ISA-600

USING THE WORK OF OTHER

AUDITOR
Overview

 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
 Introduction

Introduction
 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

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 Risk Assessment and Quality Control Principles
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,
supervision, and performance of engagement and for group audit
opinion
 Therefore, reference to component auditor in the group
auditor’s 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
 Risk Assessment and Quality Control Principles
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
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
Engagement Acceptance and
Continuance
 standard introduces an entirely different
concept
 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 and
Engagement Acceptance and Continuance
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 Acceptance and
Continuance
 Decision to accept is also based on whether group
engagement team has unrestricted access to
 Component auditors and their work
 Management and those charged with governance
(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 the Group and its Components
Understanding Group-Wide
Controls
 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 Group and its Components
Understanding the
Consolidation Process
 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 Group and its Components
Understanding the
Consolidation Process
 Understand detailed reporting instructions issued
by group management to components
 Perform specific procedures on consolidation
process
 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 Components

 specific requirements
 For a component significant due to size: an audit of the
component’s financial information
 For a component significant due to specific risks, one or
more of
 An audit of the component’s 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 Auditors
 Group engagement team to be involved in
 Component auditor’s risk assessment
 significant risks been identified?
 Involvement depends on understanding of component auditor
but standard specifies minimum work required
 Component auditor’s 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
 Significant Components and Work Effort on Components
Is Further Work Required on
Components?
 Only when sufficient appropriate audit evidence will
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
component’s financial information
 Vary selection of such components over a period of time
 Component Auditors
What is a Component Auditor?
 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
auditor’s competence and independence
 Whether group engagement team can be involved in
component auditor’s work as necessary
 Whether component auditor is subject to regulatory
oversight
 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
 Materiality

Materiality
 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?
 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
component’s 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

Communication with Component Auditors

 Nature and extent of component auditors’
communication upstream driven by 2 key
considerations
 Group engagement team’s 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 team’s attention
 A broad responsibility for component auditors
 Communication

Evaluation of Component Auditor’s

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

Communication with TCWG

 Explain to TCWG nature and extent of
 Audit work required on components
 Group engagement team’s involvement in component
auditors’ work
 Rationale
 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
components
 Nature, timing and extent of group
engagement team’s involvement in
component auditor’s 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
 Consider 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
c) Risk of material misstatement in financial statement
audited by other auditor
Principal Auditor’s Procedures
 When considering the other auditor’s 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 Auditor’s 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 laws permits so, other wise disclaim an
opinion
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