Lecture 4: Group Audit (Part 1) Flashcards
What is the Audit Standard relating to Group Audits?
ISA 600: Revised and Redrafted, Special Considerations (Audit of Group Financial Statements including the work of component auditors). ISA 600 governs the performance of group auditors.
What is the responsibility of a Group Auditor?
They’re in charged of providing audit opinion on the group financial statements.
What are some of the components of the group financial statements?
Subsidiaries, associates, joint ventures and branches.
Who can audit components’ financial statements?
It can be audited either by group auditors, component auditors or other auditors.
What are the objectives of Group Auditors?
1) establish that it is appropriate for them to act as the group auditor
2) gather sufficient & appropriate evidence to reach an opinion on the consolidated F.S.
What are the 3 steps involved in producing the group financial statement?
Stage 1: Gather evidence on the components
Stage 2: Audit the consolidation
Stage 3: Issue the group opinion
Stage 1: Gather evidence on the components
- involves planning & risk assessment
- group auditor must understand the group structure, significance (materiality) of each component, mechanics of consolidation process and risk of material misstatement presented by each co.’s F.S.
- materiality levels should be established for the group in aggregate as well as for the individually significant component
- involvement in component auditors’ work
- group auditor cannot simply rely on another auditor’s opinion on the F.S. of the co.
- a material misstatement in the F.S. of the component co. could become a material misstatement in the F.S. of the group
- group auditor can either review a report of the work done by component auditors or issue questionnaires to the component auditor
- after reviewing the work of component auditors, the group auditor can either proceed w/ the consolidated F.S. or identify further work to be carried out to ensure that the F.S. are free from material misstatement.
If in stage 1 after the group auditor has reviewed the work done by the component auditors and is still not satisfied or convinced that it is free from material misstatements, then what are the steps that can be taken by the group auditor?
- review component auditor’s overall strategy
- perform risk assessment at the co. level
- join closing meetings w/ component auditor & management of the co.
- review parts of component auditor’s working papers
- discuss w/ component auditor & management regarding those business activities that are significant to the group
- discuss w/ component auditor the sensitivity of the co.’s F.S. to material error/ misstatement
- review component auditor’s documentation of identified significant risks & conclusion arrived at those risks
After taking all the necessary actions in stage 1, what should the group auditor do?
The group auditor should have obtained sufficient evidence to show that the individual component co.’s F.S. are free from material misstatement, and are a sound basis for the preparation of the consol F.S.
Stage 2: Auditing the consolidation
- this involves the consolidation process
- group auditor must plan the audit procedures to be performed on the consolidation process. Thorough planning is essential to ensure that audit risk is minimized
Types of audit procedures: - check that figures taken into consolidation have been accurately extracted from the F.S. of the components
- evaluate the classifications of the components of the group (ie: are they properly categorized as associates, joint ventures and subsidiaries)
- review disclosure necessary in the group F.S. (ie: related party transactions)
- investigate treatment of any components which have a different financial year end from the rest of the group
- gather evidence appropriate to the specific consolidation adjustments made necessary by financial reporting standards (ie: goodwill & impairment review, cancellation of intra-group transactions, provision of unrealized profits due to inter-company transactions, FV adjustments, retranslation of a foreign currency in the F.S.)
Group auditors must communicate w/ component auditors the evidences that they are expected to gather. When is this done?
This communication between the group auditor and component auditor is usually performed at the planning stage.
Stage 3: Issuing the group audit opinion
- group auditor issues an opinion on the consolidated (group) financial statement
- this step is done after a thorough review of all audit evidence gather
- the group auditor must gather sufficient & appropriate evidence in order to issue an opinion on the consolidated F.S.
What is Joint Auditing?
It is when 2 audit firms are appointed to jointly provide an opinion on a set of F.S.
What are the benefits of Joint Auditing?
- When a new component is acquired by the group, it’s advantageous to keep the subsidiary’s existing audit firm, which will have already built up considerable knowledge & experiences of the business component
- group auditor should be appointed together w/ the existing component auditor to jointly provide an opinion on the individual F.S. of co.
- group auditor & the component auditor can work together to plan the audit, gather evidence, review the work done & finally provide an opinion
- this provides better availability of resources & the provision of a higher quality audit & assess to staff from both firms of auditor (improves audit efficiency)
What are the few disadvantages of joint auditing?
- difficult for 2 firms to work together if they use diff audit methods
- takes up quite some time to develop a joint audit approach
- cost implication of client, it’s more expensive definitely to use 2 firms of auditors to provide an audit opinion
