Group audits 3 of 3 – Joint Audits
Group audits represent some of the most risky audits to undertake, as most public interest audits comprise the audit of groups of companies. However, the standards and audit principles relevant to group audits do not always receive the detailed attention they deserve,
This article addresses audit procedures relating to joint audit engagements, which are often relevant to group audits, and should be read in conjunction with parts 1 and 2 to reach an understanding of group audits as a whole. It addresses key requirements which auditors would be wise to include in their group audit methodology.
Extracts from the IRBA Guide on Joint Audit Engagements are presented with key issues which need to be attended to. Issues that remain the same as other audits are not included.
Roles and responsibilities
All International Standards on Audit (ISAs) are relevant to joint audits. ISA 600 includes the following in its definition of a group engagement partner, “Where joint auditors conduct the group audit, the joint engagement partners and their engagement teams collectively constitute the group engagement partner and the group engagement team”.
A joint auditor’s joint responsibility means that the joint auditor is also responsible for the work performed by the other joint auditor(s), and they shall, therefore, jointly ensure that the joint audit engagement is conducted in accordance with the ISAs, and that sufficient and appropriate audit evidence (evidenced through the cross-review) is collectively obtained and documented by all the joint auditors, in order to express a joint auditors’ opinion.
An auditor is liable towards an audit client and/or third party, in accordance with the provisions made in Section 46 of the Auditing Professions Act, 2005.
The responsibility for compliance with the IRBA Code and other relevant ethical requirements rests with each joint auditor individually.
A joint auditors’ opinion is a single audit opinion formed on the financial statements of an entity by two or more separate firms engaged in a joint audit engagement, where the audit opinion is expressed in a joint auditors’ report, signed by all the firms engaged in the joint audit engagement.
The EQCRs determine the scope of their respective reviews pertaining to the joint audit engagement.
Summary of considerations = Responsibility taken
| Responsibilities for | Responsibility taken |
|---|---|
| Group engagement partner | Engagement partners, collectively |
| Group engagement team | Group engagement teams, collectively |
| Joint audit procedures | Each joint auditor for all procedures |
| Joint audit evidence | Each joint auditor for all evidence |
| Joint audit documentation | Each joint auditor for all documentation |
| Ethical and IRBA Code compliance | Each joint auditor, individually |
| Joint audit opinion | Engagement partners, collectively |
| Scope of EQCR | EQCR |
Quality control system: client acceptance and continuance
Prior to the acceptance or continuance of a joint audit engagement, the joint auditors, based on their professional judgment, need to satisfy themselves that there are sufficient appropriate quality control systems in place at each firm(s) that is party to the joint audit engagement.
Summary of considerations
Considerations during client acceptance and continuance to include:
- Quality control system of the other firm
- Percentage split of work between joint auditors poses quality risk.
Consultations
Internal consultations, differences of opinion, and their conclusions should be documented.
Reportable Irregularities
Joint auditors should consider their roles.
Appendix 3 of the IRBA Guide sets out situations where both, or one of the joint auditors are satisfied that a reportable irregularity exists.
Reportable Irregularities
One or both joint auditors can send a report to IRBA, separately or jointly, in one report.
Documentation
For this purpose (quality control by other firm), the joint auditors may need to agree on access to:
- The relevant firm records, resources or information
- Firm monitoring results
- Inspection results
- Letter or Memorandum by each partner to the other, confirming acceptance of responsibility
- Appendix 2 of the IRBA Guide, setting out a list of documentation considerations.
Archiving
The joint auditors establish policies and procedures for assembling the final audit file, in accordance with ISQC 1 and respective firm requirements, and this is ordinarily not more than 60 days after the date of the joint auditors’ report. The assembly period may be included in a formalised joint auditors’ agreement.
The joint auditors confirm to each other, in writing, that their respective portion of the final audit file has been assembled, closed and archived, in accordance with ISQC 1, the ISAs and the IRBA Code. It is not expected to be a common practice, however, that a joint auditor is required to retrieve an archived file for purposes of modification, and the joint auditors are expected to provide notice to each other of the archived engagement file being retrieved for modification, and give details of the executed modifications.
Summary of considerations
- Assembly period and arrangements in the joint auditors’ agreement
- Confirmation to each other on procedures to archive
- Communication to other partner when file retrieved.
Firm rotation
If, at the effective date of the IRBA’s MAFR ruling, the public interest entity has appointed joint auditors and both have had audit tenure of 10 years or more, only one audit firm is required to rotate at the effective date, and the remaining audit firm will be granted an additional two years before rotation is required.
Summary of considerations
- Only one joint auditor rotates at a time.
- If both reach tenure of 10 years or more, only one is required to rotate. The other may remain for two years.
Agreements
In addition to the audit engagement letter, the joint auditors may decide to put in place a formal joint auditors’ agreement that documents their agreement regarding each joint auditor’s duties and obligations, in respect of the joint audit engagement, and the policies and procedures to be followed by the joint auditors in conducting the joint audit engagement.
The IRBA guide sets out possible content of the agreement in paragraph 34.
In addition to a joint audit agreement, in respect of the audit of the financial statements, the entity may engage the firms to provide other assurance-related services that are not prohibited, such as work on interim financial statements. In such instances, further formal agreement(s), similar to joint audit agreements, regulating the firms’ participation in such other assurance-related services, may need to be considered.
Summary of considerations
- Joint auditors’ agreement optional
- Other services to be provided in separate agreement.
