This article focuses on the key areas of group audit, highlighting sections of ISA 600 (Revised), Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors). Candidates should be familiar with the standard prior to sitting the Advanced Audit and Assurance examination (AAA) exam.

The audit of group financial statements is an area frequently examined in the AAA exam. It can be tested at any stage of the audit cycle and therefore in any section of the examination. It is important that candidates are able to identify risks arising from aspects of group audits and the responsibility of auditors in this regard.

ISA 600 (Revised) deals with special considerations that apply to a group audit, including when component auditors are involved. The standard aligns the standard with recently revised standards which emphasise the assessment of risk, including ISQM1 and ISA 220 (Revised) and ISA 315 (Revised 2019). There is increased emphasis on the responsibilities of auditors s relating to professional scepticism; planning and performing a group audit; two-way communications between the group auditor and component auditors; and documentation.

ISA 600 (Revised) sets out the responsibilities of the group auditor for providing the audit opinion on the group financial statements, including components of such as subsidiaries, associates, joint ventures and non-controller entities.

The components may be audited by the group auditor or may be audited by a different firm of auditors known as the ‘component auditors’. The group auditor will provide an opinion on the consolidated financial statements, it is therefore essential that they are satisfied with work completed by component auditors or local audit teams. The group auditor will form an opinion on the parent company’s individual financial statements.

It is important for students to note that under the risk-based approach, component auditors can be, and often are, involved in all stages of the group audit.

1. Group audit acceptance considerations

Prior to acceptance of a new engagement as group auditor, or indeed the continuation of an existing group audit appointment, the group engagement partner must determine whether they can reasonably expect to obtain sufficient appropriate evidence in relation to the consolidation process including the financial information of any components of the group in order to form their group audit opinion. Often, a group audit engagement will be presented with a component auditor which gives rise to further considerations regarding acceptance or continuation of the group audit.

The specific circumstances highlighted in the scenario should be considered and may include:

• The components where audit work will be performed.
• The resources needed to perform the group audit at those components.
• Any specific risks relevant in the scenario.

Where the group audit involves component auditors the group engagement partner should consider:

• Confirmation of co-operation of the component auditors.
• Awareness of the component auditors of the relevant ethical requirements of the group audit engagement.
• Determination of the appropriate competence and capabilities of the component auditors.

Whereas a majority of examination questions are from the perspective of the group auditor, there may also be the requirement to explain the responsibilities of the component auditor before accepting appointment, and the procedures to be performed in a group situation.

2. Group audit planning

Students can reasonably be expected to identify and describe the matters to be considered and the procedures to be performed at the planning stage, when a group auditor considers the use of the work of component auditors.

ISA 600 (Revised) does not specify a qualitative benchmark to determine and therefore greater judgement is required when determining the components at which to perform audit work.

Examples of matters that may influence the group auditor’s determination include, but are not limited to: -

• The nature of events or conditions that may give rise to risks of material misstatement at the assertion level of the group financial statements that are associated with a component, for example:
  
  
  • Newly formed or acquired entities or business units.
  • Entities in which significant changes have taken place.
  • Significant transactions with related parties.
  • Significant transactions outside the normal course of business.
  • Abnormal fluctuations identified by analytical procedures.
     
• The risk of not being able to obtain sufficient appropriate audit evidence from the component.
  
  
• The nature and extent of misstatements or control deficiencies identified at a component in prior period audits.

Group audit planning questions may require the explanation of matters including:

• assessment of group and component materiality
• the impact of non-coterminous year ends within a group
• changes in group structure or a complex group structure.

The group auditor shall determine component materiality above which misstatements identified in the component financial information are to be communicated to the group auditor. Setting component materiality is a matter for group auditors, because they provide the audit opinion on the consolidated group financial statements. This may differ from materiality set at group level.

