Auditing Standard ASA 600 Special Considerations—Audits of a Group Financial Report (Including the Work of Component Auditors) (Cth)
| ASA 600 (May 2022) |
Auditing Standard ASA 600
Special Considerations—Audits of a Group Financial Report (Including the Work of Component Auditors)
Issued by the Auditing and Assurance Standards Board
Obtaining a Copy of this Auditing Standard
This Auditing Standard is available on the Auditing and Assurance Standards Board (AUASB) website: Details
| Auditing and Assurance Standards Board Level 20, 500 Collins Street Melbourne Victoria 3000 AUSTRALIA | Phone: (03) 8080 7400 Postal Address: PO Box 204, Collins Street West |
COPYRIGHT
© 2022 Commonwealth of Australia. The text, graphics and layout of this Auditing Standard are protected by Australian copyright law and the comparable law of other countries. Reproduction within Australia in unaltered form (retaining this notice) is permitted for personal and non‑commercial use subject to the inclusion of an acknowledgment of the source as being the Australian Auditing and Assurance Standards Board (AUASB).
Requests and enquiries concerning reproduction and rights for commercial purposes within Australia should be addressed to the Technical Director, Auditing and Assurance Standards Board, PO Box 204, Collins Street West, Melbourne, Victoria 8007 or sent to [email protected]. Otherwise, no part of this Auditing Standard may be reproduced, stored or transmitted in any form or by any means without the prior written permission of the AUASB except as permitted by law.
This Auditing Standard reproduces substantial parts of the corresponding International Standard on Auditing issued by the International Auditing and Assurance Standards Board (IAASB) and published by the International Federation of Accountants (IFAC), in the manner described in the statement on Conformity with International Standards on Auditing. The AUASB acknowledges that IFAC is the owner of copyright in the International Standard on Auditing incorporated in this Auditing Standard throughout the world.
All existing rights in this material are reserved outside Australia. Reproduction outside Australia in unaltered form (retaining this notice) is permitted for personal and non-commercial use only.
Further information and requests for authorisation to reproduce this Auditing Standard for commercial purposes outside Australia should be addressed to the Technical Director, Auditing and Assurance Standards Board, PO Box 204, Collins Street West, Melbourne, Victoria 8007 or sent to [email protected]. Any decision to approve a request may also require the agreement of IFAC.
ISSN 1833-4393
CONTENTS
PREFACE
AUTHORITY STATEMENT
CONFORMITY WITH INTERNATIONAL STANDARDS ON AUDITING
Paragraphs
Application.......................................................................................................... Aus 0.1-Aus 0.2
Operative Date................................................................................................................. Aus 0.3
Introduction
Scope of this Auditing Standard............................................................................................. 1-11
Effective Date............................................................................................................................ 12
Objectives................................................................................................................................. 13
Definitions............................................................................................................................ 14-15
Requirements
Leadership Responsibilities for Managing and Achieving Quality on a Group Audit................. 16
Acceptance and Continuance............................................................................................... 17-21
Overall Group Audit Strategy and Group Audit Plan............................................................ 22-29
Understanding the Group and Its Environment, the Applicable Financial Reporting Framework and the Group’s System of Internal Control.................................................................................... 30-32
Identifying and Assessing the Risks of Material Misstatement.............................................. 33-34
Materiality............................................................................................................................ 35-36
Responding to the Assessed Risks of Material Misstatement................................................ 37-44
Evaluating the Component Auditor’s Communications and the Adequacy of Their Work... 45-48
Subsequent Events................................................................................................................ 49-50
Evaluating the Sufficiency and Appropriateness of Audit Evidence Obtained..................... 51-52
Auditor’s Report........................................................................................................................ 53
Communication with Group Management and Those Charged with Governance of the Group 54-58
Documentation.......................................................................................................................... 59
Application and Other Explanatory Material
Scope of this ASA............................................................................................................. A1-A18
Definitions...................................................................................................................... A19-A28
Leadership Responsibilities for Managing and Achieving Quality on a Group Audit...... A29-A31
Acceptance and Continuance.......................................................................................... A32-A46
Overall Group Audit Strategy and Group Audit Plan....................................................... A47-A87
Understanding the Group and Its Environment, the Applicable Financial Reporting Framework and the Group’s System of Internal Control............................................................................ A88-A107
Identifying and Assessing the Risks of Material Misstatement.................................... A108-A115
Materiality................................................................................................................... A116-A123
Responding to the Assessed Risks of Material Misstatement....................................... A124-A143
Evaluating the Component Auditor’s Communication and the Adequacy of Their Work A144-A149
Subsequent Events................................................................................................................ A150
Evaluating the Sufficiency and Appropriateness of Audit Evidence Obtained............ A151-A156
Auditor’s Report......................................................................................................... A157-A158
Communication with Group Management and Those Charged with Governance of the Group A159-A165
Documentation............................................................................................................ A166-A182
Appendix 1: Illustration of Independent Auditor’s Report When the Group Auditor Is Not Able to Obtain Sufficient Appropriate Audit Evidence on Which to Base the Group Audit Opinion – General Purpose Financial Report, Qualified Opinion under the Corporations Act 2001
Appendix 2: Understanding the Group’s System of Internal Control
Appendix 3: Examples of Events or Conditions that May Give Rise to Risks of Material Misstatement of the Group Financial Report
PREFACE
Reasons for Issuing ASA 600
The AUASB issues Auditing Standard ASA 600 Special Considerations—Audits of a Group Financial Report (Including the Work of Component Auditors) pursuant to the requirements of the legislative provisions and the Strategic Direction explained below.
The AUASB is a non-corporate Commonwealth entity of the Australian Government established under section 227A of the Australian Securities and Investments Commission Act 2001, as amended (ASIC Act). Under section 336 of the Corporations Act 2001, the AUASB may make Auditing Standards for the purposes of the corporations legislation. These Auditing Standards are legislative instruments under the Legislation Act 2003.
Under the Strategic Direction given to the AUASB by the Financial Reporting Council (FRC), the AUASB is required, inter alia, to develop auditing standards that have a clear public interest focus and are of the highest quality.
Main Features
This Auditing Standard represents the Australian equivalent of ISA 600 (Revised) Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors) (April 2022) and will replace the current ASA 600 issued by the AUASB in October 2009 (as amended).
This Auditing Standard contains differences from the ISA 600 (Revised), which have been made in the Application and Other Explanatory Material and Appendices to reflect Australian regulatory requirements.
AUTHORITY STATEMENT
The Auditing and Assurance Standards Board (AUASB) makes this Auditing Standard ASA 600 Special Considerations—Audits of a Group Financial Report (Including the Work of Component Auditors) pursuant to section 227B of the Australian Securities and Investments Commission Act 2001 and section 336 of the Corporations Act 2001.
This Auditing Standard is to be read in conjunction with ASA 101 Preamble to AUASB Standards, which sets out how AUASB Standards are to be understood, interpreted and applied. This Auditing Standard is to be read also in conjunction with ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards.
Dated: 13 May 2022 W R Edge
Chair - AUASB
Conformity with International Standards on Auditing
This Auditing Standard conforms with International Standard on Auditing ISA 600 (Revised) Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors) issued by the International Auditing and Assurance Standards Board (IAASB), an independent standard‑setting board of the International Federation of Accountants (IFAC).
Paragraphs that have been added to this Auditing Standard (and do not appear in the text of the equivalent ISA) are identified with the prefix “Aus”.
This Auditing Standard incorporates terminology and definitions used in Australia.
The equivalent requirements and related application and other explanatory material included in ISA 600 (Revised) in respect of “relevant ethical requirements”, have been included in Auditing Standard, ASA 102 Compliance with Ethical Requirements when Performing Audits, Reviews and Other Assurance Engagements. There is no international equivalent to ASA 102.
Compliance with this Auditing Standard enables compliance with ISA 600 (Revised).
AUDITING STANDARD ASA 600
Special Considerations—Audits of a Group Financial Report (Including the Work of Component Auditors)
Application
Aus 0.1 This Auditing Standard applies to:
(a) an audit of a financial report for a financial year, or an audit of a financial report for a half-year, in accordance with the Corporations Act 2001; and
(b) an audit of a financial report, or a complete set of financial statements, for any other purpose.
Aus 0.2 This Auditing Standard also applies, as appropriate, to an audit of other historical financial information.
Operative Date
Aus 0.3 This Auditing Standard is operative for financial reporting periods commencing on or after 15 December 2023. Early adoption of this Auditing Standard is permitted prior to this date.
Introduction
Scope of this Auditing Standard
The Australian Auditing Standards (ASAs) apply to the audit of a group financial report (a group audit). This ASA deals with special considerations that apply to a group audit, including in those circumstances when component auditors are involved. The requirements and guidance in this ASA refer to, or expand on, the application of other relevant ASAs to a group audit, in particular ASA 220,[1] ASA 230,[2] ASA 300,[3] ASA 315,[4] and ASA 330.[5] (Ref: Para. A1–A2)
[1] See ASA 220 Quality Management for an Audit of a Financial Report and Other Historical Financial Information.
[2] See ASA 230 Audit Documentation.
[3] See ASA 300 Planning an Audit of a Financial Report.
[4] See ASA 315 Identifying and Assessing the Risks of Material Misstatement.
[5] See ASA 330 The Auditor’s Responses to Assessed Risks.
A group financial report includes the financial information of more than one entity or business unit through a consolidation process, as described in paragraph 14(k). The term consolidation process as used in this ASA refers not only to the preparation of a consolidated financial report in accordance with the applicable financial reporting framework, but also to the presentation of a combined financial report, and to the aggregation of the financial information of entities or business units such as branches or divisions. (Ref: Para. A3–A5, A27)
As explained in ASA 220,[6] this ASA, adapted as necessary in the circumstances, may also be useful in an audit of a financial report other than a group audit when the engagement team includes individuals from another firm. For example, this ASA may be useful when involving such an individual to attend a physical inventory count, inspect property, plant and equipment, or perform audit procedures at a shared service centre at a remote location.
[6] See ASA 220, paragraph A1.