EQCR
Each firm may appoint and perform engagement quality control reviews, in accordance with its own policies and procedures. In instances where one of the joint auditors appoints an EQCR, it may be appropriate for the other joint auditor(s) to also appoint an EQCR to ensure that the audit file, as a whole, is subject to engagement quality control review.
The EQCR of each joint auditor may consider the cross-review documentation, which is included in the working papers prepared by the engagement team, depending on the scope of the engagement quality review and areas of significant judgment.
The EQCR may also request access to the working papers of the other joint auditor(s).
The EQCRs may interact with each other for purposes of coordinating the engagement quality control review.
Each EQCR may consider performing a cross review of the other EQCR’s documentation in carrying out their review.
The joint auditors may agree to only one EQCR being required to be appointed jointly for the entire engagement, subject to the consideration of the policies and procedures of the firm(s).
Summary of considerations
- EQCRs to cover the whole file, even if there are two separate EQCRs
- One firm’s EQCR has access to the cross-review documentation and working papers of the other firm
- Principle of reviewing significant judgments applicable to completing the audit file, whether by reviewing cross-review working papers, or access to working papers
- EQCRs may interact with each other
- EQCRs may cross review each other’s work
- Joint auditors may agree on one EQCR.
Audit plan and strategy
To be able to develop a joint audit plan, the joint auditors establish and agree on one overall audit strategy. To cater for differences in methodology, the joint auditors may initially each develop their own audit plan, and then agree on the overall audit strategy to inform the development of the joint audit plan.
The joint auditors agree in writing on the allocation of the work for the efficient conduct of the audit, and communicate this to those charged with governance.
Summary of considerations
• One audit plan and strategy.
New engagements
To ensure clear terms of engagement for all parties involved, a single audit engagement letter is agreed to between the audit client and the joint auditors. It is encouraged that the audit engagement letter makes reference to a joint auditors’ agreement where this has been put in place.
Summary of considerations
• Single engagement letter
• Refer to joint auditors’ agreement, if applicable.
Cross review
A cross review, in the case of a joint audit engagement, refers to the procedure(s) performed by one joint auditor on the audit documentation of the other joint auditor(s).
If any joint auditor is not satisfied with the compliance with independence and other relevant ethical requirements of the other joint auditor(s), the dissatisfied joint auditor applies professional judgment, and considers bringing this to the attention of management and/or those charged with governance (while considering the IRBA Code), declining or resigning from the joint audit engagement.
If a joint auditor, after carrying out the cross review, evaluates and concludes that the procedures performed by the other joint auditor(s) are not in accordance with the audit plan as agreed between the joint auditors, the joint auditor may request that additional procedures be performed by the other joint auditor. Alternatively, if, after carrying out the audit plan as agreed between the joint auditors, a joint auditor concludes that there is insufficient and/or inappropriate audit evidence to support the conclusion reached, the joint auditor should consult with the other joint auditor(s) and agree on the approach to addressing the concerns noted.
Summary of considerations
- Independence, and compliance with relevant ethical requirements
- Confirmation from other auditors that they will comply
- Cross review
- Consideration of in-client continuance
- When reviewed work is inadequate, request additional procedures, or agree on an approach to addressing the concerns.
Communication
The joint auditors obtain and document the joint management representation letter from management and/or those charged with governance. Also, the joint auditors consult with each other on the content of the management representation letter.
A joint auditor communicates with the other joint auditor(s) on a timely basis. Examples of topics communicated are included in paragraph 66 of the IRBA Guide.
The joint auditor(s) establishes an effective communication plan with the other joint auditor(s), such that all joint auditors are aware of the issues being discussed and communicated with management, and those charged with governance.
In joint audit engagements, written communication ‒ such as management letters, letters to those charged with governance, and reports or presentations to the audit committee relating to the audit engagement, management and/or those charged with governance ‒ is made jointly by the joint auditors. This will facilitate consistent communication of the joint views and conclusions of the joint auditors.
Important or critical meetings, including planning meetings or meetings to discuss key risks and significant issues between the joint auditors, as well as periodic meetings with management and/or those charged with governance (including audit committee meetings), are attended by representatives from all the joint auditors, unless otherwise arranged.
Summary of considerations
- Management representation letters prepared jointly, and joint auditors discuss them
- Joint auditors communicate on a timely basis with each other, and keep abreast of communication with management and those charged with governance, and jointly attend such meetings.
Inspection
The joint audit engagement inspection is conducted on all joint auditors and their engagement file(s), as a whole, and is viewed as one audit engagement. One preliminary inspections report and a copy of the list of the complete inspection findings are normally issued to all joint auditors/firms, and the respective responsible engagement partners. This may differ, depending on circumstances.
Joint auditors are expected to provide a consolidated response (‘joint response’) to inspection findings. Inconsistencies in responses (or any difficulty experienced in the relationship between the joint auditors) may result in a firm-level finding being reported.
Summary of considerations
• Joint audit engagement file seen as one
• One set of findings and one report
• Findings reflect on all engagement partners
• Responses to findings are consolidated into one.
In summary
Audit procedures on the consolidation process where joint auditors are appointed, are found to be very limited, in general, and do not reflect the careful consideration of responsibilities, communication requirements, and quality control. LEAF can assist firms by performing thorough file reviews, providing practical advice and training staff on the relevant requirements.
References
1. IAASB: International Standard on Auditing 600 (ISA 600), Special considerations – Audits of group financial statements (Including the work of component auditors)
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