Reminder on ISA (UK) 600 Revised on group audits
ISA (UK) 600 Revised becomes effective for audits of group financial statements for periods beginning on or after December 15, 2023. The revised standard deals with the special considerations that apply to a group audit.
ISA (UK) 600 Revised
International Standard on Auditing (ISA) (UK) 600 (Revised September 2022), ‘Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors)’ becomes effective for audits of group financial statements for periods beginning on or after December 15, 2023, so effectively for years ending on or after 31 December 2024. This revised standard deals with the special considerations that apply to a group audit, including in those circumstances when component auditors are involved and is intended for all group audits, regardless of size or complexity, and to be applied in the context of the nature and circumstances of each group.
Key changes - summary
This is a substantially revised standard, and contains the following key revisions:
- The definition of a component has been revised with the definition of ‘significant components’ removed. This provides clarification on the scope and applicability of the standard, including in relation to branches and divisions, shared service centres and non-controlled entities. Emphasis has been given to the consideration of risks of material misstatement at the assertion level of the group financial statements that are associated with components.
- Clarification and reinforcement of that fact that all ISAs (UK) are to be applied in group audits, by establishing stronger links with other ISAs (UK) to ensure that ISA (UK) 600 revised better aligns to other recently revised standards, in particular ISA 220 (UK) (Revised) ‘Quality management for an audit of financial statement’, ISA 315 (Revised) ‘Identifying and Assessing the Risks of Material Misstatement’ and ISA (UK) 330 ‘The Auditor’s Responses to Assessed Risks; doing so encourages proactive management of quality.
- Focusing the group engagement team’s identification and assessment of risk at the group financial statement level and emphasising the importance of designing and performing appropriate procedures to respond to those risks. The introduction of this proactive risk-based approach to group audits places more focus on identifying and assessing the risks of material misstatement, planning the approach to the audit and performing engagement procedures that respond to the assessed risks at the group financial statement level.
- Reinforcing the need for robust communication and interactions between the group engagement team, group engagement partner and competent auditors. There are also enhanced requirements in relation to professional scepticism and documentation. by clarifying what the group auditor may need to document in different situations.
- Clarification on how to address restrictions on access to people and information in a group audit, including restrictions on access to component management, those charged with governance of the component, component auditors, or information at the components.
- Clarification on how the concepts of materiality and aggregation risk apply in a group audit.
Now we will look at some of these key revisions in more detail.
Planning and performing a group audit engagement
ISA (UK) 600 establishes a framework for planning and performing a group audit engagement. The standard notes that a group may be organized in various ways, and its information system, including its financial reporting process, may or may not be aligned with its organizational structure.
The framework emphasises special considerations for establishing the overall group audit strategy and group audit plan and requires the group auditor to determine the nature, timing and extent of involvement of component auditors. 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 also affect the group auditor’s determination of components, including when it may be appropriate to combine certain entities or business units for purposes of planning and performing the group audit.
As component auditors may have greater experience with, and a more in-depth knowledge of, the components and their environments (including local laws and regulations, business practices, language, and culture) than the group auditor, they can be, and often are, involved in all phases of the group audit. It focusses the group auditor’s attention on identifying, assessing and responding to the risks of material misstatement of the group financial statements, and emphasises the importance of designing and performing procedures that are appropriate to respond to those assessed risks of material misstatement.
Restrictions on access to information or people
The revised standard clarifies the various types of restriction issues and the ways in which the group auditor may be able to overcome restrictions on access to people and information, and audit documentation, including restrictions on access to component management, those charged with governance of the component, component auditors, or information at the components.
In particular, if the group engagement partner concludes that:
(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 statements, the group engagement partner shall either:
- 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
- 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 statements to the extent possible, disclaim an opinion on the group financial statements.
Component materiality
Clarification is provided in the revised standard as to how the concepts of materiality and aggregation risk apply in a group audit. In this regard ‘Aggregation risk’ is the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole; and component performance materiality is 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.
In applying ISA (UK) 320 (Revised June 2016) and ISA (UK) 450 (Revised June 2016), when classes of transactions, account balances or disclosures in the group financial statements are disaggregated across components, for purposes of planning and performing audit procedures, the group auditor shall determine:
(a) Component performance materiality. To address aggregation risk, such amount shall be lower than group performance materiality.
(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 statements.
Fostering the appropriate exercise of professional scepticism
The importance of professional scepticism is emphasised, including as part of the group auditor’s:
- Direction, supervision and review of the work of engagement team members, including component auditors, which may inform the group auditor about whether the engagement team has appropriately exercised professional scepticism; and
- Evaluation of whether sufficient appropriate audit evidence has been obtained (including by component auditors) to provide a basis for forming an opinion on the group financial statements.
Robust communications and interactions between the group auditor / group engagement partner and component auditors strengthened and clarified:
- The importance of two-way communications between the group auditor and component auditors, including the group auditor’s expectation that communications will take place at appropriate times throughout the group audit.
- Various aspects of the group auditor’s interaction with component auditors, including communicating relevant ethical requirements, determining competence and capabilities of the component auditor, and determining the appropriate nature, timing and extent of involvement by the group auditor in the work of the component auditor.
- It also highlights the importance of the group auditor’s review of component auditor audit documentation. The review of component auditor audit documentation is directly related to, and influenced by, the group auditor’s direction and supervision of the component auditors and the review of their work throughout the group audit.
- Ultimately, the increased interaction may result in more work for the group engagement team and group engagement partner, particularly in light of the enhanced responsibilities for direction, supervision and review of the work of component auditors
The full revised standard can be viewed here: ISA (UK) 600 Revised
The IAASB also produced a webinar on the revised standard which can be viewed at: https://www.iaasb.org/publications/proposed-isa-600-webinar-group-audits
The standard is not yet applicable, but firms should ensure that they will be in a position to satisfy its requirements when it becomes effective, including revising their audit methodologies as appropriate.
