Special Considerations − Audits of Group Financial Statements (Including the Work of Component Auditors)
The International Standard on Auditing 600 (Revised) (ISA 600 (Revised)) is a special considerations standard that applies to a group audit, including when component auditors are involved.
The International Auditing and Assurance Standards Board (IAASB) wanted to ensure that ISA 600 (Revised) better aligns with recently revised standards such as International Standard on Quality Management 1 (ISQM 1), International Standard on Auditing 220 (Revised), Quality Management for an Audit of Financial Statements (ISA 220 (Revised)), and International Standard on Auditing 315 (Revised 2019), Identifying and Assessing the Risks of Material Misstatement (ISA 315 (Revised 2019)).
The requirements of this standard also strengthen the auditor’s responsibilities related to professional scepticism; the planning and performing of a group audit; two-way communications between the group auditor and component auditors; and documentation.
ISA 600 (Revised) is a supplementary standard to the other ISAs; it contains special consideration requirements which need to be kept in mind when planning and performing an audit of group financial statements.
The IAASB’s objectives in revising the standard include (among others) the following:
- Strengthening the auditor’s approach to the planning and performance of a group audit by closer aligning the standard to the principles in ISA 315 (Revised 2019)
- Enhancing the documentation requirements by clarifying what the group auditor may need to document in different situations
- Reinforcing the need for robust communication and interactions during the audit
- Clarifying how to address restrictions on access to people and information in a group audit, including restrictions on access to component management, those charged with governance of the component, component auditors, or information at the components
- Clarifying how the concepts of materiality and aggregation risk apply in a group audit
- Encouraging proactive quality at engagement level and the involvement of the group engagement team (GET) in the work of component auditors
The revised standard will be effective for audits of group financial statements for periods beginning on or after 15 December 2023.
One of the key foundational principles of the standard, which is closely aligned with the principles in ISA 315 (Revised 2019), is the risk-based approach. Under this approach, the GET takes responsibility for the identification and assessment of the risks of material misstatement.
The risk-based approach better focuses the GET on determining the significant classes of transactions, account balances and disclosures in the group financial statements, and on identifying and assessing the related risks of material misstatement of the group financial statements, compared to a focus on significant components in extant ISA 600.
The emphasis of the risk assessment process is on the group financial statements. There is a greater focus on planning the most appropriate approach to obtain audit evidence which will be used to support the group financial statements. The GET is required to take responsibility for identifying and assessing the risks of material misstatement for the group financial statements.
OTHER KEY CHANGES
- The entry point to the standard is clarified with an updated definition of group financial statements that defines the process of consolidation and a component. The definition of a component is an entity, business unit, function or business activity, or some combination thereof, determined by the group auditor for purposes of planning and performing audit procedures in a group audit.
- Included as part of definitions are aggregated risk (the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole), component performance materiality, and component auditor (an auditor who performs audit work related to a component for purposes of the group audit). A component auditor is part of the engagement team for a group audit.
- Special requirements drawn from ISA 220 (Revised) provide clarity on what it means to be involved in the work of other auditors, which entails taking responsibility for the direction, supervision and review of the work of the auditor. In a group audit context, ISA 600 (Revised) includes special considerations for the involvement of the GET in the work of component auditors.
- In applying ISA 220 (Revised), the group engagement partner is required to take overall responsibility for managing and achieving quality in the group audit engagement. In doing so, the group engagement partner shall:
o Take responsibility for creating an environment for the group audit engagement that emphasises the expected behaviour of engagement team members and be sufficiently and appropriately involved throughout the group audit engagement, including in the work of component auditors, such that the group engagement partner has the basis for determining whether the significant judgements made, and the conclusions reached, are appropriate given the nature and circumstances of the group audit engagement.
- The foundation of the risk-based approach in the audit of group financial statements is based on obtaining an understanding of the group and its environment, the financial reporting framework and the internal control environment of the group.
- It is important for the GET to exercise professional judgement and professional scepticism, which includes the stand-back requirement to ensure that sufficient and appropriate audit evidence has been obtained.
- With regard to acceptance and continuance, the GET must perform a preliminary assessment to ensure that the GET will be able to obtain sufficient and appropriate audit evidence and management acknowledge that they will provide unrestricted access to information and relevant persons.
- Included under risk assessment, are additional requirements relating to going concerns and related parties.
Take note: ISA 600 (Revised) includes special considerations that auditors must take into account when auditing group financial statements; however, when the auditors need guidance for example on documentation or fraud, International Standard on Auditing 230, Audit Documentation, and International Standard on Auditing 240, The Auditor’s Responsibility Relating to Fraud in an Audit of Financial Statements, will apply respectively.
The overarching principle of ISA 600 (Revised) is the responsibility of the GET in assessing risk of the group financial statements and then designing appropriate procedures to respond to the risk.
The changes to ISA 600 (Revised) are aimed at ensuring proactive management of quality at engagement level and ensuring that the GET takes responsibility for the direction, supervision and review of component auditors.
Angel Sithole CA(SA), SAICA Project Director: Assurance