Groups and Components
A group may be organised in various ways. For example, a group may be organised by legal or other entities (e.g., a parent and one or more subsidiaries, joint ventures, or investments accounted for by the equity method). Alternatively, the group may be organised by geography, by other economic units (including branches or divisions), or by functions or business activities. In this ASA, these different forms of organisation are collectively referred to as “entities or business units.” (Ref: Para. A6)
The group auditor determines an appropriate approach to planning and performing audit procedures to respond to the assessed risks of material misstatement of the group financial report. For this purpose, the group auditor uses professional judgement in determining the components at which audit work will be performed. This determination is based on the group auditor’s understanding of the group and its environment, and other factors such as the ability to perform audit procedures centrally, the presence of shared service centres, or the existence of common information systems and internal control. (Ref: Para. A7–A9)
Involvement of Component Auditors
ASA 220[7] requires the engagement partner to determine that sufficient and appropriate resources to perform the engagement are assigned or made available to the engagement team in a timely manner. In a group audit, such resources may include component auditors. Therefore, this ASA requires the group auditor to determine the nature, timing and extent of involvement of component auditors.
[7] See ASA 220, paragraph 25.
The group auditor may involve component auditors to provide information, or to perform audit work, to fulfill the requirements of this ASA. Component auditors may have greater experience with, and a more in-depth knowledge of, the components and their environments (including laws and regulations, business practices, language, and culture) than the group auditor. Accordingly, component auditors can be, and often are, involved in all phases of the group audit. (Ref: Para. A10–A11)
Audit risk is a function of the risks of material misstatement and detection risk.[8] Detection risk in a group audit includes the risk that a component auditor may not detect a misstatement in the financial information of a component that could cause a material misstatement of the group financial report, and that the group auditor may not detect this misstatement. Accordingly, this ASA requires sufficient and appropriate involvement by the group engagement partner or group auditor, as applicable, in the work of component auditors and emphasises the importance of two-way communication between the group auditor and component auditors. In addition, this ASA explains the matters that the group auditor takes into account when determining the nature, timing and extent of the direction and supervision of component auditors and the review of their work. (Ref: Para. A12–A13)
[8] See ASA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Australian Auditing Standards, paragraph A35.
Professional Scepticism
In accordance with ASA 200,[9] the engagement team is required to plan and perform the group audit with professional scepticism and to exercise professional judgement. The appropriate exercise of professional scepticism may be demonstrated through the actions and communications of the engagement team, including emphasising the importance of each engagement team member exercising professional scepticism throughout the group audit. Such actions and communications may include specific steps to mitigate impediments that may impair the appropriate exercise of professional scepticism. (Ref: Para. A14–A18)
[9] See ASA 200, paragraphs 15‒16.
Scalability
This ASA is intended for all group audits, regardless of size or complexity. However, the requirements of this ASA are intended to be applied in the context of the nature and circumstances of each group audit. For example, when a group audit is carried out entirely by the group auditor, some requirements in this ASA are not relevant because they are conditional on the involvement of component auditors. This may be the case when the group auditor is able to perform audit procedures centrally or is able to perform procedures at the components without involving component auditors. The guidance in paragraphs A119 and A120 also may be helpful in applying this ASA in these circumstances.
Responsibilities of the Group Engagement Partner and Group Auditor
The group engagement partner remains ultimately responsible, and therefore accountable, for compliance with the requirements of this ASA. The term “the group engagement partner shall take responsibility for…” or “the group auditor shall take responsibility for…” is used for those requirements when the group engagement partner or group auditor, respectively, is permitted to assign the design or performance of procedures, tasks or actions to other appropriately skilled or suitably experienced members of the engagement team, including component auditors. For other requirements, this ASA expressly intends that the requirement or responsibility be fulfilled by the group engagement partner or group auditor, as applicable, and the group engagement partner or group auditor may obtain information from the firm or other members of the engagement team. (Ref: Para. A29)
Effective Date
[Deleted by the AUASB. Refer Aus 0.3]
Objectives
The objectives of the auditor are to:
(a)With respect to the acceptance and continuance of the group audit engagement, determine whether sufficient appropriate audit evidence can reasonably be expected to be obtained to provide a basis for forming an opinion on the group financial report;
(b)Identify and assess the risks of material misstatement of the group financial report, whether due to fraud or error, and plan and perform further audit procedures to appropriately respond to those assessed risks;
(c)Be sufficiently and appropriately involved in the work of component auditors throughout the group audit, including communicating clearly about the scope and timing of their work, and evaluating the results of that work; and
(d)Evaluate whether sufficient appropriate audit evidence has been obtained from the audit procedures performed, including with respect to the work performed by component auditors, as a basis for forming an opinion on the group financial report.
Definitions
For the purposes of this Auditing Standard, the following terms have the meanings attributed below:
(a)Aggregation risk – The probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial report as a whole. (Ref: Para. A19)
(b)Component – An entity, business unit, function or business activity, or some combination thereof, determined by the group auditor for purposes of planning and performing audit procedures in a group audit. (Ref: Para. A20)
(c)Component auditor – An auditor who performs audit work related to a component for purposes of the group audit. A component auditor is a part of the engagement team[10] for a group audit. (Ref: Para. A21–A23)
[10] See ASA 220, paragraph 12(d).
(d)Component management – Management responsible for a component. (Ref: Para. A24)
(e)Component performance materiality – An amount set by the group auditor to reduce aggregation risk to an appropriately low level for purposes of planning and performing audit procedures in relation to a component.
(f)Group – A reporting entity for which a group financial report is prepared.
(g)Group audit – The audit of a group financial report.
(h)Group auditor – The group engagement partner and members of the engagement team other than component auditors. The group auditor is responsible for:
(i)Establishing the overall group audit strategy and group audit plan;
(ii)Directing and supervising component auditors and reviewing their work;
(iii)Evaluating the conclusions drawn from the audit evidence obtained as the basis for forming an opinion on the group financial report.
(i)Group audit opinion – The audit opinion on the group financial report.
(j)Group engagement partner – The engagement partner [11] who is responsible for the group audit. (Ref: Para. A25)
[11] See ASA 220, paragraph 12(a).
(k)Group financial report – A financial report that includes the financial information of more than one entity or business unit through a consolidation process. For purposes of this ASA, a consolidation process includes: (Ref: Para. A26–A28)
(i)Consolidation, proportionate consolidation, or an equity method of accounting;
(ii)The presentation in a combined financial report of the financial information of entities or business units that have no parent but are under common control or common management; or
(iii)The aggregation of the financial information of entities or business units such as branches or divisions.
(l)Group management – Management responsible for the preparation of the group financial report.
(m)Group performance materiality – Performance materiality [12] in relation to the group financial report as a whole, as determined by the group auditor.
[12] See ASA 320 Materiality in Planning and Performing an Audit, paragraphs 9 and 11.
Reference in this ASA to “the applicable financial reporting framework” means the financial reporting framework that applies to the group financial report.
Requirements
Leadership Responsibilities for Managing and Achieving Quality on a Group Audit
In applying ASA 220,[13] the group engagement partner is required to take overall responsibility for managing and achieving quality on the group audit engagement. In doing so, the group engagement partner shall: (Ref: Para. A29–A30)
[13] See ASA 220, paragraph 13.
(a)Take responsibility for creating an environment for the group audit engagement that emphasises the expected behaviour of engagement team members. (Ref: Para. A31)
(b)Be sufficiently and appropriately involved throughout the group audit engagement, including in the work of component auditors, such that the group engagement partner has the basis for determining whether the significant judgements made, and the conclusions reached, are appropriate given the nature and circumstances of the group audit engagement.
Acceptance and Continuance
Before accepting or continuing the group audit engagement, the group engagement partner shall determine whether sufficient appropriate audit evidence can reasonably be expected to be obtained to provide a basis for forming an opinion on the group financial report. (Ref: Para. A32–A35)
If, after the acceptance or continuance of the group audit engagement, the group engagement partner concludes that sufficient appropriate audit evidence cannot be obtained, the group engagement partner shall consider the possible effects on the group audit. (Ref: Para. A36)
Terms of the Engagement
In applying ASA 210,[14] the group auditor shall obtain the agreement of group management that it acknowledges and understands its responsibility to provide the engagement team with: (Ref: Para. A37)
[14] See ASA 210 Agreeing the Terms of Audit Engagements, paragraphs 6(b) and 8(b).
(a)Access to all information of which group management is aware that is relevant to the preparation of the group financial report such as records, documentation and other matters;
(b)Additional information that the engagement team may request from group management or component management for the purpose of the group audit; and
(c)Unrestricted access to persons within the group from whom the engagement team determines it necessary to obtain audit evidence.
Restrictions on Access to Information or People Outside the Control of Group Management
If the group engagement partner concludes that group management cannot provide the engagement team with access to information or unrestricted access to persons within the group due to restrictions that are outside the control of group management, the group engagement partner shall consider the possible effects on the group audit. (Ref: Para. A38–A46)
Restrictions on Access to Information or People Imposed by Group Management
If the group engagement partner concludes that: (Ref: Para. A43–A46)
(a)It will not be possible for the group auditor to obtain sufficient appropriate audit evidence due to restrictions imposed by group management; and
(b)The possible effect of this limitation will result in a disclaimer of opinion on the group financial report,
the group engagement partner shall either:
(i)In the case of an initial engagement, not accept the engagement, or, in the case of a recurring engagement, withdraw from the engagement, when withdrawal is possible under applicable law or regulation; or
(ii)When law or regulation prohibit an auditor from declining an engagement or when withdrawal from an engagement is not otherwise possible, having performed the audit of the group financial report to the extent possible, disclaim an opinion on the group financial report.
Overall Group Audit Strategy and Group Audit Plan
In applying ASA 300,[15] the group auditor shall establish, and update as necessary, an overall group audit strategy and group audit plan. In doing so, the group auditor shall determine: (Ref: Para. A47–A50)
[15] See ASA 300, paragraphs 7–11.
(a)The components at which audit work will be performed; and (Ref: Para. A51)
(b)The resources needed to perform the group audit engagement, including the nature, timing and extent to which component auditors are to be involved. (Ref: Para. A52–A56)
Considerations When Component Auditors Are Involved
In establishing the overall group audit strategy and group audit plan, the group engagement partner shall evaluate whether the group auditor will be able to be sufficiently and appropriately involved in the work of the component auditor. (Ref: Para. A57)
As part of the evaluation in paragraph 23, the group auditor shall request the component auditor to confirm that the component auditor will cooperate with the group auditor, including whether the component auditor will perform the work requested by the group auditor. (Ref: Para. A58)
Relevant Ethical Requirements, Including Those Related to Independence
In applying ASA 220,[16] the group engagement partner shall take responsibility for: (Ref: Para. A59–A60, A87)
[16] See ASA 220, paragraph 17.
