Testing intra-group transaction elimination means independently rebuilding the elimination schedule from both legal entities' own books for every intercompany balance and transaction — receivables against payables, intercompany sales against intercompany purchases, and intercompany loans against their mirror balance — confirming each pair actually matches before it is eliminated, and separately recomputing the unrealised profit still sitting in closing inventory or fixed assets acquired from another group entity, since that profit has to come out of the consolidated numbers even though both legal entities recorded their own transaction correctly.
Why a balanced elimination schedule can still be wrong
An elimination schedule that nets to zero proves the schedule is internally consistent, not that it is complete or correct. A balance eliminated against the wrong counterparty, a transaction recorded in different periods by the two entities, or unrealised profit missed entirely, can all leave a schedule that balances and still misstates the consolidated figures.
The testing sequence
- 01Obtain the intercompany balance confirmation from each entity independently, not a pre-matched scheduleAsk each component for its own list of balances with other group entities, then match the two sides yourself, rather than reviewing a schedule the group finance team has already reconciled.
- 02Identify every unmatched or partially matched balance and investigate the reasonCommon causes are transactions recorded in different periods due to goods or cash in transit, different exchange rates applied by each entity, or a genuine recording error in one of the books — each has a different correcting entry.
- 03Recompute the elimination of intercompany revenue and cost of salesThe full amount of intercompany sales should be eliminated against the corresponding purchase, not just the margin, since consolidated revenue should reflect only sales to parties outside the group.
- 04Identify inventory and fixed assets still held within the group at the year end that originated from an intercompany saleTrace the specific items through to the buying entity's closing stock or fixed asset register, and recompute the unrealised profit margin embedded in their carrying value.
- 05Recompute the unrealised profit elimination and its tax effectThe profit margin on the intercompany sale, applied to the portion of goods or assets still unsold or unconsumed within the group, with the corresponding deferred tax effect recognised since the entities are taxed separately even though the group is consolidated as one.
- 06Test intercompany loans and the related interest income and expense for full eliminationBoth the loan balance and the interest income/expense recognised by each side should be eliminated in full; a partial elimination that leaves a net interest figure in the consolidated P&L is a sign the test was not completed.
- 07Trace any residual difference to a specific, investigated causeA consolidation adjustment account that absorbs the net unmatched balance without identifying what caused it is a plug, not a resolved reconciliation, and should be raised as an open item.
| Item | What is recomputed |
|---|---|
| Intercompany receivable/payable | Matched independently from each entity's own confirmation, not a pre-netted schedule |
| Intercompany sales/purchases | Full transaction value eliminated, not just the margin |
| Unrealised profit in closing inventory/fixed assets | Margin on goods or assets still held within the group, with deferred tax effect |
| Intercompany loans and interest | Both the principal and the related interest income/expense eliminated in full |
| Residual unmatched difference | Investigated to a specific cause, not absorbed into a plug |
Regulatory requirement
Ind AS 110 requires elimination in full of intragroup assets, liabilities, equity, income, expenses and cash flows relating to transactions between entities within the group. Verify the current text before concluding.
How we think about this
Matching both sides of every intercompany balance and recomputing the unrealised profit margin on goods still held within the group is a mechanical reconciliation that should cover the full population, every period, not a sample. Judging whether a residual difference reflects a genuine timing issue or an error that needs correction is where the auditor's work actually starts, once the full population has been matched.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Audit workflow & automationSA 600: group audits, and the group auditor's responsibility for component auditors' workUsing another firm's work on a subsidiary doesn't transfer responsibility for the group opinion. SA 600 is explicit about what stays with the group auditor regardless.
- Related parties & disclosuresRelated-party transaction testing under AS 18 / Ind AS 24Testing related-party transactions means proving the population is complete before checking what management already disclosed.
- Audit data & extractsTrial balance mapping for audit softwareMapping a client's idiosyncratic ledgers to a standard chart of accounts is the step that decides whether analytics and disclosures work at all, and the one most firms rush.
- Related parties & disclosuresCommon-control entities: why they raise audit riskA promoter running several unlisted entities under common control creates a structure where money, not just transactions, can move without much friction. That is the risk to test for.
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