Clarified ISAs ISA 600 - Groups John Kellas November 2009

ISA 600 – Why revise? Political necessity – required by EC Focus required on ‘sole responsibility’ Current standard limited to other auditors More comprehensive and rigorous standard needed to achieve more consistent practice throughout the world

ISA 600 – Key points Scope Group auditor and component auditor Audit scoping and risk analysis Materiality Approach to components

ISA 600 - Scope Not restricted to conventional group of holding company and subsidiaries Distinction is rather whether reporting entity has a component Component – entity or activity for which financial information is prepared for inclusion in ‘group financial statements’ May also be useful where other auditors used for specific purposes

ISA 600 – Scope (2) Objective of group auditor: (a) to determine whether to act (b) if acting: (i) to communicate clearly with component auditors (ii) to obtain sufficient appropriate audit evidence about components and consolidation process

ISA 600 – Group auditor and component auditor Important distinction is between group engagement team and other auditors involved in the audit The group auditor is required to drive the audit in a proactive and involved way The principle does not depend upon whether component auditor is from same firm or not

ISA 600 – Audit scoping and risk analysis Sole responsibility principle leads to group auditor responsibility for scope, risk analysis, audit performance and conclusions Of course, some work carried out by other auditors but group auditor must instruct and be sufficiently involved An understanding of component auditors is therefore required

ISA 600 – Audit scoping and risk analysis (2) Group auditor to: Understand group, including group-wide controls and components Understand consolidation process Assess risks of m.m. of group financial statements Determine type of work to be carried out and group auditor’s involvement in it

ISA 600 – Group auditor ‘involvement’ Group auditor to be ‘involved to extent necessary to obtain sufficient appropriate audit evidence’ Group auditor entitled to take account of understanding of component auditor ISA specifies minimum involvement where component is significant Access to component auditor or information

ISA 600 - Materiality Normal principles apply, but components complicate Group auditor determines group overall materiality, and any special materiality for specific transactions, balances or disclosures Group auditor also determines component materiality which is required to be less than group materiality

ISA 600 – Materiality (2) Group auditor also determines what ‘clearly trivial’ means in context of group Normally, where component is audited for group purposes, component auditor sets performance materiality (in context of component materiality set by group auditor) and group auditor evaluates

ISA 600 – Approach to components Group auditor identifies significant components (either because of individual financial significance or likelihood of containing a significant risk) Audit for components that are individually significant More flexibility for components that are significant because of significant risk

ISA 600 – Approach to components (2) Other components – at least analytical review, but further procedures required as group auditor deems necessary

ISA 600 - Communications Communication to component auditors: instructions, context, ethical requirements, information Communication from component auditors: agreement to instructions, findings and conclusions (no standard form of report) Communications with management and directors

ISA 600 - Conclusion A complex and detailed standard Careful study of whole ISA required Will probably require some changes in approach for all firms May require significant changes for some firms Major effect may be when component auditors differ from group engagement team