(a)Component auditors having been made aware of relevant ethical requirements that are applicable given the nature and circumstances of the group audit engagement; and
(b)Confirming whether the component auditors understand and will comply with the relevant ethical requirements, including those related to independence, that apply to the group audit engagement.
Engagement Resources
In applying ASA 220,[17] the group engagement partner shall: (Ref: Para. A61–A68)
[17] See ASA 220, paragraphs 25–26.
(a)Determine that component auditors have the appropriate competence and capabilities, including sufficient time, to perform the assigned audit procedures at the component; and
(b)If information about the results of the monitoring and remediation process or external inspections related to the component auditor has been provided by the group auditor’s firm or has otherwise been made available to the group engagement partner, determine the relevance of such information to the group auditor’s determination in paragraph 26(a).
The group auditor shall obtain sufficient appropriate audit evidence relating to the work to be performed at the component without involving the component auditor if:
(a)The component auditor does not comply with the relevant ethical requirements, including those related to independence, that apply to the group audit engagement;[18] or (Ref: Para. A69–A70)
[18] See ASA 200, paragraph 14.
(b)The group engagement partner has serious concerns about the matters in paragraphs 23–26. (Ref: Para. A71)
Engagement Performance
In applying ASA 220,[19] the group engagement partner shall take responsibility for the nature, timing and extent of direction and supervision of component auditors and the review of their work, taking into account: (Ref: Para. A72–A77)
[19] See ASA 220, paragraph 29.
(a)Areas of higher assessed risks of material misstatement of the group financial report, or significant risks identified in accordance with ASA 315; and
(b)Areas in the audit of the group financial report that involve significant judgement.
Communications with Component Auditors
The group auditor shall communicate with component auditors about their respective responsibilities and the group auditor's expectations, including an expectation that communications between the group auditor and component auditors take place at appropriate times throughout the group audit. (Ref: Para. A78–A87)
Understanding the Group and Its Environment, the Applicable Financial Reporting Framework and the Group’s System of Internal Control
In applying ASA 315,[20] the group auditor shall take responsibility for obtaining an understanding of the following: (Ref: Para. A88–A92)
[20] See ASA 315, paragraphs 19–27.
(a)The group and its environment, including: (Ref: Para. A93–A95)
(i)The group’s organisational structure and its business model, including:
a.The locations in which the group has its operations or activities;
b.The nature of the group’s operations or activities and the extent to which they are similar across the group; and
c.The extent to which the group’s business model integrates the use of information technology (IT);
(ii)Regulatory factors impacting the entities and business units in the group; and
(iii)The measures used internally and externally to assess the financial performance of the entities or business units;
(b)The applicable financial reporting framework and the consistency of accounting policies and practices across the group; and
(c)The group’s system of internal control, including:
(i)The nature and extent of commonality of controls; (Ref: Para. A96–A99, A102)
(ii)Whether, and if so, how, the group centralises activities relevant to financial reporting; (Ref: Para. A100–A102)
(iii)The consolidation process used by the group, including sub-consolidations, if any, and consolidation adjustments; and
(iv)How group management communicates significant matters that support the preparation of the group financial report and related financial reporting responsibilities in the information system and other components of the group’s system of internal control to management of entities or business units. (Ref: Para. A103–A105)
Considerations When Component Auditors Are Involved
The group auditor shall communicate to component auditors on a timely basis: (Ref: Para. A106)
(a)Matters that the group auditor determines to be relevant to the component auditor’s design or performance of risk assessment procedures for purposes of the group audit;
(b)In applying ASA 550,[21] related party relationships or transactions identified by group management, and any other related parties of which the group auditor is aware, that are relevant to the work of the component auditor; and (Ref: Para. A107)
[21] See ASA 550 Related Parties, paragraph 17.
(c)In applying ASA 570,[22] events or conditions identified by group management or the group auditor that may cast significant doubt on the group’s ability to continue as a going concern that are relevant to the work of the component auditor.
[22] See ASA 570 Going Concern.
The group auditor shall request component auditors to communicate on a timely basis:
(a)Matters related to the financial information of the component that the component auditor determines to be relevant to the identification and assessment of the risks of material misstatement of the group financial report, whether due to fraud or error;
(b)Related party relationships not previously identified by group management or the group auditor; and (Ref: Para. A107)
(c)Any events or conditions identified by the component auditor that may cast significant doubt on the group’s ability to continue as a going concern.
Identifying and Assessing the Risks of Material Misstatement
In applying ASA 315,[23] based on the understanding obtained in paragraph 30, the group auditor shall take responsibility for the identification and assessment of the risks of material misstatement of the group financial report, including with respect to the consolidation process. (Ref: Para. A108–A113)
[23] See ASA 315, paragraphs 28‒34.
Considerations When Component Auditors Are Involved
In applying ASA 315,[24] the group auditor shall evaluate whether the audit evidence obtained from the risk assessment procedures performed by the group auditor and component auditors provides an appropriate basis for the identification and assessment of the risks of material misstatement of the group financial report. (Ref: Para. A114–A115)
[24] See ASA 315, paragraph 35.
Materiality
In applying ASA 320[25] and ASA 450,[26] when classes of transactions, account balances or disclosures in the group financial report is disaggregated across components, for purposes of planning and performing audit procedures, the group auditor shall determine:
[25] See ASA 320, paragraph 11.
[26] See ASA 450 Evaluation of Misstatements Identified during the Audit, paragraph 5.
(a)Component performance materiality. To address aggregation risk, such amount shall be lower than group performance materiality. (Ref: Para. A116–A120)
(b)The threshold above which misstatements identified in the component financial information are to be communicated to the group auditor. Such threshold shall not exceed the amount regarded as clearly trivial to the group financial report. (Ref: Para. A121)
Considerations When Component Auditors Are Involved
The group auditor shall communicate to the component auditor the amounts determined in accordance with paragraph 35. (Ref: Para: A122–A123)
Responding to the Assessed Risks of Material Misstatement
In applying ASA 330,[27] the group auditor shall take responsibility for the nature, timing and extent of further audit procedures to be performed, including determining the components at which to perform further audit procedures and the nature, timing and extent of the work to be performed at those components. (Ref: Para. A124–A139)
[27] See ASA 330, paragraphs 6‒7.
Consolidation Process
The group auditor shall take responsibility for designing and performing further audit procedures to respond to the assessed risks of material misstatement of the group financial report arising from the consolidation process. This shall include: (Ref: Para. A140)
(a)Evaluating whether all entities and business units have been included in the group financial report as required by the applicable financial reporting framework and, if applicable, for designing and performing further audit procedures on sub-consolidations;
(b)Evaluating the appropriateness, completeness and accuracy of consolidation adjustments and reclassifications; (Ref: Para. A141)
(c)Evaluating whether management’s judgements made in the consolidation process give rise to indicators of possible management bias; and
(d)Responding to assessed risks of material misstatement due to fraud arising from the consolidation process.
If the financial information of an entity or business unit has not been prepared in accordance with the same accounting policies applied to the group financial report, the group auditor shall evaluate whether the financial information has been appropriately adjusted for purposes of preparing and presenting the group financial report.
If the group financial report includes the financial information of an entity or business unit with a financial reporting period-end that differs from that of the group, the group auditor shall take responsibility for evaluating whether appropriate adjustments have been made to that financial information in accordance with the applicable financial reporting framework.
Considerations When Component Auditors Are Involved
When the group auditor involves component auditors in the design or performance of further audit procedures, the group auditor shall communicate with the component auditor about matters that the group auditor or component auditor determine to be relevant to the design of responses to the assessed risks of material misstatement of the group financial report.
For areas of higher assessed risks of material misstatement of the group financial report, or significant risks identified in accordance with ASA 315, on which a component auditor is determining the further audit procedures to be performed, the group auditor shall evaluate the appropriateness of the design and performance of those further audit procedures. (Ref: Para. A142)
When component auditors perform further audit procedures on the consolidation process, including on sub-consolidations, the group auditor shall determine the nature and extent of direction and supervision of component auditors and the review of their work. (Ref: Para. A143)
The group auditor shall determine whether the financial information identified in the component auditor’s communication (see paragraph 45(a)) is the financial information that is incorporated in the group financial report.
Evaluating the Component Auditor’s Communications and the Adequacy of Their Work
The group auditor shall request the component auditor to communicate matters relevant to the group auditor’s conclusion with regard to the group audit. Such communication shall include: (Ref: Para. A144)
(a)Identification of the financial information on which the component auditor has been requested to perform audit procedures;
(b)Whether the component auditor has performed the work requested by the group auditor;
(c)Whether the component auditor has complied with the relevant ethical requirements, including those related to independence, that apply to the group audit engagement;
(d)Information about instances of non-compliance with laws or regulations;
(e)Corrected and uncorrected misstatements of the component financial information identified by the component auditor and that are above the threshold communicated by the group auditor in accordance with paragraph 36; (Ref: Para. A145)
(f)Indicators of possible management bias;
(g)Description of any deficiencies in the system of internal control identified in connection with the audit procedures performed;
(h)Fraud or suspected fraud involving component management, employees who have significant roles in the group’s system of internal control at the component or others where the fraud resulted in a material misstatement of the component financial information;
(i)Other significant matters that the component auditor communicated or expects to communicate to component management or those charged with governance of the component;
(j)Any other matters that may be relevant to the group audit, or that the component auditor determines are appropriate to draw to the attention of the group auditor, including exceptions noted in the written representations that the component auditor requested from component management; and
(k)The component auditor’s overall findings or conclusions. (Ref: Para. A146)
The group auditor shall:
(a)Discuss significant matters arising from communications with the component auditor, including those in accordance with paragraph 45, with the component auditor, component management or group management, as appropriate; and
(b)Evaluate whether communications with the component auditor are adequate for the group auditor’s purposes. If such communications are not adequate for the group auditor’s purposes, the group auditor shall consider the implications for the group audit. (Ref: Para. A147)
The group auditor shall determine whether, and the extent to which, it is necessary to review additional component auditor audit documentation. In making this determination, the group auditor shall consider: (Ref: Para. A148–A149)
(a)The nature, timing and extent of the work performed by the component auditor;
(b)The competence and capabilities of the component auditor as determined in accordance with paragraph 26(a); and
(c)The direction and supervision of the component auditor and review of their work.
