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International Auditing and Assurance

Standards Board

Audits of Group Financial Statements

ISA Implementation Support Module

Prepared by IAASB Staff

November 2009


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Introduction

Significant Features of New Standard

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

Overview

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The context for revising the standard

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 andquality control principles in group audit context

Standard reflects international best practice

Introduction

Introduction

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A major thrust of the new standard

Risk assessment provides basis for determining nature

and extent of work on the group audit

Identification and assessment of risks through obtaining

an understanding of the group, its components, and their

environments

Effect on current practice will vary

If best practices already followed, changes may not be

significant

In other cases, more effort could be required

Applying Risk Assessment and Quality

Control Principles


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Standard reflects ISA 220 principle regarding responsibility for

the audit

Group engagement partner alone should be responsible for

direction, supervision, and performance of engagement and forgroup 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


Control Principles


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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 componentauditors are, standard requires group engagement

team to obtain an understanding of them


Control Principles


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A new approach

Main consideration under old standard was whether

portion of group audited by the auditor was sufficient for

the auditor to act as principal auditor

New standard introduces an entirely different concept

Group engagement 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 engagement

team will be able to be involved in component auditors

work



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Key consideration is whether sufficient appropriateaudit 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) may not be an issue

In other cases, difficulty in accessing relevant

information (e.g. at components such as joint ventures,

associates) may give rise to a scope limitation



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Decision to accept is also based on whether groupengagement team has unrestricted access to

Component auditors and their work

Management and those charged with governance(TCWG) of the group

Management and TCWG 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



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As part of understanding the group and its

components, group engagement team now required

to understand

Group-wide controls

Consolidation process

What are group-wide controls?

Any controls over group financial reporting

E.g. Controls for monitoring and reconciling intra-group

transactions

Understanding Group-Wide Controls and

Consolidation Process

Understanding the Group and its Components

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Understanding group-wide controls helps to plannature, timing, and extent of work on consolidation

process and components

Group engagement team tests, or asks component

auditor(s) to test, operating effectiveness of these

controls if:

There will be planned reliance on the controls, or

Substantive procedures alone cannot provide sufficientappropriate audit evidence at the assertion level

Communicate significant deficiencies in group-wide

controls in accordance with ISA 265

Understanding Group-Wide Controls


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Under current practice, group engagement teamsmay perform at least some work on the

consolidation process

However, no specific requirements under old standard

Practice therefore inconsistent

New 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 engagement

team with regard to consolidation process

Understanding the Consolidation Process


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Understand detailed reporting instructions issued bygroup 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

Understanding the Consolidation Process


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New standard introduces important concept of asignificant component

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


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Old standard did not specify any particular level of workon components

New standard establishes specific requirements

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 oftransactions or disclosures affected by the significant risks

Specified audit procedures responsive to the significant risks

For components that are not significant, analyticalprocedures at group level

Work Effort on Components


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Not the same as audit of statutory financial statements

For example, component auditor may not need to audit

Items that will be audited centrally if so informed by group

engagement team

Disclosures required for statutory purposes but not for group

audit purposes

Audit to component materiality (materiality for statutory

audit may be lower) Group engagement team to specify form of reporting

expected from component auditor

Standard does not mandate form of reporting


Audit of Component Financial Information

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Group engagement team to be involved in

Component auditors risk assessment

Have all the 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

Significant Components Audited by

Component Auditors


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Only when sufficient appropriate audit evidence willnot 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 individualcomponents financial information

Vary selection of such components over a period of time


Is Further Work Required on Components?

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An auditor of a component is a component auditor onlywhen it has been asked by the group engagement 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 incomponent auditors work as necessary

Whether component auditor is subject to regulatory

oversight

Component Auditors

What is a Component Auditor?

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Nature, timing and extent of work tounderstand component auditors depend on a

number of factors, e.g.

Previous experience with or knowledge ofcomponent auditors

Degree to which group engagement team and

component auditors are subject to commonpolicies and procedures

E.g. in quality control, audit methodology

Component Auditors

Understanding Component Auditors

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Standard now requires 4 different types ofmateriality to be determined

Group materiality

If relevant, materiality levels for particular classes oftransactions, account balances or disclosures

Component materiality where an audit or a review of

a component is necessary

Threshold above which misstatements cannot be

treated as clearly trivial to the group

Materiality

Materiality

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Materiality for a component necessary for groupengagement partner 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

What is Component Materiality?

Materiality

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Standard places greater emphasis on effectivecommunication between group engagement team and

component auditors

Effective involvement in component auditors work required

by the standard otherwise not possible Vital to ensure expectations on both sides are clear

Standard recognizes need for effective communication with

TCWG and management

Opens up dialogue with TCWG on significant matters

Enables TCWG and management to be made aware of matters

relevant to discharging their respective responsibilities for

financial reporting process, a matter of public interest

Importance of Effective Communication

Communication

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Communication now broader and more specific

Guiding principles when communicating downstream

Will component auditors be clear as to nature and extent of

work requested of them on the components and whether group

engagement team will be involved in their work?

Will component auditors be clear as to required form of

reporting to group engagement team and reporting deadlines?

Standard requires specific matters to be communicatedto component auditors

E.g. component materiality, form and content of reporting

Communication should be timely

Communication with Component Auditors

Communication

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Nature and extent of component auditorscommunication 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

Communication with Component Auditors

Communication

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Communicate matters relevant to group managementsresponsibility for preparing group financial statements

E.g. Deficiencies in group-wide controls; fraud

An opportunity to also communicate, through group

management, matters group engagement team has

identified that are relevant to component managements

responsibility to prepare component financial statements

Group engagement team should not rely on componentauditors communication with component management

to discharge responsibility to communicate with group

management

Communication with Group Management

Communication

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Explain to TCWG nature and extent of Audit work required on components

Group engagement teams 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

Communication with TCWG

Communication

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Additi l A t


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Standard requires

Subsequent events work on components that are

audited

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 teams

involvement in component auditors work on

significant components

Subsequent Events and Documentation

Additional Aspects

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Note

This set of support slides does not amend or override

the ISAs, the texts of which alone are authoritative.

Reading the slides is not a substitute for reading the

ISAs. The slides are not meant to be exhaustive andreference to the ISAs themselves should always be

made. In conducting an audit in accordance with

ISAs, the auditor is required to comply with all the

ISAs that are relevant to the engagement.

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Copyright November 2009 by the International Federation of Accountants

(IFAC). All rights reserved. Permission is granted to make copies of this work

provided that such copies are for use in academic classrooms or for personal use

and are not sold or disseminated and provided that each copy bears the

following credit line: Copyright November 2009 by the International

Federation of Accountants (IFAC). All rights reserved. Used with permission of

IFAC. [email protected] for permission to reproduce, store, or

transmit this work. Otherwise, written permission from IFAC is required to

reproduce, store, or transmit, or to make other similar uses of, this work, except

as permitted by law. Contact [email protected].

International Federationof Accountants

ISBN: 978-1-60815-050-2

www.ifac.org
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]

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