Auditing Standard ASA 600 Special Considerations—Audits of a Group Financial Report (Including the Work of Component Auditors)
Scope of this ASA (Ref: Para. 1—2)Scope of this ASA (Ref: Para. 1—2)
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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.
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.
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.
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.
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)
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.
Section Scope of this ASA (Ref: Para. 1—2) - Auditing Standard ASA 600 Special Considerations—Audits of a Group Financial Report (Including the Work of Component Auditors) - Scope of this ASA (Ref: Para. 1—2) | Zoe
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.
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.
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]
Involvement of Component Auditors (Ref: Para. 7–8)
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.
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.
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.
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)
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.
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.
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.
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.
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.
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.