If the group auditor concludes that the work of the component auditor is not adequate for the group auditor’s purposes, the group auditor shall determine what additional audit procedures are to be performed, and whether they are to be performed by a component auditor or by the group auditor.
Subsequent Events
In applying ASA 560,[28] the group auditor shall take responsibility for performing procedures, including, as appropriate, requesting component auditors to perform procedures, designed to identify events that may require adjustment of, or disclosure in, the group financial report. (Ref: Para. A150)
[28] See ASA 560 Subsequent Events, paragraphs 6–7.
Considerations When Component Auditors Are Involved
The group auditor shall request the component auditors to notify the group auditor if they become aware of subsequent events that may require adjustment of, or disclosure in, the group financial report. (Ref: Para. A150)
Evaluating the Sufficiency and Appropriateness of Audit Evidence Obtained
In applying ASA 330,[29] the group auditor shall evaluate whether sufficient appropriate audit evidence has been obtained from the audit procedures performed, including from the work performed by component auditors, on which to base the group audit opinion. (Ref: Para. A151–A155)
[29] See ASA 330, paragraph 26.
The group engagement partner shall evaluate the effect on the group audit opinion of any uncorrected misstatements (whether identified by the group auditor or communicated by component auditors) and any instances when there has been an inability to obtain sufficient appropriate audit evidence. (Ref: Para. A156)
Auditor’s Report
The auditor’s report on the group financial report shall not refer to a component auditor, unless required by law or regulation to include such reference. If such reference is required by law or regulation, the auditor’s report shall indicate that the reference does not diminish the group engagement partner’s or the group engagement partner’s firm’s responsibility for the group audit opinion. (Ref: Para. A157–A158)
Communication with Group Management and Those Charged with Governance of the Group
Communication with Group Management
The group auditor shall communicate with group management an overview of the planned scope and timing of the audit, including an overview of the work to be performed at components of the group. (Ref: Para. A159)
If fraud has been identified by the group auditor or brought to its attention by a component auditor (see paragraph 45(h)), or information indicates that a fraud may exist, the group auditor shall communicate this on a timely basis to the appropriate level of group management in order to inform those with primary responsibility for the prevention and detection of fraud of matters relevant to their responsibilities. (Ref: Para. A160)
A component auditor may be required by statute, regulation or other reasons to express an audit opinion on the financial report of an entity or business unit that forms part of the group. In that case, the group auditor shall request group management to inform management of the entity or business unit of any matter of which the group auditor becomes aware that may be significant to the financial report of the entity or business unit, but of which management of the entity or business unit may be unaware. If group management refuses to communicate the matter to management of the entity or business unit, the group auditor shall discuss the matter with those charged with governance of the group. If the matter remains unresolved, the group auditor, subject to legal and professional confidentiality considerations, shall consider whether to advise the component auditor not to issue the auditor’s report on the financial report of the entity or business unit until the matter is resolved. (Ref: Para. A161–A162)
Communication with Those Charged with Governance of the Group
The group auditor shall communicate the following matters with those charged with governance of the group, in addition to those required by ASA 260[30] and other ASAs: (Ref: Para. A163)
[30] See ASA 260 Communication with Those Charged with Governance.
(a)An overview of the work to be performed at the components of the group and the nature of the group auditor’s planned involvement in the work to be performed by component auditors. (Ref: Para. A164)
(b)Instances when the group auditor’s review of the work of a component auditor gave rise to a concern about the quality of that component auditor’s work, and how the group auditor addressed the concern.
(c)Any limitations on the scope of the group audit, for example, significant matters related to restrictions on access to people or information.
(d)Fraud or suspected fraud involving group management, component management, employees who have significant roles in the group’s system of internal control or others when the fraud resulted in a material misstatement of the group financial report.
Communication of Identified Deficiencies in Internal Control
In applying ASA 265,[31] the group auditor shall determine whether any identified deficiencies in the group’s system of internal control are required to be communicated to those charged with governance of the group or group management. In making this determination, the group auditor shall consider deficiencies in internal control that have been identified by component auditors and communicated to the group auditor in accordance with paragraph 45(g). (Ref: Para. A165)
[31] See ASA 265 Communicating Deficiencies in Internal Control to Those Charged with Governance and Management.
Documentation
In accordance with ASA 230,[32] the audit documentation for a group audit engagement needs to be sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the nature, timing and extent of audit procedures performed, the evidence obtained, and the conclusions reached with respect to significant matters arising during the group audit. In applying ASA 230,[33] the group auditor shall include in the audit documentation: (Ref: Para. A166–A169, A179–A182)
[32] See ASA 230, paragraph 8.
[33] See ASA 230, paragraphs 1–3, 9–11, A6–A7 and Appendix.
(a)Significant matters related to restrictions on access to people or information within the group that were considered before deciding to accept or continue the engagement, or that arose subsequent to acceptance or continuance, and how such matters were addressed.
(b)The basis for the group auditor’s determination of components for purposes of planning and performing the group audit. (Ref: Para. A170)
(c)The basis for the determination of component performance materiality, and the threshold for communicating misstatements in the component financial information to the group auditor.
(d)The basis for the group auditor’s determination that component auditors have the appropriate competence and capabilities, including sufficient time, to perform the assigned audit procedures at the components. (Ref: Para. A171)
(e)Key elements of the understanding of the group’s system of internal control in accordance with paragraph 30(c);
(f)The nature, timing and extent of the group auditor’s direction and supervision of component auditors and the review of their work, including, as applicable, the group auditor’s review of additional component auditor audit documentation in accordance with paragraph 47. (Ref: Para. A172–A178)
(g)Matters related to communications with component auditors, including:
(i)Matters, if any, related to fraud, related parties or going concern communicated in accordance with paragraph 32.
(ii)Matters relevant to the group auditor’s conclusion with regard to the group audit, in accordance with paragraph 45, including how the group auditor has addressed significant matters discussed with component auditors, component management or group management.
(h)The group auditor’s evaluation of, and response to, findings or conclusions of the component auditors about matters that could have a material effect on the group financial report.
* * *
Application and Other Explanatory Material
Scope of this ASA (Ref: Para. 1–2)
A1.This ASA also deals with the special considerations for the group engagement partner or group auditor, as applicable, in applying the requirements and guidance in ASA 220, including for the direction and supervision of component auditors and the review of their work.
A2.ASQM 1[34] addresses the engagements for which an engagement quality review is required to be performed. ASQM 2[35] deals with the appointment and eligibility of the engagement quality reviewer and the engagement quality reviewer’s responsibilities relating to performing and documenting an engagement quality review, including for a group audit.
[34] See ASQM 1 Quality Management for Firms that Perform Audits or Reviews of Financial Reports and Other Financial Information, or Other Assurance or Related Services Engagements.
[35] See ASQM 2 Engagement Quality Reviews.
A3.An entity or business unit of a group may also prepare its own group financial report that incorporates the financial information of those entities or business units it encompasses (that is, a sub-group). This ASA applies to an audit of the group financial report of such sub-groups performed for statutory, regulatory or other reasons.
A4.A single legal entity may be organised with more than one business unit, for example, a company with operations in multiple locations, such as a bank with multiple branches. When those business units have characteristics such as separate locations, separate management, or separate information systems (including a separate general ledger) and the financial information is aggregated in preparing the single legal entity’s financial report, such a financial report meets the definition of a group financial report because they include the financial information of more than one entity or business unit through a consolidation process.
A5.In some cases, a single legal entity may configure its information system to capture financial information for more than one product or service line for legal or regulatory reporting or other management purposes. In these circumstances, the entity’s financial report is not a group financial report because there is no aggregation of the financial information of more than one entity or business unit through a consolidation process. Further, capturing separate information (e.g., in a sub-ledger) for legal or regulatory reporting or other management purposes does not create separate entities or business units (e.g., divisions) for purposes of this ASA.
Groups and Components (Ref: Para. 4–5)
A6.The group’s information system, including its financial reporting process, may or may not be aligned with the group’s organisational structure. For example, a group may be organised according to its legal structure, but its information system may be organised by function, process, product or service (or by groups of products or services), or geographic locations for management or reporting purposes.
A7.Based on the understanding of the group’s organisational structure and information system, the group auditor may determine that the financial information of certain entities or business units may be considered together for purposes of planning and performing audit procedures. For example, a group may have three legal entities with similar business characteristics, operating in the same geographical location, under the same management, and using a common system of internal control, including the information system. In these circumstances, the group auditor may decide to treat these three legal entities as one component.
A8.A group may also centralise activities or processes that are applicable to more than one entity or business unit within the group, for example through the use of a shared service centre. When such centralised activities are relevant to the group’s financial reporting process, the group auditor may determine that the shared service centre is a component.
A9.Another consideration that may be relevant to the group auditor’s determination of components is how management has determined operating segments in accordance with the disclosure requirements of the applicable financial reporting framework.[36]
[36] See, for example, AASB 8, Operating Segments.
Involvement of Component Auditors (Ref: Para. 7–8)
A10.Component auditors may perform an audit of the financial report of a component, whether for statutory, regulatory or other reasons, particularly when a component is a legal entity. When a component auditor is also performing or has completed an audit of the component financial report, the group auditor may be able to use audit work performed on the component financial report, provided the group auditor is satisfied that such work is appropriate for purposes of the group audit. In addition, component auditors may adapt the work performed on the audit of the component financial report to also meet the needs of the group auditor. In any event, the requirements of this ASA apply, including those relating to the direction and supervision of component auditors and the review of their work.
A11.In accordance with ASA 220,[37] the engagement partner is required to determine that the approach to direction, supervision and review is responsive to the nature and circumstances of the audit engagement. Paragraph A76 provides examples of different ways in which the group engagement partner may take responsibility for directing and supervising component auditors and reviewing their work, and may be helpful in circumstances when the group auditor plans to use the audit work from an audit of a component financial report that has already been completed.
[37] See ASA 220, paragraph 30(b).
