidation and ensures compliance with group reporting expectations.

What are the recent changes to reporting standards?

One major development is the revision of UK accounting standards (FRS 102), designed to bring them more closely in line with IFRS. This alignment seeks to minimise disparities in accounting treatment and disclosures, particularly for groups with international operations. The changes are as follows:

Leases

The FRS 102 update for leases, effective from 1 January 2026, requires most leases to be recognised on the balance sheet by lessees as a right-of-use asset and a lease liability, like IFRS 16. Short-term and low-value leases are exempt, and lessor accounting remains largely unchanged.

Revenue recognition

The FRS 102 update for revenue recognition, effective from 1 January 2026, introduces a single five-step model like IFRS 15. Entities must identify contracts and performance obligations, determine and allocate the transaction price, and recognise revenue as each obligation is satisfied. This change may affect the timing of revenue recognition and requires more detailed guidance and disclosures.

Final thoughts

While the international landscape remains dynamic, the common challenges and practicalities involved in group and international group audits are manageable. With the right advisors for each entity, robust communication channels among stakeholders, and effective systems for data collection, reporting, and analysis, many of the risks and complications can be effectively mitigated.

For more information, or if you would like to speak to one of the team about your audit requirements, please contact one of the Audit and assurance team using the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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