Clarified ISAs
ISA 600 - Groups
John Kellas
November 2009
ISA 600 – Why revise?
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Political necessity – required by EC
Focus required on ‘sole responsibility’
Current standard limited to other auditors
More comprehensive and rigorous standard
needed to achieve more consistent practice
throughout the world
ISA 600 – Key points
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Scope
Group auditor and component auditor
Audit scoping and risk analysis
Materiality
Approach to components
ISA 600 - Scope
• Not restricted to conventional group of
holding company and subsidiaries
• Distinction is rather whether reporting
entity has a component
• Component – entity or activity for which
financial information is prepared for
inclusion in ‘group financial statements’
• May also be useful where other auditors
used for specific purposes
ISA 600 – Scope (2)
• Objective of group auditor:
(a) to determine whether to act
(b) if acting:
(i) to communicate clearly with
component auditors
(ii) to obtain sufficient appropriate audit
evidence about components and
consolidation process
ISA 600 – Group auditor and component
auditor
• Important distinction is between group
engagement team and other auditors
involved in the audit
• The group auditor is required to drive the
audit in a proactive and involved way
• The principle does not depend upon
whether component auditor is from same
firm or not
ISA 600 – Audit scoping and risk
analysis
• Sole responsibility principle leads to group
auditor responsibility for scope, risk
analysis, audit performance and conclusions
• Of course, some work carried out by other
auditors but group auditor must instruct and
be sufficiently involved
• An understanding of component auditors is
therefore required
ISA 600 – Audit scoping and risk
analysis (2)
• Group auditor to:
- Understand group, including group-wide
controls and components
- Understand consolidation process
- Assess risks of m.m. of group financial
statements
- Determine type of work to be carried out
and group auditor’s involvement in it
ISA 600 – Group auditor ‘involvement’
• Group auditor to be ‘involved to extent
necessary to obtain sufficient appropriate
audit evidence’
• Group auditor entitled to take account of
understanding of component auditor
• ISA specifies minimum involvement where
component is significant
• Access to component auditor or information
ISA 600 - Materiality
• Normal principles apply, but components
complicate
• Group auditor determines group overall
materiality, and any special materiality for
specific transactions, balances or
disclosures
• Group auditor also determines component
materiality which is required to be less than
group materiality
ISA 600 – Materiality (2)
• Group auditor also determines what ‘clearly
trivial’ means in context of group
• Normally, where component is audited for
group purposes, component auditor sets
performance materiality (in context of
component materiality set by group auditor)
and group auditor evaluates
ISA 600 – Approach to components
• Group auditor identifies significant
components (either because of individual
financial significance or likelihood of
containing a significant risk)
• Audit for components that are individually
significant
• More flexibility for components that are
significant because of significant risk
ISA 600 – Approach to components (2)
• Other components – at least analytical
review, but further procedures required as
group auditor deems necessary
ISA 600 - Communications
• Communication to component auditors:
instructions, context, ethical requirements,
information
• Communication from component auditors:
agreement to instructions, findings and
conclusions (no standard form of report)
• Communications with management and
directors
ISA 600 - Conclusion
• A complex and detailed standard
• Careful study of whole ISA required
• Will probably require some changes in
approach for all firms
• May require significant changes for some
firms
• Major effect may be when component
auditors differ from group engagement team