A12.As explained in ASA 200,[38] detection risk relates to the nature, timing and extent of the auditor’s procedures that are determined by the auditor to reduce audit risk to an acceptably low level. Detection risk is a function not only of the effectiveness of an audit procedure but also the application of that procedure by the auditor. Therefore, detection risk is influenced by matters such as adequate planning, the assignment of appropriate resources to the engagement, the exercise of professional scepticism, and the supervision and review of the audit work performed.
[38] See ASA 200, paragraph A48.
A13.Detection risk is a broader concept than aggregation risk as described in paragraphs 14(a) and A19. In a group audit, there may be a higher probability that the aggregate of uncorrected and undetected misstatements may exceed materiality for the group financial report as a whole because audit procedures may be performed separately on the financial information of components across the group. Accordingly, component performance materiality is set by the group auditor to reduce aggregation risk to an appropriately low level.
Professional Scepticism (Ref: Para. 9)
A14.ASA 220[39] provides examples of the impediments to the exercise of professional scepticism at the engagement level, including unconscious auditor biases that may impede the exercise of professional scepticism when designing and performing audit procedures and evaluating audit evidence. ASA 220 also provides possible actions that the engagement team may take to mitigate impediments to the exercise of professional scepticism at the engagement level.
[39] See ASA 220, paragraphs A35‒A37.
A15.Requirements and relevant application material in ASA 315,[40] ASA 540[41] and other ASAs address the exercise of professional scepticism, and include examples of how documentation may help provide evidence of the auditor’s exercise of professional scepticism.
[40] See ASA 315, paragraph A238.
[41] See ASA 540 Auditing Accounting Estimates and Related Disclosures, paragraph A11.
A16.All members of the engagement team are required to exercise professional scepticism throughout the group audit. The group auditor’s direction and supervision of engagement team members, including component auditors, and the review of their work, may inform the group auditor about whether the engagement team has appropriately exercised professional scepticism.
A17.The exercise of professional scepticism in a group audit may be affected by matters such as the following:
·Component auditors in different locations may be subject to varying cultural influences, which may affect the nature of the biases to which they are subject.
·The complex structure of some groups may introduce factors that give rise to increased susceptibility to risks of material misstatement. In addition, an overly complex organisational structure may be a fraud risk factor in accordance with ASA 240[42] and therefore may require additional time or expertise to understand the business purpose and activities of certain entities or business units.
[42] See ASA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of a Financial Report, Appendix 1.
·The nature and extent of intra-group transactions (e.g., transactions that involve multiple entities and business units within the group or multiple related parties), cash flows or transfer pricing agreements may give rise to additional complexities. In some cases, such matters may also give rise to fraud risk factors.
·When the group audit is subject to tight reporting deadlines imposed by group management, this may put pressure on engagement team members when completing the work assigned. In these circumstances, the engagement team may need to take additional time to appropriately question management’s assertions, make appropriate judgements, or appropriately review the audit work performed.
A18.The exercise of professional scepticism by the group auditor includes remaining alert for inconsistent information from component auditors, component management and group management about matters that may be significant to the group financial report.
Definitions
Aggregation Risk (Ref: Para. 14(a))
A19.Aggregation risk exists in all audits of the financial report, but is particularly important to understand and address in a group audit because there is a greater likelihood that audit procedures will be performed on classes of transactions, account balances or disclosures that are disaggregated across components. Generally, aggregation risk increases as the number of components increases at which audit procedures are performed separately, whether by component auditors or other members of the engagement team.
Component (Ref: Para. 14(b))
A20.The group auditor uses professional judgement in determining components at which audit work will be performed. Paragraph A7 explains that the financial information of certain entities or business units may be considered together for purposes of planning and performing audit procedures. However, the group auditor’s responsibility for the identification and assessment of the risks of material misstatement of the group financial report encompasses all of the entities and business units whose financial information is included in the group financial report.
Component Auditor (Ref: Para. 14(c))
A21.References in this ASA to the engagement team include the group auditor and component auditors. Component auditors may be from a network firm, a firm that is not a network firm, or the group auditor’s firm (e.g., another office within the group auditor’s firm).
A22.In some circumstances, the group auditor may perform centralised testing on classes of transactions, account balances or disclosures, or may perform audit procedures related to a component. In these circumstances, the group auditor is not considered a component auditor.
A23.Paragraph 24 requires the group auditor to request the component auditor to confirm that the component auditor will cooperate with the group auditor, including whether the component auditor will perform the work requested by the group auditor. Paragraph A58 provides guidance for circumstances in which the component auditor is unable to provide such a confirmation.
Component Management (Ref: Para. 14(d))
A24.Component management refers to management responsible for the financial information or other activity (e.g., processing of transactions at a shared service centre) at an entity or business unit that is part of the group. When the group auditor considers the financial information of certain entities or business units together as a component or determines that a shared service centre is a component (see paragraphs A7‒A8), component management refers to the management that is responsible for the financial information or transaction processing that is subject to the audit procedures being performed in relation to that component. In some circumstances, there may not be separate component management and group management may be directly responsible for the financial information or other activities of the component.
Group Engagement Partner (Ref: Para. 14(j))
A25.[Deleted by the AUASB]
Group Financial Report (Ref: Para. 2, 14(k))
A26.The requirements for the preparation and presentation of the group financial report may be specified in the applicable financial reporting framework, which may therefore affect the determination of the financial information of entities or business units to be included in the group financial report. For example, some frameworks require the preparation of a consolidated financial report when an entity (a parent entity) controls one or more other entities (e.g., subsidiaries) through majority ownership interest or other means. In some cases, the applicable financial reporting framework includes separate requirements for, or may otherwise permit, the presentation of a combined financial report. Examples of circumstances in which the presentation of a combined financial report may be permitted include entities that have no parent but are under common control or entities under common management.
A27.The term “consolidation process” as used in this ASA is not intended to have the same meaning as “consolidation” or “consolidated financial report” as defined or described in financial reporting frameworks. Rather, the term “consolidation process” refers more broadly to the process used to prepare a group financial report.
A28.The detailed aspects of the consolidation process vary from one group to another, depending on the group’s structure and information system, including the financial reporting process. However, a consolidation process involves considerations such as the elimination of intra-group transactions and balances and, when applicable, implications of different reporting periods for entities or business units included in the group financial report.
Leadership Responsibilities for Managing and Achieving Quality on a Group Audit (Ref: Para. 11, 16)
A29.It may not be possible or practical for the group engagement partner to solely deal with all requirements in ASA 220, particularly when the engagement team includes a large number of component auditors located in multiple locations. In managing quality at the engagement level, ASA 220[43] permits the engagement partner to assign the design or performance of procedures, tasks or actions to other members of the engagement team to assist the engagement partner. Accordingly, the group engagement partner may assign procedures, tasks or actions to other members of the engagement team and these members may assign procedures, tasks or actions further. In such circumstances, ASA 220 requires that the engagement partner shall continue to take overall responsibility for managing and achieving quality on the audit engagement.
[43] See ASA 220, paragraph 15.
A30.Policies or procedures established by the firm, or that are common network requirements or network services,[44] may support the group engagement partner by facilitating communication between the group auditor and component auditors and supporting the group auditor’s direction and supervision of those component auditors and the review of their work.
[44] See ASQM 1, paragraphs 48–52.
A31.ASA 220[45] explains that a culture that demonstrates a commitment to quality is shaped and reinforced by the engagement team members as they demonstrate expected behaviours when performing the engagement. In addressing the requirement in paragraph 16(a), the group engagement partner may communicate directly to other members of the engagement team (including component auditors) and reinforce this communication through personal conduct and actions (e.g., leading by example).
[45] See ASA 220, paragraph A29.
Acceptance and Continuance
Determining Whether Sufficient and Appropriate Audit Evidence Can Reasonably Be Expected to Be Obtained (Ref: Para. 17–18)
A32.In determining whether sufficient appropriate audit evidence can reasonably be expected to be obtained, the group engagement partner may obtain an understanding of matters such as:
·The group structure, including both the legal and organisational structure.
·Activities that are significant to the group, including the industry and regulatory, economic and political environments in which those activities take place.
·The use of service organisations.
·The use of shared service centres.
·The consolidation process.
·Whether the group auditor:
oWill have unrestricted access to those charged with governance of the group, group management, those charged with governance of the component, component management and component information, including of those components that are accounted for by the equity method; and
oWill be able to perform necessary work on the financial information of the components when applicable.
·Whether sufficient and appropriate resources are assigned or will be made available.
A33.In the case of an initial group audit engagement, the group auditor’s understanding of the matters in paragraph A32 may be obtained from:
·Information provided by group management;
·Communication with group management;
·Communication with those charged with governance of the group; and
·When applicable, communication with component management or the predecessor auditor.
A34.For a recurring engagement, the ability to obtain sufficient appropriate audit evidence may be affected by significant changes in, for example:
·The group structure (e.g., acquisitions, disposals, joint ventures, reorganisations, or changes in how the group financial reporting system is organised).
·Components’ activities that are significant to the group.
·The composition of those charged with governance of the group, group management, or key management of components for which audit procedures are expected to be performed.
·The group auditor’s understanding of the integrity and competence of group or component management.
·The applicable financial reporting framework.
Aus A34.1 Section 323B of the Corporations Act 2001 (the Act) requires the officer or auditor of a controlled entity to give the principal auditor access to the controlled entity’s books; and give the auditor any information, explanation or assistance required under section 323A of the Act.
A35.There may be additional complexities with obtaining sufficient appropriate audit evidence in a group audit when components are located in jurisdictions other than the group auditor’s jurisdiction because of cultural and language differences, and different laws or regulations. For example, law or regulation may restrict the component auditor from providing documentation outside of its jurisdiction, or war, civil unrest or outbreaks of disease may restrict the group auditor’s access to relevant component auditor audit documentation. Paragraph A180 includes possible ways to address these situations.
A36.Restrictions may be imposed after the group engagement partner’s acceptance of the group audit engagement that may affect the engagement team’s ability to obtain sufficient appropriate audit evidence. Such restrictions may include those affecting:
·The group auditor’s access to component information, management or those charged with governance of components, or the component auditors (including relevant audit documentation sought by the group auditor) (see paragraphs 20 and 21); or
·The work to be performed on the financial information of components.
Paragraphs A45–A46 explain the possible effect of such restrictions on the auditor’s report on the group financial report.
