You are on page 1of 27


Risk Assessment and Quality Control Principles Engagement Acceptance and Continuance Understanding the Group and Its Components Significant Components and Work Effort on Components Component Auditors Materiality Communication Additional Aspects


Lack of an international standard dealing

specifically with group audits

Varying group audit practice around the world Regulatory concerns about rigor and consistency

of practice in this important and complex area

Need to reflect application of risk assessment and

quality control principles in group audit context

Applying Risk Assessment and Quality Control Principles Standard reflects ISA 220 principle regarding responsibility for
the audit
Group Auditor alone should be responsible for direction,

Risk Assessment and Quality Control Principles

supervision, and performance of engagement and for group audit opinion

Therefore, reference to component auditor in the group

auditors report no longer permitted

Practical implications:
Need to pay greater attention to where risks lie within the group Component auditors may expect group engagement team to be

more involved in their work

Applying Risk Assessment and Quality Control Principles Emphasis on sole responsibility does not imply that
group audit should be performed by only one firm or one network
No requirement for this in the standard Different components may be audited by different

Risk Assessment and Quality Control Principles

component auditors

However, regardless of who the component

auditors are, standard requires group Audit team to obtain an understanding of them

Engagement Acceptance and Continuance

standard introduces an entirely different

Engagement Acceptance and Continuance

Group Audit team now needs to consider

whether sufficient appropriate audit evidence can be obtained to express group audit opinion before accepting engagement
This consideration includes whether group

Audit team will be able to be involved in component auditors work


Engagement Acceptance Engagement Acceptance and Continuance and Continuance

Key consideration is whether sufficient appropriate

audit evidence can reasonably be expected to be obtained regarding

The consolidation process Components financial information

Access to components controlled by the entity (e.g.

subsidiaries, branches)
In other cases, difficulty in accessing relevant

information (e.g. at components such as joint ventures, associates) may give rise to a scope limitation

Engagement Acceptance and Continuance

engagement team has unrestricted access to
Component auditors and their work Management and those charged with governance

Engagement Acceptance and Continuance

Decision to accept is also based on whether group

(TCWG) of the group and of the components

Consideration of engagement acceptance a key

aspect of the standard

Thus, determining whether to act as auditor of the

group is one of the objectives under the standard


Understanding GroupWide Controls

Understanding the Group and its Components

Understanding group-wide controls helps to plan

nature, timing, and extent of work on consolidation process and components

Group Audit team tests himself, or may asks

component auditor to test, effectiveness of the controls if:

There will be planned reliance on the controls, or Substantive procedures alone cannot provide sufficient

appropriate audit evidence at the assertion level

Understanding the Consolidation Process

Understanding the Group and its Components

Under current practice, group Audit teams may

perform at least some work on the consolidation process

Standard formalizes best practice in this regard
Recognizes that material misstatements can arise as a

result of consolidation process

New set of responsibilities for group Audit team

with regard to consolidation process


Understanding the Consolidation Process

by group management to components
Perform specific procedures on consolidation

Understanding the Group and its Components

Understand detailed reporting instructions issued

Evaluate consolidation adjustments for appropriateness,

completeness, and accuracy

Includes consideration of whether fraud risk factors or indicators of management bias exist
Evaluate whether components that report under different

financial reporting frameworks have been consolidated on the basis of consistent accounting policies

Significant Components and Work Effort on Components

Significant Components
What is a significant component?
A component financially significant to the group (i.e. size) A component likely to include significant risks of material

misstatement of the group financial statements due to its specific nature or circumstances (i.e. specific risks)

Why is concept of significant component important?

Determines direction of group audit Work effort focused on components with greatest risks

Significant Components and Work Effort on Components

Work Effort on specific requirements Components

For a component significant due to size: an audit of the

components financial information

For a component significant due to specific risks, one or

more of
An audit of the components financial information An audit of one or more account balances, classes of transactions or disclosures affected by the significant risks Specified audit procedures responsive to the significant risks
For components that are not significant, analytical

procedures at group level

Significant Components and Work Effort on Components

Significant Components Audited by Component Group engagement team to be involved in Auditors

Component auditors risk assessment

significant risks been identified? Involvement depends on understanding of component auditor but standard specifies minimum work required
Component auditors responses to significant risks

Are the responses appropriate? Direct involvement by group engagement team in responding to the significant risks may be necessary based on understanding of component auditor

Is Further Work Required on Components?

