Topic 7 :

GROUP AUDIT AND

USING WORK OF
OTHERS
(ISA 600 AND ISA 620)
 Topic Coverage
•Planning and administration for group audit
•Specific issues in group audit
• Group engagement partner (GEP) and
component auditor (CA)
• Related parties’ transactions (parent and
subsidiary companies)
• Goodwill on consolidation
• Implication of subsidiaries audit report
Planning and
Administration
 ISA 600 SPECIAL CONSIDERATIONS — AUDITS OF GROUP
FINANCIAL STATEMENTS (INCLUDING THE WORK OF
COMPONENT AUDITORS)

• Component – An entity or business activity for which

group or component management prepares financial
information that should be included in the group
financial statements.
• Component auditor – An auditor who, at the request of
the group engagement team, performs work on
financial information related to a component for the
group audit.
• Component management – Management responsible
for the preparation of the financial information of a
component.
• Component materiality – The materiality for a
component determined by the group engagement
team.
 ISA 600 SPECIAL CONSIDERATIONS — AUDITS OF GROUP
FINANCIAL STATEMENTS (INCLUDING THE WORK OF
COMPONENT AUDITORS)
• Group engagement partner – The partner or other
person in the firm who is responsible for the group audit
engagement, and for the auditor’s report on the group
financial statements that is issued on behalf of the firm.

• Where joint auditors conduct the group audit, the joint

engagement partners and their engagement teams
collectively constitute the GEP and the group engagement
team.

• Group engagement team – Partners, including the GEP,

and staff who establish the overall group audit strategy,
communicate with component auditors, perform work on
the consolidation process, and evaluate the conclusions
drawn from the audit evidence as the basis for forming an
opinion on the group financial statements.
 Responsibility of Group Engagement Partner

• Responsible for the direction, supervision and

performance of the group audit engagement in
compliance with professional standards and applicable
legal and regulatory requirements, and whether the
auditor’s report that is issued is appropriate in the
circumstances.

• As a result, the auditor’s report on the group financial

statements shall not refer to a component auditor, unless
required by law or regulation to include such reference.

• If such reference is required by law or regulation, the

auditor’s report shall indicate that the reference does not
diminish the GEP’s or the GEP’s firm’s responsibility for
the group audit opinion.
 Acceptance and Continuance
• The GEP shall determine whether sufficient appropriate
audit evidence can reasonably be obtained in relation to
the consolidation process.

• For this purpose, the group engagement team shall obtain

an understanding of the group, its components, and their
environments that is sufficient to identify significant
components.

• Where component auditors will perform work on the

financial information of such components, the GEP shall
evaluate whether the group engagement team will be
able to be involved in the work of component auditors to
obtain sufficient appropriate audit evidence.
 Acceptance and Continuance
• The GEP shall determine whether sufficient appropriate audit evidence can
reasonably be obtained in relation to the consolidation process.

• For this purpose, the group engagement team shall obtain an understanding
of the group, its components, and their environments that is sufficient to
identify significant components.

• Where component auditors will perform work on the financial information of

such components, the GEP shall evaluate whether the group engagement
team will be able to be involved in the work of component auditors to obtain
sufficient appropriate audit evidence.

• If the GEP concludes that it is not possible for the group engagement team to
obtain sufficient appropriate audit evidence due to restrictions imposed by
group management; and thus, resulting in a disclaimer of opinion, GEP shall
either:
• in the case of a new engagement, not accept the engagement, or, in the case of a
continuing engagement, withdraw from the engagement; or
• where law or regulation prohibits an auditor from declining an engagement or
where withdrawal is not possible, having performed the audit of the group financial
statements to the extent possible, disclaim an opinion on the group financial
statements
 Overall Audit Strategy and Audit Plan

•The group engagement team shall establish an

overall group audit strategy and shall develop a
group audit plan in accordance with ISA 300

•The GEP shall review the overall group audit

strategy and group audit plan.
Specific Issues in Group Audit
 Group Engagement Partner and
Component Auditor
• Auditors are required to identify and assess the risks of material
misstatement through obtaining an understanding of the entity
and its environment.