Agreeing the Terms of Audit Engagements (Ref: Para. 19)
A37.ASA 210[46] requires the auditor to agree the terms of the audit engagement with management or those charged with governance, as appropriate. The terms of engagement identify the applicable financial reporting framework. Additional matters that may be included in the terms of a group audit engagement include:
[46] See ASA 210, paragraphs 9 and 10(d).
·Communications between the group auditor and component auditors should be unrestricted to the extent possible under laws or regulations;
·Important communications between component auditors and those charged with governance of the component or component management, including communications on significant deficiencies in internal control, should be communicated to the group auditor;
·Communications between regulatory authorities and entities or business units related to financial reporting matters that may be relevant to the group audit should be communicated to the group auditor; and
·The group auditor should be permitted to perform work, or request a component auditor to perform work, at the component.
Restrictions on Access to Information or People (Ref: Para. 20–21)
A38.Restrictions on access to information or people do not eliminate the requirement for the group auditor to obtain sufficient appropriate audit evidence.
A39.Access to information or people can be restricted for many reasons, such as restrictions imposed by component management, laws or regulations or other conditions, for example, war, civil unrest or outbreaks of disease. Paragraph A180 describes how the group auditor may be able to overcome restrictions on access to component auditor audit documentation.
A40.In some circumstances, the group auditor may be able to overcome restrictions on access to information or people, for example:
·If access to component management or those charged with governance of the component is restricted, the group auditor may request group management or those charged with governance of the group to assist with removing the restriction or otherwise request information directly from group management or those charged with governance of the group.
·If the group has a non-controlling interest in an entity that is accounted for by the equity method, the group auditor may determine whether provisions exist (e.g., in the terms of joint venture agreements, or the terms of other investment agreements) regarding access by the group to the financial information of the entity and request group management to exercise such rights.
·If the group has a non-controlling interest in an entity that is accounted for by the equity method and the group has representatives who are on the executive board or are members of those charged with governance of the non-controlled entity, the group auditor may enquire whether they can provide financial and other information available to them in these roles.
A41.If the group has a non-controlling interest in an entity that is accounted for by the equity method and the group auditor’s access to information or people at the entity is restricted, the group auditor may be able to obtain information to be used as audit evidence regarding the entity’s financial information, for example:
·Financial information that is available from group management, as group management also needs to obtain the non-controlled entity’s financial information in order to prepare the group financial report.
·Publicly available information, such as an audited financial report, public disclosure documents, or quoted prices of equity instruments in the non-controlled entity.
It is a matter of professional judgement, particularly in view of the assessed risks of material misstatement of the group financial report and considering other sources of information that may corroborate or otherwise contribute to audit evidence obtained, whether the auditor can obtain sufficient appropriate audit evidence.[47]
[47] See ASA 330, paragraph 7(b).
A42.If the group has a non-controlling interest in an entity that is accounted for by the equity method and access to information or people at the entity is restricted, the group auditor may consider whether such restrictions are inconsistent with group management’s assertions regarding the appropriateness of the use of the equity method of accounting.
A43.When the group auditor is unable to obtain sufficient appropriate audit evidence due to restrictions on access to information or people, the group auditor may:
·Communicate the restrictions to the group auditor’s firm to assist the group auditor in determining an appropriate course of action. For example, the group auditor’s firm may communicate with group management about the restrictions and encourage group management to communicate with regulators. This may be useful when restrictions affect multiple audits in the jurisdiction or by the same firm, for example, because of war, civil unrest or outbreaks of disease in a major economy.
·Be required by law or regulation to communicate with regulators, listing authorities, or others, about the restrictions.
A44.Restrictions on access may have other implications for the group audit. For example, if restrictions are imposed by group management, the group auditor may need to reconsider the reliability of group management’s responses to the group auditor’s enquiries and whether the restrictions call into question group management’s integrity.
Effect of Restrictions on Access to Information or People on the Auditor’s Report on a Group Financial Report (Ref: Para. 20–21)
A45.ASA 705[48] contains requirements and guidance about how to address situations when the group auditor is unable to obtain sufficient appropriate audit evidence. Appendix 1 contains an example of an auditor’s report containing a qualified group audit opinion based on the group auditor’s inability to obtain sufficient appropriate audit evidence in relation to a component that is accounted for by the equity method.
[48] See ASA 705 Modifications to the Opinion in the Independent Auditor’s Report.
Law or Regulation Prohibit the Group Engagement Partner from Declining or Withdrawing from an Engagement (Ref: Para. 20–21)
A46.Law or regulation may prohibit the group engagement partner from declining or withdrawing from an engagement. For example, in some jurisdictions the auditor is appointed for a specified period of time and is prohibited from withdrawing before the end of that period. Also, in the public sector, the option of declining or withdrawing from an engagement may not be available to the auditor due to the nature of the mandate or public interest considerations. In these circumstances, the requirements in this ASA still apply to the group audit, and the effect of the group auditor’s inability to obtain sufficient appropriate audit evidence is addressed in ASA 705.
Overall Group Audit Strategy and Group Audit Plan
The Continual and Iterative Nature of Planning and Performing a Group Audit (Ref: Para. 22)
A47.As explained in ASA 300,[49] planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit engagement. For example, due to unexpected events, changes in conditions, or audit evidence obtained from risk assessment or further audit procedures, the group auditor may need to modify the overall group audit strategy and group audit plan, and the resulting planned nature, timing and extent of further audit procedures, based on the revised consideration of assessed risks. The group auditor may also modify the determination of the components at which to perform audit work as well as the nature, timing and extent of the component auditors’ involvement. ASA 300[50] requires the auditor to update and change the overall audit strategy and audit plan as necessary during the course of the audit.
[49] See ASA 300, paragraph A3.
[50] See ASA 300, paragraph 10.
Establishing the Overall Group Audit Strategy and Group Audit Plan (Ref: Para. 22)
A48.In an initial group audit engagement, the group auditor may have a preliminary understanding of the group and its environment, the applicable financial reporting framework and the entity’s system of internal control based on information obtained from group management, those charged with governance of the group and, when applicable, communication with component management or the predecessor auditor. In a recurring group audit engagement, the group auditor’s preliminary understanding may be obtained through prior period audits. This preliminary understanding may assist the group auditor in developing initial expectations about the classes of transactions, account balances and disclosures that may be significant.
A155.In some circumstances, an overall summary memorandum describing the work performed and the results thereof may provide a basis on its own for the group auditor to conclude that the work performed and audit evidence obtained by the component auditor is sufficient for purposes of the group audit. This may be the case, for example, when the component auditor has been requested to perform specific further audit procedures as identified and communicated by the group auditor.
Evaluating the Effect on the Group Audit Opinion (Ref: Para. 52)
A156.The group engagement partner’s evaluation may include a consideration of whether corrected and uncorrected misstatements communicated by component auditors indicate a systemic issue (e.g., regarding transactions subject to common accounting policies or common controls) that may affect other components.
Auditor’s Report (Ref: Para. 53)
A157.Although component auditors may perform work on the financial information of the components for the group audit and as such are responsible for their overall findings or conclusions, the group engagement partner or the group engagement partner’s firm is responsible for the group audit opinion.
A158.When the group audit opinion is modified because the group auditor was unable to obtain sufficient appropriate audit evidence in relation to the financial information of one or more components, the Basis for Qualified Opinion or Basis for Disclaimer of Opinion section in the auditor’s report on the group financial report describes the reasons for that inability.[90] In some circumstances, a reference to a component auditor may be necessary to adequately describe the reasons for the modified opinion, for example, when the component auditor is unable to perform or complete the work requested on the component financial information due to circumstances beyond the control of component management.
[90] See ASA 705, paragraphs 20 and 24.
Communication with Group Management and Those Charged with Governance of the Group
Communication with Group Management (Ref: Para. 54–56)
A159.The group audit may be complex due to the number and nature of the entities and business units comprising the group. In addition, as explained in paragraph A7, the group auditor may determine that certain entities or business units may be considered together as a component for purposes of planning and performing the group audit. Therefore, discussing with group management an overview of the planned scope and timing may help in co-ordinating the work performed at components, including when component auditors are involved, and in identifying component management (see paragraph A24).
A160.ASA 240[91] contains requirements and guidance on the communication of fraud to management and, when management may be involved in the fraud, to those charged with governance.
[91] See ASA 240, paragraphs 41–43.
A161.Group management may need to keep certain material sensitive information confidential. Examples of matters that may be significant to the financial report of the component of which component management may be unaware include the following:
·Potential litigation.
·Plans for abandonment of material operating assets.
·Subsequent events.
·Significant legal agreements.
A162.Group management may inform the group auditor about non-compliance or suspected non-compliance with laws or regulations in entities or business units within the group. Paragraph A87 provides guidance for the group engagement partner in these circumstances.
Communication with Those Charged with Governance of the Group (Ref: Para. 57)
A163.The matters the group auditor communicates to those charged with governance of the group may include those brought to the attention of the group auditor by component auditors that the group auditor judges to be significant to the responsibilities of those charged with governance of the group. Communication with those charged with governance of the group may take place at various times during the group audit. For example, the matter referred to in paragraph 57(a) may be communicated after the group auditor has determined the work to be performed on the financial information of the components. On the other hand, the matter referred to in paragraph 57(b) may be communicated at the end of the audit, and the matters referred to in paragraph 57(c)–(d) may be communicated when they occur.
A164.ASA 260[92] requires the auditor to communicate with those charged with governance an overview of the planned scope and timing of the audit. For a group audit, this communication helps those charged with governance understand the group auditor’s determination of the components at which audit work will be performed, including whether certain of the group’s entities or business units will be considered together as a component, and the planned involvement of component auditors. This communication also helps to enable a mutual understanding of and discussion about the group and its environment (see paragraph 30) and areas, if any, in which those charged with governance may request the group auditor to undertake additional procedures.
[92] See ASA 260, paragraph 15.
Communication of Identified Deficiencies in Internal Control (Ref: Para. 58)
A165.The group auditor is responsible for determining, on the basis of the audit work performed, whether one or more identified deficiencies, individually or in combination, constitute significant deficiencies.[93] The group auditor may request input from the component auditor about whether an identified deficiency or combination of deficiencies at the component is a significant deficiency in internal control.
[93] See ASA 265, paragraph 8.