3. Communication with component auditors

ISA 600 (Revised) strengthens and clarifies the importance of two-way communication throughout the whole audit process between the group auditor and the component auditors. The standard specifies the following areas as required areas of contact:

• Communication of the financial information on which the component auditor has been requested to perform audit procedures
• Whether the component auditor has performed the work requested by the group auditor
• Compliance with relevant ethical requirements by the component auditor
• Information about instances of non-compliance with laws or regulations
• Corrected and uncorrected misstatements of the component financial information identified by the component auditor
• Indicators of possible management bias
• Description of any deficiencies in the system of internal control
• Fraud or suspected fraud involving component management
• Other significant matters that the component auditor communicated or expects to communicate to component management or Those Charged with Governance of the component
• Any other matters that may be relevant to the group audit
• The component auditor’s overall findings or conclusions.

4. The consolidation process

Students should be proficient at understanding the consolidation process in order to allow them to identify and explain the relevant audit risks and audit procedures necessary to obtain sufficient audit evidence.

The group auditor must plan the audit procedures to be performed on the consolidation process. For some groups, the consolidation will be complex and is likely to involve some areas of judgement and so there is a high degree of audit risk. Thorough planning will be essential to ensure that audit risk is minimised.

The group auditor will require an understanding of the group-wide controls relevant to the consolidation process, for example the instructions issued to components by management. The group auditor will need to assess the adequacy of such controls and their operating effectiveness in determining whether reliance can be placed upon those controls in determining the nature, extent and timing of procedures on the consolidation.

Candidates should be confident in their knowledge of the relevant group financial reporting standards, which include IFRS® 3 Business Combinations, IAS® 28 Investments in Associates and Joint Ventures, IFRS 9 Financial Instruments, IAS 32 Financial Instruments: Presentation

5. Group audit procedures

Procedures are examined regularly in the AAA examination and therefore candidates should be able to recognise the audit problems and describe audit procedures specific to group audit scenarios including:

• a business combination, including the classification of investments
• the determination of goodwill and its impairment
• group accounting policies
• intra-group trading
• equity accounting for associates and joint ventures
• changes in group structure, including acquisitions and disposals
• accounting for a foreign subsidiary.

The types of audit procedures which may be performed include:

• Evaluating the classifications of the components of the group – for example, whether the components have been correctly identified and treated as subsidiaries, associates or joint ventures.
  
  
• Confirming that figures taken into the consolidation have been accurately extracted from the financial statements of the components and that all components are included.
  
  
• Reviewing the disclosures necessary in the group financial statements, such as related party transactions and minority interests.
  
  
• Investigating the treatment of any components which have a different financial year end or accounting policies from those of the rest of the group.
  
  
• Gathering evidence appropriate to the specific consolidation adjustments made necessary by financial reporting standards, including, for example:
  
  
  • the calculation of goodwill and its impairment review
  • cancellation of intra-group balances and transactions
  • provision for unrealised profits as a result of intra-group transactions
  • fair value adjustments needed for assets and liabilities held by the component
  • retranslation of financial statements of components denominated in a foreign currency.
     
• Trading difficulties in a subsidiary which may indicate an impairment adjustment is required for goodwill held in the consolidated financial statements.

Some of the evidence required to meet the above objectives will be gathered by the component auditor, and it is the group auditor’s responsibility to communicate to the component auditor the evidence which they are expected to gather. This communication ideally occurs at the audit planning stage.

6. Evaluating the audit work performed by a component auditor

ISA 600 (Revised) includes enhanced documentation requirements and application material, in particular when there are restrictions on access to component auditor audit documentation. ISA 600 (Revised) also emphasises the importance of the group auditor’s review of component auditor audit documentation. The review of component auditor audit documentation is directly related to, and influenced by, the group auditor’s direction and supervision of the component auditors and the review of their work throughout the group audit.

Professional marks in group audits

ISA 600 (Revised) emphasises professional scepticism throughout the standard with the result that this will be expected to be demonstrated by students when answering questions in a group scenario. This may include challenging the results of audit work by component auditors, assessing management judgements in goodwill calculations and scrutinising the accounting treatment of investments in entities.

Commercial acumen can also be important in group audit questions with, for example, the relative merits of travelling to overseas subsidiaries or utilising a component auditor having a commercial consideration for an audit firm, in addition to the professional and ethical matters.

Conclusion

Group audits are frequently examined in the AAA exam and are examinable in a variety of ways across many syllabus areas. Candidates are expected to have strong knowledge of the underlying accounting issues and audit implications arising in a group context.