CH 19 GRP Audit

19
GROUP AUDIT AND

USING THE WORK OF
OTHERS
Learning Outcomes
At the end of this chapter, you should be able to:

Explain the composition of a group of companies.
Discuss the responsibilities of the principal auditor and other
auditors.
Describe the role and function of a support letter.
Outline the advantages and disadvantages of using an
auditors’ expert and the conditions under which one may be
used.
Explain the criteria for external auditors to use the work of
internal audit.
FUNDAMENTALS OF AUDITING All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2017 1– 3
Introduction
 ISA 600 states the objectives of an auditor performing a

group audit are:
(a) To determine whether to act as the auditor of the group
financial statements, and
(b) If they are acting as the auditor of the group financial
statements,
• to communicate clearly with component auditors
(i.e. other auditors) about the scope and timing of
their work on financial information related to
components and their findings; and

Introduction (cont.)
• to obtain sufficient and appropriate audit

evidence regarding the financial information of
the components and the consolidation process
to express an opinion on whether the group
financial statements are prepared, in all
material respects, in accordance with the
applicable financial reporting framework.

6
Introduction (cont.)
 Overall audit strategy must clearly set out the resources

required for specific audit areas; the use of experienced team
members for high risk areas or involvement of experts on
complex matters.
 Public accounting firms need to ensure that their audit
engagements are completed by auditors having the proper
degree of technical training and proficiency given the
circumstances of the clients.
 Factors that should be considered: engagement size &
complexity, level of risk, special technical expertise,
personnel availability and timing of the work to be performed.

7
Specific Issues In Group Audit
Work of Other Auditors

When the principal auditor uses the work of another auditor, the principal auditor
should:
(a)Determine how the work of other auditors will affect the audit;
(b)Consider the professional competence of the other auditors in the context of the
specific assignment;
(c)Perform procedures to obtain sufficient and appropriate audit evidence that the
work of the other auditors is adequate for the principal auditor’s purposes, in the
context of the specific assignment, and
(d)Consider the significant findings of the other auditors.

8

(cont.)
 The following information regarding the professional

competence of the other auditors can be used by
principal auditors when performing their evaluation:
(a) Membership of professional organization;
(b) Membership or affiliation with another firm;
(c) Inquiries with other auditors, bankers etc. and
(d) Discussion with the other auditors.

9

(cont.)
 Principal auditor would advise the other auditor of:
(a) Independence requirements and obtaining written
representations of their compliance;
(b) The use of the auditor’s work and making sufficient
arrangements for the coordination of efforts at the initial
stages of the audit (such as matters requiring special
considerations, procedures for identification of intercompany
transactions that may require disclosure, and timetable for
completion of audit);
(c) Accounting, auditing and reporting requirements and obtaining
written representations of their compliance.

(cont.)
 Principal auditor should also document the

following in the audit working papers:
(a) Components whose FS was audited by other
auditors;
(b) Their significance to the FS of the entity as a whole;
(c) Names of the other auditors, and
(d) Procedures performed and conclusions reached.

1
1

(cont.)
 ISA 600 defines:
– Principal auditor; the auditor with the responsibility for
reporting on the financial statements of an entity when
those FS include one or more components audited by
another auditor.
– Other auditor; an auditor, other than the principal auditor
with the responsibility for reporting on the FS of a
component which is included in the FS audited by the
principal auditor.
– Component; a division, branch, subsidiary, JV, associated
co.

1
2

(cont.)
 The other auditors, knowing the context in which the

principal auditors will use their work, should cooperate
with the principal auditors.
 When the principal auditor concludes that the work of
the other auditors cannot be used and has not been
able to perform sufficient additional procedures
regarding the financial information of the components
audited by the other auditors, the principal auditor is
required to issue a qualified opinion or a disclaimer
(limitation in scope).

1
3

(cont.)
 If the other auditors issue, or intend to issue a

modified auditor’s report, then the principal auditor
has the duty to consider whether the subject of the
modification is of significance, and if a modification
is of significance, and if a modification of the
principal auditor’s report is required.

