Group Audit Timelines

Although auditors often end up doing group audits at some point, surprisingly, many of them don’t realise the importance of adhering to timelines during the audit. Generally, group auditors perform the fieldwork and conclusion work first, and only later include planning working papers and group instructions to complete the audit file. They do this at their peril, as group and component auditors may not identify and respond to all risks during fieldwork.

Pre-engagement and planning

The key considerations of a group audit are:
• The quality of evidence to be obtained for the whole group
• The level of involvement of the group engagement team in the audits of components
• Risk considerations revolving around group controls and risks relating to the consolidations. Company and component issues are addressed in the audit files.

These considerations should always be the cornerstone of each stage of the group audit. The principles of ISA 600 (Revised) are still valid, even when components are audited by the same firm.

ISA 600 (Revised) sets out the following logical steps for pre-engagement and planning, which should be performed at the beginning of the group audit to give clear direction to all involved:
• Paragraphs 17‒21: Acceptance and continuance, which include considering any possible restrictions on access to information and agreeing on the terms of engagement
• Paragraphs 22‒29: Overall group audit strategy and group audit plan, which include determining the components on which audit work will be performed and the resources needed to perform the group engagement
• Paragraphs 30‒32: Understanding the group and its environment, the applicable financial reporting framework and the group’s system of internal control.

Group instructions and communication

ISA 600 (Revised), paragraph 29, requires that the group auditor already start communicating overall group instructions after determining the overall group audit strategy and group audit plan. It is important to communicate with component auditors about their responsibilities and the group auditor’s expectations, so that they understand how to execute their work at component level.

Paragraphs 31 and 32 require that the group instructions then be supplemented by communication of relevant aspects identified from the understanding obtained of the group and its environment, the accounting framework and the group’s system of internal control. This ensures that component auditors are informed on a timely basis of matters that are relevant to performing risk assessment procedures, identification of related party relationships and transactions, and going concern issues relevant to the work of component auditors. Likewise, component auditors must communicate similar matters that may have a bearing on the group financial statements, identified at component level, to the group auditors.

Risk assessment and materiality

ISA 600 (Revised), paragraphs 33–34, requires that the group auditor identify and assess the risks of material misstatement of the group financial statements based on the risk assessment procedures performed by the group auditor and component auditors. This means that planning procedures must be completed beforehand because they provide the basis for risk assessment.

Paragraphs 35‒36 then require that the group auditor determine group materiality, component performance materiality and the threshold above which misstatements identified by the component auditor must be communicated to the group auditor. Once determined, these amounts must be communicated to the component auditor for implementation during audit work.

Risk responses

Only at this stage, can the group auditor and component auditors commence with fieldwork testing, in response to the identified and assessed risks of material misstatement; otherwise risks may not be addressed and required procedures may not be performed.

ISA 600 (Revised), paragraphs 41–42, requires that the group auditor communicate with the component auditors regarding matters relevant to the design of responses to the assessed risks of material misstatements, and evaluate the appropriateness of the design and performance of further procedures, in response to significant risks.

Review and evaluation of evidence

ISA 600 (Revised), paragraph 45‒46 requires that the group auditor request the component auditor to communicate several matters relevant to the group auditor’s conclusion on the group financial statements, discuss significant matters arising from communications with the component auditor, and evaluate whether communications with the component auditors are adequate.

Paragraphs 47–50 requires that the group auditor determine the potential extent of the review of additional component information and additional procedures to be performed, if necessary, and procedures to identify subsequent events that may require adjustment or disclosure.

Finally, the group auditor evaluates whether sufficient appropriate audit evidence was obtained, and the group audit report is finalised, according to paragraphs 51‒53. This can only be done if the planning was done upfront, audit procedures responded appropriately to identified risks, and the required information was communicated and collated.

Overall steps

  • Group strategy and plan
  • Group instructions
    • Responsibilities
    • Information from group
    • Request for updates
  • Risk information from components
  • Group risk assessment
  • Communication of group risks
  • Information and results from components
  • Evaluation of evidence and level of involvement considerations.

In summary

It is clear that the order in which the procedures are performed at the various stages of a group audit has a great bearing on the sufficiency and appropriateness of audit evidence obtained, and the appropriateness of the group audit report.

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).

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