• Group engagement team shall:

• Enhance its understanding of the group, its components, and their
environments, including group-wide controls, obtained during the
acceptance or continuance stage
• Obtain an understanding of the consolidation process, including the
instructions issued by group management to components

• Group engagement team shall obtain an understanding that is

sufficient to:
• Confirm or revise its initial identification of components that are likely to
be significant; and
• Assess the risks of material misstatement of the group financial statements.
 Understanding the Component Auditor

• Whether the component auditor understands and will comply with the ethical
requirements that are relevant to the group audit and, in particular, is
independent.

• The component auditor’s professional competence.

• Whether the group engagement team will be able to be involved in the work of
the component auditor to obtain sufficient appropriate audit evidence.

• Whether the component auditor operates in a regulatory environment that

actively oversees auditors.

• If a component auditor does not meet the independence requirements, or the

group engagement team has serious concerns about the above, the group
engagement team shall obtain sufficient appropriate audit evidence relating to the
financial information of the component without requesting that component
auditor to perform work on the financial information of that component.
 Materiality
• Group engagement team shall determine
• The materiality for the group financial statements as a whole in the overall group audit
strategy.
• The materiality level or levels to be applied to those particular classes of transactions,
account balances or disclosures which materiality level is lesser than the group
materiality level but expected to influence the economic decisions of users.
• Component materiality for those components where component auditors will perform
an audit or a review for purposes of the group audit.
• The threshold which misstatements cannot be regarded as clearly trivial to the group
financial statements.

• Where component auditors will perform an audit for purposes of the group audit,
the group engagement team shall evaluate the appropriateness of performance
materiality determined at the component level.

• If a component is subject to audit by statute, regulation or other reason, and the

group engagement team decides to use that audit to provide audit evidence for the
group audit, the group engagement team shall determine whether:
• materiality for the component financial statements as a whole; and
• performance materiality at the component level meet the requirements of ISA600.
 Responding to Assessed Risks
• The auditor is required to design and implement appropriate responses to
address the assessed risks of material misstatement of the financial
statements.

• The group engagement team shall determine the type of work to be

performed by the group engagement team, or the component auditors on
its behalf, on the financial information of the components.

• The group engagement team shall also determine the nature, timing and
extent of its involvement in the work of the component auditors.

• If the nature, timing and extent of the work to be performed on the

consolidation process or the financial information of the components are
based on an expectation that group-wide controls are operating effectively,
or if substantive procedures alone cannot provide sufficient appropriate
audit evidence at the assertion level, the group engagement team shall
test, or request a component auditor to test, the operating effectiveness
of those controls.
 Consolidation Process
• The group engagement team obtains an understanding of group-wide controls and the
consolidation process, including the instructions issued by group management to
components.

• The group engagement team, or component auditor at the request of the group
engagement team, tests the operating effectiveness of group-wide controls if the
nature, timing and extent of the work to be performed on the consolidation process are
based on an expectation that groupwide controls are operating effectively, or if
substantive procedures alone cannot provide sufficient appropriate audit evidence at
the assertion level.

• The group engagement team shall design and perform further audit procedures on the
consolidation process to respond to the assessed risks of material misstatement of the
group financial statements arising from the consolidation process.

• This shall include evaluating whether all components have been included in the group
financial statements.

• The group engagement team shall evaluate the appropriateness, completeness and
accuracy of consolidation adjustments and reclassifications, and shall evaluate
whether any fraud risk factors or indicators of possible management bias exist.
 Subsequent Events
• The group engagement team or the component
auditors shall perform procedures designed to
identify subsequent events at those
components, and that may require adjustment
to or disclosure in the group financial
statements.

• Where component auditors perform work other

than audits of the financial information of
components, the group engagement team shall
request the component auditors to notify
them if they become aware of subsequent
events that may require an adjustment to or
disclosure in the group financial statements.
 Communication with the Component Auditor
• The group engagement team shall communicate its requirements to the
component auditor on a timely basis.

• Setting out the work to be performed, the use to be made of that work, and
the form and content of the component auditor’s communication with the
group engagement team.

• The group engagement team shall request the component auditor to

communicate matters relevant to the group engagement team’s conclusion
with regard to the group audit

• The ethical requirements especially the independence requirements.

• The identified significant risks of material misstatement of the group financial

statements and the component auditor’s responses to such risks.

