The group engagement team may use a percentage of a chosen benchmark to help identify components of individual financial significance, eg 10% of group profit, albeit different benchmarks and percentages could be appropriate. On the other hand a component that is not of individual financial significance may still pose a significant risk at group level if it is involved in critical activities, for example by performing a procurement or treasury function for the whole group.
Group audit strategy and plan
To fulfil his or her responsibility for the direction of group audit, the group engagement partner shall review the overall strategy and plan developed by the group engagement team.
ISA (UK and Ireland) 600, in line with the risk-based approach of ISA (UK and Ireland) 315, requires the group engagement team to enhance the understanding of the group, its components and their environments obtained at the acceptance or continuance stage, and to obtain an understanding of the consolidation process, including instructions issued by group management to components.
The level of understanding required is the level sufficient to confirm or revise the initial identification of significant components and to assess the risks of material misstatement of the group financial statements, whether due to fraud or error, that will form the basis for designing and implementing responses to such risks.
Matters that could be relevant in obtaining an adequate understanding of the group and the consolidation process include group-wide controls, for example; financial controls on components’ operations and results; group financial reporting procedures, including the existence of a manual; and matters relevant to the consolidation process, such as the group’s process for identifying and accounting for component, the required consolidation adjustments and the nature, frequency and size of intra-group transactions.
The component auditor
The group audit team needs to obtain an understanding of the component auditor if it intends to request one to perform work on the financial information of a component. In particular it would be necessary to investigate whether the component auditor understands and will comply with the ethical requirements applicable to group audit and in particular whether he or she is independent. In the case of a component auditor based in a different jurisdiction the ethical requirements may be different or additional to the local ones.
The professional competence of the component auditor will also need to be examined to ascertain, for instance, whether he or she has a sufficient understanding of the applicable auditing and financial reporting standards, sufficient resources to perform the work and the required specialist skills, such as industry-specific knowledge, for the particular component.
It is also important to establish whether the group audit team will be involved in the work of the component auditor to a sufficient extent and whether the component auditor operates in a regulatory environment that actively oversees auditors.
The above information about the component auditor could be obtained in a number of ways, including the completion of specific questionnaires.
If the group audit team understands that the component auditor is not independent or has serious concerns about their compliance with ethical standards, professional competence or the ability to be involved, it should not rely on the component auditor to obtain sufficient appropriate audit evidence about the component.
The group engagement team is required to set various types of materiality.
First, it needs to set materiality for the group financial statements as a whole which is used when establishing the overall group audit strategy. If deemed to be appropriate, materiality may be set for particular classes of transactions, balances and disclosures of the group accounts.
The group audit team should also determine component materiality for those components where component auditors will perform an audit or a review for the purposes of the group audit. Component materiality is set at a lower level than group materiality and can be set at different levels for different components.
Responses to assessed risks
To address the assessed risks of material misstatement of the group financial statements, the group audit team is required to design and perform further procedures on the consolidation process and the financial information of components.
ISA (UK and Ireland) 600 introduces quite specific requirements in respect of the type of work that the group audit team should or can choose to perform on the financial information of components. In addition, the standard also sets a minimum level of involvement of the group auditor in the work performed by component auditors.