Documentation (Ref: Para. 59)
A166.Other ASAs contain specific documentation requirements that are intended to clarify the application of ASA 230 in the particular circumstances of those other ASAs. The Appendix to ASA 230 lists other ASAs that contain specific documentation requirements and guidance.
A167.The audit documentation for the group audit supports the group auditor’s evaluation in accordance with paragraph 51 as to whether sufficient appropriate audit evidence has been obtained on which to base the group audit opinion. Also see paragraph A154.
A168.The audit documentation for the group audit comprises:
·The documentation in the group auditor’s file; and
·The separate documentation in the respective component auditor files relating to the work performed by the component auditors for purposes of the group audit (i.e., component auditor audit documentation).
A169.The final assembly and retention of the audit documentation for a group audit is subject to the policies or procedures of the group auditor’s firm in accordance with ASQM 1.[94] The group auditor may provide specific instructions to component auditors regarding the assembly and retention of the documentation of work performed by them for purposes of the group audit.
[94] See ASQM 1, paragraphs 31(f) and A83–A85.
Basis for the Group Auditor’s Determination of Components (Ref: Para: 59(b))
A170.The basis for the group auditor’s determination of components may be documented in various ways, including, for example, documentation related to the fulfillment of the requirements in paragraphs 22, 33 and 57(a) of this ASA.
Basis for the Group Auditor’s Determination of the Competence and Capabilities of Component Auditors (Ref: Para: 59(d))
A171.ASQM 1[95] provides guidance on matters that the firm’s policies or procedures may address regarding the competence and capabilities of the engagement team members. Such policies or procedures may describe or provide guidance about how to document the determination of the competence and capabilities of the engagement team, including component auditors. For example, the confirmation obtained from the component auditor in accordance with paragraph 24 may include information about the component auditor’s relevant industry experience. The group auditor also may ask for confirmation that the component auditor has sufficient time to perform the assigned audit procedures.
[95] See ASQM 1, paragraph A96.
Documentation of the Direction and Supervision of Component Auditors and the Review of Their Work (Ref: Para. 59(f))
A172.As described in paragraph A75, the approach to direction, supervision and review in a group audit will be tailored by the group auditor based on the facts and circumstances of the engagement, and will generally include a combination of addressing the group auditor’s firm policies or procedures and responses specific to the group audit. Such policies or procedures may also describe or provide guidance about the documentation of the group auditor’s direction and supervision of the engagement team and the review of their work.
A173.ASA 300[96] requires the auditor to develop an audit plan that includes a description of the nature, timing and extent of the planned direction and supervision of engagement team members and the review of their work. When component auditors are involved, the extent of such descriptions will often vary by component, recognising that the planned nature, timing and extent of direction and supervision of component auditors, and review of their work, may be influenced by the matters described in paragraph A51.
[96] See ASA 300, paragraph 9.
A174.The group auditor’s documentation of the direction and supervision of component auditors and the review of their work may include, for example:
·Required communications with component auditors, including instructions issued and other confirmations required by this ASA.
·The rationale for the selection of visits to component auditor sites, attendees at meetings and the nature of the matters discussed.
·Matters discussed in meetings with component auditors or component management.
·The rationale for the group auditor’s determination of component auditor audit documentation selected for review.
·Changes in the planned nature and extent of involvement in the work of component auditors, and the reasons why (e.g., assigning more experienced engagement team members in areas of the audit that are more complex or subjective than initially anticipated).
A175.Paragraph 47 requires the group auditor to determine whether, and the extent to which it is necessary to review additional component auditor audit documentation. Paragraphs A148–A149 provide guidance for the group auditor in making this determination.
A176.Component auditor audit documentation ordinarily need not be replicated in the group auditor’s audit file. However, the group auditor may decide to summarise, replicate or retain copies of certain component auditor documentation in the group auditor’s audit file to supplement the description of a particular matter in communications from the component auditor, including the matters required to be communicated by this ASA. Examples of such component auditor documentation may include:
·A listing or summary of the significant judgements made by the component auditor, and the conclusions reached thereon, that are relevant to the group audit;
·Matters that may need to be communicated to those charged with governance of the group; or
·Matters that may be determined to be key audit matters to be communicated in the auditor’s report on the group financial report.
A177.When required by law or regulation, certain component auditor documentation may need to be included in the group auditor’s audit file, for example, to respond to the request of a regulatory authority to review documentation related to work performed by a component auditor.
A178.Policies or procedures established by the firm in accordance with the firm’s system of quality management, or resources provided by the firm or a network, may assist the group auditor in documenting the direction and supervision of component auditors and the review of their work. For example, an electronic audit tool may be used to facilitate communications between the group auditor and component auditors. The electronic audit tool also may be used for audit documentation, including providing information about the reviewer(s) and the date(s) and extent of their review.
Additional Considerations When Access to Component Auditor Audit Documentation is Restricted (Ref: Para. 59)
A179.Audit documentation for a group audit may present some additional complexities or challenges in certain circumstances. This may be the case, for example, when law or regulation restrict the component auditor from providing documentation outside of its jurisdiction, or when war, civil unrest or outbreaks of disease restrict access to relevant component auditor audit documentation.
A180.The group auditor may be able to overcome such restrictions by, for example:
·Visiting the location of the component auditor, or meeting with the component auditor in a location different from where the component auditor is located, to review the component auditor’s audit documentation;
·Reviewing the relevant audit documentation remotely through the use of technology, when not prohibited by law or regulation;
·Requesting the component auditor to prepare and provide a memorandum that addresses the relevant information and holding discussions with the component auditor, if necessary, to discuss the contents of the memorandum; or
·Discussing with the component auditor the procedures performed, the evidence obtained and the conclusions reached by the component auditor.
It is a matter of professional judgement whether one or more of the actions described above may be sufficient to overcome the restrictions depending on the facts and circumstances of the group audit.
A181.When access to component auditor audit documentation is restricted, the group auditor’s documentation nonetheless needs to comply with the requirements of the ASAs, including those relating to the documentation of the nature, timing and extent of the group auditor’s direction and supervision of component auditors and the review of their work. The guidance in paragraphs A148–A149 may be helpful in determining the extent of the group auditor’s review of the component auditor audit documentation in these circumstances. Paragraphs A176 and A177 provide examples of circumstances in which certain component auditor audit documentation may be included in the group auditor’s audit file.
A182.If the group auditor is unable to overcome restrictions on access to the component auditor audit documentation, the group auditor may need to consider whether a scope limitation exists that may require a modification to the opinion on the group financial report. See paragraph A45.
Appendix 1
(Ref: Para. A42)
Illustration 1: [Deleted by the AUASB] Refer [Aus] Illustration 1A
[Aus] Illustration 1A: Illustration of Independent Auditor’s Report When the Group Auditor Is Not Able to Obtain Sufficient Appropriate Audit Evidence on Which to Base the Group Audit Opinion – General Purpose Financial Report, Qualified Opinion under the Corporations Act 2001
| For purposes of this illustrative auditor’s report, the following circumstances are assumed: · The audit is a group audit of a listed company with subsidiaries (i.e., ASA 600 applies). · The consolidated financial report is prepared by the directors of the company in accordance with Australian Accounting Standards (a general purpose framework). The financial report is prepared under the Corporations Act 2001. · The terms of the audit engagement reflect the description of the directors’ responsibility for the consolidated financial report in ASA 210. · The group auditor is unable to obtain sufficient appropriate audit evidence relating to a component accounted for by the equity method (recognised at $15 million in the statement of financial position, which reflects total assets of $60 million) because the group auditor did not have access to the accounting records, management, or auditor of the component. · The group auditor has read the audited financial report of the component as at 31 December, 20X1, including the auditor’s report thereon, and considered related financial information kept by group management in relation to the component. · In the group engagement partner’s judgement, the effect on the group financial report of this inability to obtain sufficient appropriate audit evidence is material but not pervasive.* · The APESB Code comprises all of the relevant ethical requirements that apply to the audit. · Based on the audit evidence obtained, the auditor has concluded that a material uncertainty does not exist related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern in accordance with ASA 570. · Key audit matters have been communicated in accordance with ASA 701.# · The auditor has obtained no other information prior to the date of the auditor's report but expects to obtain the other information after the date of the auditor’s report. · In addition to the audit of the consolidated financial report, the auditor has other reporting responsibilities required under section 308(3C) of the Corporations Act 2001. |
* If, in the group engagement partner’s judgment, the effect on the group financial report of the inability to obtain sufficient appropriate audit evidence is material and pervasive, the group engagement partner would disclaim an opinion in accordance with ASA 705.
# See ASA 701 Communicating Key Audit Matters in the Independent Auditor’s Report.
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of ABC Company [or Other Appropriate Addressee]
Report on the Audit of the Consolidated Financial Report
The sub-title, “Report on the Audit of the Consolidated Financial Statements” is unnecessary in circumstances when the second sub-title, “Report on Other Legal and Regulatory Requirements” is not applicable.
Qualified Opinion
We have audited the consolidated financial report of ABC Company and its subsidiaries (the Group), which comprise the consolidated statement of financial position as at 31 December, 20X1, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial report, including a summary of significant accounting policies, and the directors’ declaration.
In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion section of our report, the accompanying consolidated financial report of the Group is in accordance with the Corporations Act 2001, including:
Giving a true and fair view of, the consolidated financial position of the Group as at 31 December, 20X1, and (of) its consolidated financial performance and its consolidated cash flows for the year then ended; and
Complying with Australian Accounting Standards and the Corporations Regulations 2001.
Basis for Qualified Opinion
ABC Company’s investment in XYZ Company, a foreign associate acquired during the year and accounted for by the equity method, is carried at $15 million on the consolidated statement of financial position as at 31 December, 20X1, and ABC’s share of XYZ’s net income of $1 million is included in the consolidated statement of comprehensive income for the year then ended. We were unable to obtain sufficient appropriate audit evidence about the carrying amount of ABC’s investment in XYZ as at 31 December, 20X1 and ABC’s share of XYZ’s net income for the year because we were denied access to the financial information, management, and the auditors of XYZ. Consequently, we were unable to determine whether any adjustments to these amounts were necessary.
We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional & Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code), and we have fulfilled our other ethical responsibilities in accordance with the Code.
