Applying Group Audit Principles
ISA 600 (Revised) provides clear requirements on how to approach the audit of group financial statements. One may think that these requirements only apply to the audit of a group where consolidated financial statements are compiled, in terms of the relevant financial reporting framework. However, the scope of ISA 600 (Revised) goes beyond that, and there are different circumstances in practice where the principles of ISA 600 (Revised) may be applied.
Sub-groups and branches
ISA 600 (Revised), paragraphs 2 and 14(k), explains that group financial statements include the financial information of more than one entity or business unit through a consolidation process. The term, ‘consolidation process’, used in the standard, is not intended to have the same meaning as ‘consolidation’ or ‘consolidated financial statements’ as defined or described in financial reporting frameworks. Rather, the term, ‘consolidation process’, refers more broadly to the process used to prepare group financial statements. Therefore, it does not only refer to the preparation of consolidated financial statements (consolidation, proportionate consolidation or an equity method of accounting), in accordance with the applicable financial reporting framework, but also to:
- The presentation in combined financial statements of the financial information of entities or business units that have no parent, but are under common control or common management
- The aggregation of the financial information of entities or business units such as branches or divisions.An entity or business unit of a group may prepare its own group financial statements that incorporate the financial information of those entities or business units it encompasses (that is, a sub-group). ISA 600 (Revised) applies to an audit of the group financial statements of such sub-groups performed for statutory, regulatory or other reasons.
A single legal entity may be organised with more than one business unit, for example, a company with operations in multiple locations, such as a bank with multiple branches. When these business units have characteristics such as separate locations, separate management, or separate information systems (including a separate general ledger), and the financial information is aggregated while preparing the single legal entity’s financial statements, such financial statements meet the definition of group financial statements because they include the financial information of more than one entity or business unit through a consolidation process.
In some cases, a single legal entity may configure its information system to capture financial information for more than one product or service line, for legal or regulatory reporting or other management purposes. In these circumstances, the entity’s financial statements are not group financial statements because there is no aggregation of the financial information of more than one entity or business unit through a consolidation process. Furthermore, capturing separate information (e.g. in a sub-ledger) for legal or regulatory reporting or other management purposes does not create separate entities or business units (e.g. divisions) for purposes of ISA 600 (Revised).
Other applications
ISA 600 (Revised), paragraph 3, and ISA 220 (Revised), paragraph A1, indicate that this standard, adapted as necessary in the circumstances, may also be useful in an audit of financial statements other than a group audit, when the engagement team includes individuals from another firm. For example, this standard may be useful when involving such an individual to attend a physical inventory count; inspect property, plant and equipment; or perform audit procedures at a shared service centre, at a remote location.
Although ISA 600 (Revised) includes requirements that address using the work of component auditors in audits of group financial statements, the principles contained in the following paragraphs, adapted as necessary in the circumstances, may be relevant to providing the auditor with guidance on additional procedures that can be performed in ensuring that sufficient appropriate audit evidence is obtained when using the work of another auditor, or other auditors in other instances:
•   Para 26‒29: Understanding the Component Auditor
•   Para 37‒44: Responding to Assessed Risk
•   Para 45–50: Communication with the Component Auditor
•  Para 51‒52: Evaluating the Sufficiency and Appropriateness of Audit Evidence Obtained
•   Para 59: Documentation.
In summary
It is important to be aware of all the circumstances where the requirements of ISA 600 (Revised) apply. It is also prudent to perform additional procedures, guided by the principles of ISA 600 (Revised), as considered necessary and appropriate in the interest of ensuring that sufficient appropriate audit evidence has been obtained.
LEAF can assist firms with performing thorough file reviews, providing practical advice, reviewing methodology design, designing audit working paper templates and providing staff training on the relevant requirements and procedures.
References
1. ISA 600 (Revised), Special considerations – Audits of group financial statements (Including the work of component auditors)
2. SAICA Frequently Asked Questions, Application of the requirements of the International Standards on Auditing in relation to matters arising from monitoring findings and other in-practice challenges, Updated August 2022.
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