1. Clarified ISAs ISA 600 - Groups
John Kellas
November 2009

2. 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

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

4. ISA 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. ISA 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

11. 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

12. 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

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

14. ISA 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

15. 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