We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company would be in the same terms if given to the directors as at the time of this auditor’s report.§
§ Or, alternatively, include statements (a) to the effect that circumstances have changed since the declaration was given to the relevant directors; and (b) setting out how the declaration would differ if it had been given to the relevant directors at the time the auditor’s report was made.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.
Key Audit Matters
[Reporting in accordance with ASA 700 – see [Aus] Illustration 2A in the Appendix of ASA 700.]
Other Information [or another title if appropriate such as “Information Other than the Financial Report and Auditor’s Report Thereon”]
[Reporting in accordance with the reporting requirements in ASA 720* – – see [Aus] Illustration 4A in Appendix 3 of ASA 720.]
* See ASA 720 The Auditor’s Responsibilities Relating to Other Information.
Responsibilities of the Directors for the Consolidated Financial Report
[Reporting in accordance with ASA 700# – see [Aus] Illustration 2A in the Appendix of ASA 700.]
# See ASA 700 Forming an Opinion and Reporting on a Financial Report.
Auditor’s Responsibilities for the Audit of the Consolidated Financial Report
[Reporting in accordance with ASA 700 – see [Aus} Illustration 2A in the Appendix of ASA 700..]
Report on the Remuneration Report
The Report on the Remuneration Report is an example of “Other Reporting Responsibilities”—see ASA 700, paragraphs 43-45. Any additional “Other Reporting Responsibilities” that the auditor needs to address, will also be included in a separate section of the auditor’s report. Under paragraph 43 of ASA 700, the sub-title “Report on Other Legal and Regulatory Requirements” or other sub-title as appropriate to the section, is used.
[Reporting in accordance with ASA 700 – see [Aus] Illustration 2A in the Appendix of ASA 700.]
[Auditor’s name and signature]§
§ The auditor is required, under the Corporations Act 2001, to sign the auditor’s report in both their own name and the name of their firm [section 324AB(3)] or the name of the audit company [section 324AD(1)], as applicable.
[Name of Firm]
[Auditor Address]
[Date]
Appendix 2
(Ref: Para. A85)
Understanding the Group’s System of Internal Control
This appendix provides examples of matters related to internal control that may be helpful in obtaining an understanding of the system of internal control in the context of a group environment, and expands on how ASA 315[97] is to be applied in relation to an audit of a group financial report. The examples may not be relevant to every group audit engagement and the list of examples is not necessarily complete.
[97] See ASA 315, Appendix 3.
Control Environment
The group auditor’s understanding of the control environment may include matters such as the following:
·The structure of the governance and management functions across the group, and group management’s oversight responsibilities, including arrangements for assigning authority and responsibility to management of entities or business units in the group.
·How oversight over the group’s system of internal control by those charged with governance is structured and organised.
·How ethical and behavioural standards are communicated and reinforced in practice across the group, (e.g., group-wide programs, such as codes of conduct and fraud prevention programs).
·The consistency of policies and procedures across the group, including a group financial reporting procedures manual.
The Group’s Risk Assessment Process
The group auditor’s understanding of the group’s risk assessment process may include matters such as group management’s risk assessment process, that is, the process for identifying, analysing and managing business risks, including the risk of fraud, that may result in material misstatement of the group financial report. It may also include an understanding of how sophisticated the group’s risk assessment process is and the involvement of entities and business units in this process.
The Group’s Process to Monitor the System of Internal Control
The group auditor’s understanding of the group’s process to monitor the system of internal control may include matters such as monitoring of controls, including how the controls are monitored across the group and, when relevant, activities of the internal audit function across the group, including its nature, responsibilities and activities in respect of monitoring of controls at entities or business units in the group. ASA 610[98] requires the auditor to evaluate the extent to which the internal audit function’s organisational status and relevant policies and procedures support the objectivity of internal auditors, the level of competence of the internal audit function, and whether the internal audit function applies a systematic and disciplined approach, including quality control.
[98] See ASA 610 Using the Work of Internal Auditors, paragraph 15.
The Information System and Communication
The group auditor’s understanding of the group’s information system and communication may include matters such as the following:
·The extent of centralisation in the group’s IT environment and the commonality of IT applications, IT processes and IT infrastructure.
·Group management’s monitoring of operations and the financial results of entities or business units in the group, including regular reporting routines, which enables group management to monitor performance against budgets, and to take appropriate action.
·Monitoring, controlling, reconciling, and eliminating intra-group transactions and unrealised profits, and intra-group account balances at group level.
·A process for monitoring the timeliness and evaluating the accuracy and completeness of financial information received from entities or business units in the group.
Consolidation Process
The group auditor’s understanding of the consolidation process may include matters such as the following:
Matters Relating to the Applicable Financial Reporting Framework
·The extent to which management of entities or business units in the group have an understanding of the applicable financial reporting framework.
·The process for identifying and accounting for entities or business units in the group in accordance with the applicable financial reporting framework.
·The process for identifying reportable segments for segment reporting in accordance with the applicable financial reporting framework.
·The process for identifying related party relationships and related party transactions for reporting in accordance with the applicable financial reporting framework.
·The accounting policies applied to the group financial report, changes from those of the previous financial year, and changes resulting from new or revised standards under the applicable financial reporting framework.
·The procedures for dealing with entities or business units in the group with financial year-ends different from the group’s year-end.
Matters Relating to the Consolidation Process
·Group management’s process for obtaining an understanding of the accounting policies used by entities or business units in the group, and, when applicable, ensuring that uniform accounting policies are used to prepare the financial information of the entities or business units in the group for the group financial report, and that differences in accounting policies are identified, and adjusted when required in terms of the applicable financial reporting framework. Uniform accounting policies are the specific principles, bases, conventions, rules, and practices adopted by the group, based on the applicable financial reporting framework, that the entities or business units in the group use to report similar transactions consistently. These policies are ordinarily described in the financial reporting procedures manual and reporting package issued by group management.
·Group management’s process for ensuring complete, accurate and timely financial reporting by the entities or business units in the group for the consolidation.
·The process for translating the financial information of foreign entities or business units in the group into the currency of the group financial report.
·How the group’s IT environment is organised for the consolidation and the policies that define the flows of information in the consolidation process, including the IT applications involved.
·Group management’s process for obtaining information on subsequent events.
Matters Relating to Consolidation Adjustments and Reclassifications:
·The process for recording consolidation adjustments, including the preparation, authorisation and processing of related journal entries, and the experience of personnel responsible for the consolidation.
·The consolidation adjustments required by the applicable financial reporting framework.
·The business rationale for the events and transactions that gave rise to the consolidation adjustments.
·Frequency, nature and size of transactions between entities or business units in the group.
·The procedures for monitoring, controlling, reconciling and eliminating intra-group transactions and unrealised profits, and intra-group account balances.
·Steps taken to arrive at the fair value of acquired assets and liabilities, procedures for amortising goodwill (when applicable), and impairment testing of goodwill, in accordance with the applicable financial reporting framework.
·Arrangements with a majority owner or minority interests regarding losses incurred by an entity or business unit in the group (e.g., an obligation of the minority interest to make good such losses).
Control Activities
The group auditor’s understanding of the control activities component may include matters such as the following:
·The commonality of information processing controls and general IT controls for all or part of the group.
·The extent of the commonality of the design of controls for all or part of the group that address risks of material misstatement of the group financial report at the assertion level.
·The extent to which commonly designed controls have been implemented consistently for all or part of the group.
Appendix 3
(Ref: Para. A110)
Examples of Events or Conditions that May Give Rise to Risks of Material Misstatement of the Group Financial Report
The following are examples of events (including transactions) and conditions that may indicate the existence of risks of material misstatement of the group financial report, whether due to fraud or error, including with respect to the consolidation process. The examples provided by inherent risk factor cover a broad range of events and conditions; however, not all events and conditions are relevant to every group audit engagement and the list of examples is not exhaustive. The events and conditions have been categorised by the inherent risk factor that may have the greatest effect in the circumstances. Importantly, due to the interrelationships among inherent risk factors, the example events and conditions also are likely to be subject to, or affected by, other inherent risk factors to varying degree. Also see ASA 315, Appendix 2.
| Inherent Risk Factor | Examples of Events or Conditions that May Give Rise to the Existence of Risks of Material Misstatement of the Group Financial Report at the Assertion Level: |
| Complexity | · The existence of complex transactions that are accounted for in more than one entity or business units in the group. · The application of accounting policies by entities or business units in the group that differ from those applied to the group financial report. · Accounting measurements or disclosures that involve complex processes used by entities or business units in the group, such as accounting for complex financial instruments. · Operations that are subject to a high degree of complex regulation in multiple jurisdictions, or entities or business units in the group that operate in multiple industries that are subject to different types of regulation. |
| Subjectivity | · Judgements regarding which entities or business units in the group require incorporation of their financial information in the group financial report in accordance with the applicable financial reporting framework, for example, whether any special-purpose entities or non-trading entities exist and require incorporation. · Judgements regarding the correct application of the requirements of the applicable financial reporting framework by entities or business units in the group. |
| Change | · Frequent acquisitions, disposals or reorganisations. |
| Uncertainty | · Entities or business units in the group operating in foreign jurisdictions that may be exposed to factors such as unexpected government intervention in areas such as trade and fiscal policy, and restrictions on currency and dividend movements; and fluctuations in exchange rates. |
| Susceptibility to Misstatement Due to Management Bias or Other Fraud Risk Factors Insofar as They Affect Inherent Risk | · Unusual related party relationships and transactions. · Entities or business units in the group with different financial year-ends, which may be utilised to manipulate the timing of transactions. · Prior occurrences of unauthorised or incomplete consolidation adjustments. · Aggressive tax planning within the group, or large cash transactions with entities in tax havens. · Prior occurrences of intra-group account balances that did not balance or reconcile on consolidation. · Large or unusual cash transfers within the group, particularly to newly incorporated entities or business units operating in locations with a significant or heighted fraud risk |
Indicators that the control environment, the group’s risk assessment process or the group’s process to monitor the group’s system of internal control are not appropriate to the group’s circumstances, considering the nature and complexity of the group, and do not provide an appropriate foundation for the other components of the group’s system of internal control, include:
Poor corporate governance structures, including decision making processes that are not transparent.
Non-existent or ineffective controls over the group’s financial reporting process, including inadequate group management information on monitoring of operations and financial results of entities or business units in the group.
0
0
0