(cont.)
Related Party Transactions

Entities such as associated companies, where the
parent company does not have overall control but can
exercise a significant right over their affairs, together
with other related parties such as partnerships and
joint ventures.
In some circumstances, may give rise to higher risks
of material misstatement of the financial statements
than transactions with unrelated parties.

(cont.)
 The objectives of the auditor are:

(a) To obtain sufficient and appropriate understanding of the
related party relationships and transactions to be able:
– to recognize fraud risk factors,
– to conclude, based on the audit evidence obtained, whether
the financial statements, achieve fair presentation or are not
misleading
(b) To obtain sufficient audit evidence about whether related party
relationships and transactions have been appropriately
identified, accounted for and disclosed in the financial
statements in accordance with the framework.

(cont.)
Directors are primarily responsible for the disclosure

of related party and ownership matters.
Hence auditors must obtain written assurances from
them in a form of a Letter of representation.

1
7
Using The Work Of Others
Work Of An Expert
ISA 620 -The auditor has sole responsibility for the
opinion expressed and that responsibility is not reduced
by the work of an auditors’ expert.
If an auditor using the work of an expert concludes that
the work of that expert is adequate for the auditor’s
purposes, then the expert’s findings or conclusions may
be accepted as appropriate audit evidence.

1
8

(cont.)
 In general, the auditor’s programme of work will

provide them with sufficient, reliable, and relevant
evidence to substantiate their opinion.
 However, there can be circumstances where the
auditors’ knowledge is insufficient and they may
need to rely on experts or specialists to help form
an opinion.

1
9

(cont.)
 ISA 620 defines experts as

– An individual or organization possessing
expertise in a field other than accounting or
auditing, whose work in that field is used by the
auditor to assist in obtaining sufficient and
appropriate audit evidence.
– May be either an auditor’s internal expert (a
partner or staff of the auditor's firm or a network
firm) or an auditor’s external expert.

2
0

(cont.)
 Examples of specialists whose work may be relied

upon include:
(a) Valuers- on the value of non-current assets, complex
financial instruments, works of art, antiques;
(b) Quantity surveyors- on the value of work done on
long-term contracts;
(c) Actuaries- on the liability to be included for pension
scheme liabilities, insurance contracts, and
(d) Geologists, stockbrokers, lawyers etc.

2
1

(cont.)
 An auditor’s expert may be needed to assist auditor in one
or more of the following:
(a) Obtaining an understanding of the entity and its
environment, also internal control;
(b) Identifying and assessing the risk of material misstatement;
(c) Determining and implementing overall responses to
assessed risk;
(d) Designing and performing further audit procedures, and
(e) Evaluating the sufficiency and appropriateness of the audit
evidence obtained.

2
2

(cont.)
 In deciding whether auditors need specialist

opinions, the following will be considered:
(a) Knowledge and abilities of the audit team, and;
(b) Risks of material misstatements based on the
nature, complexity and materiality of the material
being considered, and
(c) Quantity and quality of other audit evidence which
can be obtained.
 Can be hired either by the auditor or the client
 Either way the client is likely to bear the cost.
2
3

(cont.)
 Auditors should involve experts only when no other

sufficient appropriate evidence is available.
 The following factors may influence auditors to rely
upon or not rely upon the work of a specialist:
(a) Competence of the specialist- technical
qualification, certification and license or
membership of professional bodies;
(b) Experience of the specialist, and
(c) Independence of the specialist

2
4

(cont.)
 If the decision is to rely on the work of a specialist, a consultation between
the auditors, the client and the specialist, when the specialist is appointed,
is important. This is to reach an agreement on the work to be performed.
 The agreement should cover:
(a) Objectives, scope and subject matter of the specialist’s work;
(b) Assumptions upon which the specialist's report depends and their
compatibility with the accounts;
(c) A statement of the bases used in previous years & any change to be
made;
(d) The use to be made of the specialist's findings;
(e) The form & content of the specialist’s report or opinion;

2
5

(cont.)
(f) The sources of information to be provided to the

specialist;
(g) Identification of any relationship which may affect the
specialist’s objectivity.