• The group engagement team shall request the component auditor to

communicate on a timely basis related parties not previously identified.
 Communication with the Component Auditor
• The group engagement team shall request the component auditor to
communicate matters relevant to the group engagement team’s conclusion with
regard to the group audit:
• Whether the component auditor has complied with ethical requirements including
independence and professional competence;
• Whether the component auditor has complied with the group engagement team’s
requirements;
• Identification of the financial information of the component on which the component
auditor is reporting;
• Non-compliance with laws or regulations that could give rise to a material misstatement;
• A list of uncorrected material misstatements of the financial information of the
component
• Indicators of possible management bias;
• Description of any identified significant deficiencies in internal control at the component
level;
• Other significant matters that the component auditor communicated/ expects to
communicate to those charged with governance of the component, including fraud or
suspected fraud that resulted in a material misstatement of the financial information of
the component;
• Any other matters that may be relevant to the group audit, or that the component
auditor wishes to draw to the attention of the group engagement team, including
exceptions noted in the written representations that the component auditor requested
from component management; and
• The component auditor’s overall findings, conclusions or opinion.
 Communication with the Component Auditor
• Evaluating the Component Auditor’s Communication and Adequacy of their Work
• Discuss significant matters arising from that evaluation with the component
auditor, component management or group management, as appropriate; and
• Determine whether it is necessary to review other relevant parts of the
component auditor’s audit documentation
• If the group engagement team concludes that the work of the component
auditor is insufficient, the group engagement team shall determine what
additional procedures are to be performed, and whether they are to be
performed by the component auditor or by the group engagement team

• Sufficiency and Appropriateness of Audit Evidence

• The auditor is required to obtain sufficient appropriate audit evidence to reduce
audit risk to an acceptably low level.
• The group engagement team shall evaluate whether sufficient appropriate
audit evidence has been obtained from the audit procedures performed on the
consolidation process and the work performed by the group engagement team
and the component auditors.
 Related Parties’ Transactions
• People prefer to do business with people they know, like and trust.
• But related-party transactions can provide opportunities for individuals to
act in a way that creates confusion between the concerns of the entities
and shareholders.
• What is related party?
• A parent entity and its subsidiaries,
• Subsidiaries of a common parent,
• An entity and trusts for the benefit of its employees, such as pension and profit-
sharing trusts that are managed by or under the trusteeship of the entity’s
management,
• An entity and its principal owners and managers (or members of their immediate
families), and
• Affiliated entities.
• Risks
• May involve contracts for goods or services that are priced at less (or more)
favorable terms
• E.g. a spinoff business might lease office space from its parent company at below-
market rates.
 Auditing Consolidation Process
• Checking that figures taken into the consolidation have been accurately
extracted from the financial statements of the components
• 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
• 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 from that 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 inter-company balances and transactions
– provision for unrealised profits as a result of inter-company transactions
– fair value adjustments needed for assets and liabilities held by the component
– re-translation of financial statements of components denominated in a foreign
currency.
 Additional Reading

https://www.accaglobal.com/lk/e
n/student/exam-support-
resources/professional-exams-
study-resources/p7/technical-
articles/group-audit-issues.html
 REPORTING CONSIDERATIONS

Report by Group Engagement Partner

Unqualified

Qualified report
• When the GEP concludes that the work of the other auditor
cannot be used and the principal auditor has not been able
to perform sufficient additional procedures regarding the
financial information of the component, the principal auditor
should express:-
• Qualified opinion (if not so material and not pervasive) or
• Disclaimer (if material and pervasive)
 REPORTING CONSIDERATIONS

If other auditor issued qualified report on the component:-

• The GEP should consider the significance towards the whole group:-
• If immaterial effect to the group, principal auditor may express
unqualified opinion

• If immaterial effect to the group and not pervasive, principal auditor may
express qualified opinion (except for)

• If significant (material) effect to the group and pervasive, principal

auditor may express disclaimer (limitation of scope) or adverse
(disagreement)
Coverage
● Work of other auditors
● Work of expert
● Work of internal auditor

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USING THE WORK OF OTHERS
Consideration to use the work of:

