Audits Of Group Financial Statements Including The Work Of Component Auditors

Earlier this year, the IAASB published a revised standard (ISA 600) Audits of Group Financial Statements—Including the Work of Component Auditors. The new standard introduces significant changes to group audits and requires a greater emphasis on anticipating risks of material misstatement, planning the audit approach, performing engagement procedures in accordance with those plans, and exercising professional skepticism throughout the audit process. The standard is effective for audits of groups for periods starting on or after 15 December 2023, with early adoption permitted.

To support the implementation of ISA 600, the IAASB also issued an exposure draft (ED) in April 2020. The ED is intended to help GETs and component auditors understand the new requirements, consider their implications, and identify the steps they need to take to implement them effectively.

The ED includes revised documentation requirements and expanded application material. These are designed to give the GET more guidance on the nature, timing and extent of its involvement in the audits of the components. Specifically, the ED provides guidance on the nature of the GET’s evaluation of the component auditor’s findings; on how to document the GET’s determination of whether to obtain additional evidence, or what procedures to perform, to address significant matters; and on how to communicate with component audit management when to perform these additional procedures.

For the first time, a GET is required to determine the materiality of each component’s performance and communicate this amount to the component auditors. The ED also contains provisions that require the GET to communicate the overall amount of risk related to all components in the group and in each individual component. This is intended to ensure that the GET and component auditors have the same understanding of the overall level of risk in the group and each component.

Another change is the requirement that the GET must assess and communicate the risk of the existence of material misstatements in the stand-alone financial statements of each component. The GET must also evaluate the adequacy of the internal control environment in each component and provide its opinion on the overall effectiveness of that control. In addition, the ED now includes an expectation that the GET perform procedures to evaluate the quality of the internal audit function in each component.

One area of the ED that has raised concerns is the requirement to perform inquiries where the GET judges that the internal audit function will not ’have information that is likely to assist in identifying risks of material misstatement due to fraud or error’. This may lead to a proliferation of unnecessary inquiries that can damage the quality of the audit.

The ED does not appear to provide the GET with sufficient guidance on when to reject an acceptance decision because of a lack of access to a client’s financial information in the case of investment entities accounted for under the equity method or other circumstances where the GET has little or no access to a component’s audited stand-alone financial statements. The ED also places an undue emphasis on the GET’s inquiry of other parties, which can lead to a risk that the GET will be influenced by management’s responses and fail to maintain its independence.