2
6

(cont.)
 At the end of the work, auditors will have to review the

expert findings and draw conclusions by looking at:
(a) The source data used;
(b) Assumptions & methods used- consistency with previous
periods;
(c) When was the expert’s work was carried out, and
(d) The overall evaluation of the expert’s work in light of the
auditor's overall knowledge of the business and the
results of other audit procedures which may go towards
corroborating the expert’s opinion.

2
7

(cont.)
 Specific procedures to evaluate the adequacy of the

auditor’s expert’s work:
(a) Making inquiries of the expert
(b) Reviewing their working papers and reports
(c) Corroborative procedures such as observing their
work, examining published data, confirming relevant
matters with third parties, performing detailed analytical
procedures, re-performing calculations and discussion
with other relevant expertise or the management.

2
8

(cont.)
 Clearly the auditor does not have the same level of

expertise and experience as an expert and hence
an expert’s opinion can be difficult to challenge.
 Auditors have to bear in mind that the expert’s
opinion is the expert’s responsibility, and whether
that work provides sufficient appropriate evidence
for the auditor is the auditor’s responsibility.

2
9

(cont.)
 If auditors are unsatisfied with the expert’s work,

they can opt for the following:
(a) Try again with another expert (however, cost
considerations are important and there is no
guarantee the outcome will be any different);
(b) Discuss the situation with the client and the expert
to see if difficulties can be resolved, and
(c) It may be necessary to modify (qualify) the auditor's
report on the grounds of lack of evidence.

3
0

(cont.)
 Auditors shall not refer to the work of an expert in the

auditor’s report (unmodified opinion) unless it is
required by law (i.e. transparency in the public sector).
 If the auditor makes references to the work of an
auditor’s expert (with the permission of an expert) in
the auditor’s report (relevant to the understanding of a
modification to auditor’s opinion), the auditor must
indicate that such references do not reduce the
auditor's responsibility for that opinion.

3
1
Using The Work Of Others (cont.)
Work Of Internal Auditors

It is widely recognized that an effective internal audit often allows
a modification in the nature and timing and also reduces the
extent of audit procedures performed by the external auditor.
ISA 610 states:
……external auditor should obtain sufficient
understanding of the internal audit activities to consider its
effect on external audit procedures.

3
2

(cont.)
 Objectives of an external auditor (if an entity has an internal audit
functions) are:
(a) To determine whether the work of the internal audit function can
be used (in which areas and to what extent), and
(b) To determine whether that work (if in use) is adequate for
purposes of the audit.
 ISA 610 defines internal audit function as the function of an entity
that performs assurance and consulting activities which are
designed to evaluate and improve the effectiveness of entity’s
governance, risk management and internal control processes.

3
3

(cont.)
 The major consideration for the external auditor is to assess the
competence and objectivity of the internal auditors.
 Among the criteria for assessment are:
(a) Organizational status- to achieve the desired level of independence,
internal auditor should report to the highest level of management and
be free from any operating responsibility;
(b) Scope of function- nature and extent of functions performed by
internal audit; management’s action and response to the internal audit
recommendations;
(c) Technical competence- adequate training and skills
(d) Due professional care- internal audit work should be properly
planned, reviewed and documented.

3
4

(cont.)
 Materiality of the account balances or class of

transactions and its related audit risk may also
determine how much the external auditor can rely
on the internal auditor’s work.