◦ ISA 600: Using the Work of Another auditor – Group audit

◦ ISA 610: Considering the Work of Internal Auditor – Internal

audit

◦ ISA 620: Using the Work of an Auditor’s Expert

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ISA 600: Using the Work of
Another auditor
To satisfy the principal auditors,

Principal auditors should consider the competence of other auditors such as

o Professional membership
o Ethics
o Training
o Audit methodologies

Principal auditors would advise

◦ Independent requirements
◦ Communicate at the planning stage

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ISA 600: Using the Work of
Another auditor
o Accounting, auditing, and legal requirements

o Areas of significant risks

o Areas of special consideration – intercompany transactions

◦ Written representation from other auditors
◦ Accounting, auditing & reporting requirements
◦ Use other auditor’s work (highlighted any problems face during
audit)

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ISA 600: Using the Work of
Another auditor
o Sufficient appropriate evidence for group audit

o If evidence is sufficient and appropriate for group audit – no

additional procedures
- Risk of material misstatements at group audit
- Courtesy to inform BOD when use other auditor’s work
- Datelines should be informing by the principal auditor

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ISA 610: Considering the Work
of Internal Auditor
Technical competence - The skill and expertise of the internal auditor.

Professional due care - The process of internal audit with due care, i.e.
proper planned, supervision, review and documentations

Scope of work - Audit evidence obtained is sufficient and appropriate for

external auditor to form an opinion

The documentation on planning of internal auditor

Sample size selected by internal auditor

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ISA 620: Using the Work of an
Auditor’s Expert
As auditor, there are time for certain assertions requires
an expert opinion and involvement.
For example:-
• Valuation of land and building or valuation of work of arts
• Quantity survey of granite stocks, underground mineral and petroleum reserves
• Information security for a bank
• The measurement of work completed and to be completed on contracts is
progress
• Legal opinion concerning interpretations of agreement, status and regulations

Expert means a person possess special skill, knowledge and experience

in a particular field other than accounting and auditing.

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 An expert may be:-

Engaged by Engaged by Employed by Employed by

the entity the auditor the entity the auditor

When determining the need to use the work of an expert, auditor would
consider:-
The materiality of the financial statement item being considered, for
example the materiality of underground mineral.
The risk of misstatement based on the nature and complexity
of the matter being considered; and
The quantity and quality of other audit evidence
available…
Procedures to be performed / consideration by the auditor:
1. To ensure that the
expert is professional
competent to take up the
engagement. (License,
certificate, membership,
experience and reputation)
2. To assess the objectivity of
the expert. The objectivity of
the expert will be impaired
when the expert is employed
by entity or related to the
company in other manner. In
this case, auditor may need
to undertake additional audit
procedures..
Procedures to be performed / consideration by the
auditor:
3. The auditor need to consider:
•The objective of involving the work of an expert. For
example it is unavoidable to involve an expert to evaluate
the amount of mineral underground, to account for as
inventory figure.

•The scope of work of the expert’s work. The expert is

needed just to give auditor the quantities of mineral
underground but not for market value. So in this case,
auditor may need to seek for another expert opinion on
market value.

•The assumption and method used by the expert. The

auditor should have some general knowledge about the
assumption and method used. For example, on valuation
of land. The auditor may need to know the market value of
the land surrounding the area, to gauge the reasonable
market value reported by the expert.
Procedures to be performed / consideration by the
auditor:

4. The auditor of course does 5. Ultimately, the

not have the same expertise
and knowledge with the
expert. However, based on
knowledge and experience
should go for appropriateness
and reasonableness of
assumption and method by
the expert and figures
reported.
auditor should assess
the appropriateness of
the expert’s work as
audit evidence
regarding the financial
statement assertion
being considered for as
a basis of opinion
 Reporting Consideration

If an expert does not provide sufficient audit evidence, the

auditor still have to resolve the matter.
Discussion with management and the expert
To resolve, the auditor
may:- Applying additional procedures including engaging
another expert, if required

Unqualified opinion with emphasis of matter

(on the methodology adopted by the expert is
uncommon and the auditor is unable to make
If still unresolved, the comparison on the results reported by the
auditor may modify the expert); or
audit report:-
Auditor may issue a qualified report (due
to lack of audit evidence or
disagreement)
THANK YOU