Only when sufficient appropriate audit evidence will

Significant Components and Work Effort on Components

not be obtained through work on significant components, group-wide controls and consolidation process, and analytical procedures at group level
If so, select one or more components that are not

significant and obtain additional audit evidence through one or more specified actions
E.g. Perform an audit or review of the individual

components financial information

Vary selection of such components over a period of time

What is a Component Auditor?

Component Auditors

An auditor of a component is a component auditor only

when it has been asked by the group Audit team to perform work on the component for the group audit
Can be an auditor in another firm or an auditor in another

office of the same firm or network

Understand 2 further matters besides component

auditors competence and independence

Whether group engagement team can be involved in

component auditors work as necessary

Whether component auditor is subject to regulatory


Component Auditors Understanding Component Auditors

Nature of work to understand component

auditors depend on a number of factors, e.g.

Previous experience with or knowledge of

component auditors
Degree to which group audit team and

component auditors are subject to common policies and procedures

E.g. in quality control, audit methodology


Standard now requires 4 different types of

materiality to be determined
1. Group materiality 2. If relevant, materiality levels for particular classes

of transactions, account balances or disclosures

3. Component materiality where an audit or a review

of a component is necessary
4. Threshold above which misstatements cannot be

treated as clearly trivial to the group

What is Component Materiality?


Materiality for a component necessary for group

Auditor to form an opinion on group financial statements

Not for component auditor to form an opinion on

components financial information

Should be lower than group materiality so that

misstatements in components in the aggregate will not exceed group materiality

Should be set for each component for which an

audit or review is required


Communication with Component Auditors

Nature and extent of component auditors

communication upstream driven by 2 key considerations

Group engagement teams specific requirements

E.g. significant risks identified by component auditors; previously unidentified related parties
Whether any specific matters have been identified that

are relevant to the group audit or that would merit group engagement teams attention
A broad responsibility for component auditors


Evaluation of Component Auditors Communication

Standard requires evaluation of component

auditors communication
To identify significant matters for follow-up with

component auditors, group management or component management as appropriate

To determine whether to review specific aspects of

component auditors audit documentation

Greater scrutiny of component auditors work may

lead to more discussion of issues with them in person or over the phone


Communication with TCWG

Explain to TCWG nature and extent of
Audit work required on components Group engagement teams involvement in component

auditors work

Sets clear expectation among TCWG that overall

responsibility for group audit rests with group engagement team

Helps them understand where audit effort is being

directed so that they may provide assistance with any issues that may arise

Additional Aspects

Documentation of specific matters, e.g.

Analysis of components, including

identification of significant components

Type of work to be performed on the

Nature, timing and extent of group

engagement teams involvement in component auditors work on significant components


Acceptance as principal Auditor Auditor must ensure that the

a) The accounting policies followed are consistent

and disclosed b) Financial statements drafted and information presented in accordance with companies ordinance 1984 c) Audit work performed according basic principles and conclusion drawn reasonable


the sufficiency of his own participation to act as principal auditor consider as

a) Materiality of his portion of work in Financial

statements b) Degree of his participation in audit

Principal Auditors Procedures When considering the other

auditors work obtain information as regards to his professional competence and independence Advise the other auditor
Treat component as independent entity To apply all necessary reporting

requirement and complete documentation

Discuss with other auditor

Audit programme Use of his work and report

Primary Auditor Responsibility The group engagement

partner or principal Auditor is responsible for direction and supervision and performance and compliance of regulations and standards of group audit The Auditors report should not refer other auditor unless required to do so by local laws and regulations If principal auditor finds that he is unable to get sufficient and appropriate audit evidence due to restrictions by management should withdraw if local

Reporting considerations
Where local regulations allow, and If

principal auditor basis his opinion on the work of other auditor this fact and magnitude of portion of financial statements audited by other auditor should be disclosed in report If other auditor work not satisfactory and auditor find himself unable to get sufficient and appropriate audit evidence should modify his opinion