3
5

(cont.)
 Examples of internal audit functions that can be used

by external auditors:
(a) Testing of the operation effectiveness of controls;
(b) Substantive procedures involving limited judgement;
(c) Observations of inventory counts;
(d) Tracing transactions through the information
systems relevant to financial reporting, and
(e) Testing compliance with regulatory requirements

3
6

(cont.)
 If the external auditor plans to use the work of the internal
auditors, the external auditor must discuss the planned use
as a basis for coordinating their respective activities.
 Among the procedures external auditors may perform to
evaluate the quality of the work and the conclusions reached
by the internal audit function, in addition to re-performance,
are:
(a) Making inquiries of appropriate individuals within the internal
audit function;
(b) Observing procedures performed by the internal audit
function;

3
7

(cont.)
(c) Reviewing the internal audit’s work programme and

working papers (to evaluate whether the work had been
properly planned, performed, supervised, reviewed and
documented; sufficient and appropriate evidence had been
obtained and appropriate conclusions had been reached).

3
8

(cont.)
 The more judgement involved, the higher the

assessed risks of material misstatements, and the
lower the level of competence and objectivity of the
internal audit function.
 Hence the external auditor will perform more
procedures on the internal audit function to form
an audit opinion.

3
9

(cont.)
 If the external auditor decides to use the work of

internal auditors, the audit documentation shall
include:
(a) Evaluation of the internal audit function’s level of
objectivity, competency and quality control;
(b) Nature and extent of the work used;
(c) Audit procedures performed by the external auditor
to evaluate the adequacy of the work used.


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19

GROUP AUDIT AND

At the end of this chapter, you should be able to:

FUNDAMENTALS OF AUDITING All Rights Reserved

 ISA 600 states the objectives of an auditor performing a

FUNDAMENTALS OF AUDITING All Rights Reserved

• to obtain sufficient and appropriate audit

FUNDAMENTALS OF AUDITING All Rights Reserved

 Overall audit strategy must clearly set out the resources

FUNDAMENTALS OF AUDITING All Rights Reserved

Specific Issues In Group Audit

Work of Other Auditors

FUNDAMENTALS OF AUDITING All Rights Reserved

Specific Issues In Group Audit

 The following information regarding the professional

FUNDAMENTALS OF AUDITING All Rights Reserved

Specific Issues In Group Audit

FUNDAMENTALS OF AUDITING All Rights Reserved

 Principal auditor should also document the

FUNDAMENTALS OF AUDITING All Rights Reserved

Specific Issues In Group Audit

FUNDAMENTALS OF AUDITING All Rights Reserved

Specific Issues In Group Audit

 The other auditors, knowing the context in which the

FUNDAMENTALS OF AUDITING All Rights Reserved

Specific Issues In Group Audit

 If the other auditors issue, or intend to issue a

FUNDAMENTALS OF AUDITING All Rights Reserved

Related Party Transactions

FUNDAMENTALS OF AUDITING All Rights Reserved

 The objectives of the auditor are:

FUNDAMENTALS OF AUDITING All Rights Reserved

Directors are primarily responsible for the disclosure

FUNDAMENTALS OF AUDITING All Rights Reserved

Using The Work Of Others

FUNDAMENTALS OF AUDITING All Rights Reserved

Using The Work Of Others

 In general, the auditor’s programme of work will

FUNDAMENTALS OF AUDITING All Rights Reserved

Using The Work Of Others

 ISA 620 defines experts as

FUNDAMENTALS OF AUDITING All Rights Reserved

Using The Work Of Others

 Examples of specialists whose work may be relied

FUNDAMENTALS OF AUDITING All Rights Reserved

Using The Work Of Others

FUNDAMENTALS OF AUDITING All Rights Reserved

Using The Work Of Others

 In deciding whether auditors need specialist

Using The Work Of Others

 Auditors should involve experts only when no other

FUNDAMENTALS OF AUDITING All Rights Reserved

Using The Work Of Others

FUNDAMENTALS OF AUDITING All Rights Reserved

Using The Work Of Others

(f) The sources of information to be provided to the

FUNDAMENTALS OF AUDITING All Rights Reserved

Using The Work Of Others

 At the end of the work, auditors will have to review the

FUNDAMENTALS OF AUDITING All Rights Reserved

Using The Work Of Others

 Specific procedures to evaluate the adequacy of the

FUNDAMENTALS OF AUDITING All Rights Reserved