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Transcript of Slide Presentation Powerpo 1
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International Auditing and Assurance
Standards Board
Audits of Group Financial Statements
ISA Implementation Support Module
Prepared by IAASB Staff
November 2009
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Introduction
Significant Features of New Standard
Risk Assessment and Quality Control Principles
Engagement Acceptance and Continuance
Understanding the Group and Its Components
Significant Components and Work Effort on Components
Component Auditors Materiality
Communication
Additional Aspects
Overview
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The context for revising the standard
Lack of an international standard dealing
specifically with group audits
Varying group audit practice around the world
Regulatory concerns about rigor and consistency
of practice in this important and complex area
Need to reflect application of risk assessment andquality control principles in group audit context
Standard reflects international best practice
Introduction
Introduction
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A major thrust of the new standard
Risk assessment provides basis for determining nature
and extent of work on the group audit
Identification and assessment of risks through obtaining
an understanding of the group, its components, and their
environments
Effect on current practice will vary
If best practices already followed, changes may not be
significant
In other cases, more effort could be required
Applying Risk Assessment and Quality
Control Principles
Risk Assessment and Quality Control Principles
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Standard reflects ISA 220 principle regarding responsibility for
the audit
Group engagement partner alone should be responsible for
direction, supervision, and performance of engagement and forgroup audit opinion
Therefore, reference to component auditor in the group
auditors report no longer permitted
Practical implications:
Need to pay greater attention to where risks lie within the group
Component auditors may expect group engagement team to be
more involved in their work
Applying Risk Assessment and Quality
Control Principles
Risk Assessment and Quality Control Principles
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Emphasis on sole responsibility does not imply that
group audit should be performed by only one firm
or one network
No requirement for this in the standard
Different components may be audited by different
component auditors
However, regardless of who the componentauditors are, standard requires group engagement
team to obtain an understanding of them
Applying Risk Assessment and Quality
Control Principles
Risk Assessment and Quality Control Principles
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A new approach
Main consideration under old standard was whether
portion of group audited by the auditor was sufficient for
the auditor to act as principal auditor
New standard introduces an entirely different concept
Group engagement team now needs to consider whether
sufficient appropriate audit evidence can be obtained to
express group audit opinion before accepting engagement This consideration includes whether group engagement
team will be able to be involved in component auditors
work
Engagement Acceptance and Continuance
Engagement Acceptance and Continuance
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Key consideration is whether sufficient appropriateaudit evidence can reasonably be expected to be
obtained regarding
The consolidation process
Components financial information
Access to components controlled by the entity (e.g.
subsidiaries, branches) may not be an issue
In other cases, difficulty in accessing relevant
information (e.g. at components such as joint ventures,
associates) may give rise to a scope limitation
Engagement Acceptance and Continuance
Engagement Acceptance and Continuance
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Decision to accept is also based on whether groupengagement team has unrestricted access to
Component auditors and their work
Management and those charged with governance(TCWG) of the group
Management and TCWG of the components
Consideration of engagement acceptance a key
aspect of the standard
Thus, determining whether to act as auditor of the
group is one of the objectives under the standard
Engagement Acceptance and Continuance
Engagement Acceptance and Continuance
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As part of understanding the group and its
components, group engagement team now required
to understand
Group-wide controls
Consolidation process
What are group-wide controls?
Any controls over group financial reporting
E.g. Controls for monitoring and reconciling intra-group
transactions
Understanding Group-Wide Controls and
Consolidation Process
Understanding the Group and its Components
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Understanding group-wide controls helps to plannature, timing, and extent of work on consolidation
process and components
Group engagement team tests, or asks component
auditor(s) to test, operating effectiveness of these
controls if:
There will be planned reliance on the controls, or
Substantive procedures alone cannot provide sufficientappropriate audit evidence at the assertion level
Communicate significant deficiencies in group-wide
controls in accordance with ISA 265
Understanding Group-Wide Controls
Understanding the Group and its Components
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Under current practice, group engagement teamsmay perform at least some work on the
consolidation process
However, no specific requirements under old standard
Practice therefore inconsistent
New standard formalizes best practice in this regard
Recognizes that material misstatements can arise as a
result of consolidation process
New set of responsibilities for group engagement
team with regard to consolidation process
Understanding the Consolidation Process
Understanding the Group and its Components
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Understand detailed reporting instructions issued bygroup management to components
Perform specific procedures on consolidation
process Evaluate consolidation adjustments for appropriateness,
completeness, and accuracy
Includes consideration of whether fraud risk factors or
indicators of management bias exist
Evaluate whether components that report under different
financial reporting frameworks have been consolidated
on the basis of consistent accounting policies
Understanding the Consolidation Process
Understanding the Group and its Components
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New standard introduces important concept of asignificant component
What is a significant component?
A component financially significant to the group (i.e. size)
A component likely to include significant risks of material
misstatement of the group financial statements due to its
specific nature or circumstances (i.e. specific risks)
Why is concept of significant component important?
Determines direction of group audit
Work effort focused on components with greatest risks
Significant Components
Significant Components and Work Effort on Components
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Old standard did not specify any particular level of workon components
New standard establishes specific requirements
For a component significant due to size: an audit of the
components financial information For a component significant due to specific risks, one or
more of
An audit of the components financial information
An audit of one or more account balances, classes oftransactions or disclosures affected by the significant risks
Specified audit procedures responsive to the significant risks
For components that are not significant, analyticalprocedures at group level
Work Effort on Components
Significant Components and Work Effort on Components
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Not the same as audit of statutory financial statements
For example, component auditor may not need to audit
Items that will be audited centrally if so informed by group
engagement team
Disclosures required for statutory purposes but not for group
audit purposes
Audit to component materiality (materiality for statutory
audit may be lower) Group engagement team to specify form of reporting
expected from component auditor
Standard does not mandate form of reporting
Significant Components and Work Effort on Components
Audit of Component Financial Information
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Group engagement team to be involved in
Component auditors risk assessment
Have all the significant risks been identified?
Involvement depends on understanding of component auditor
but standard specifies minimum work required
Component auditors responses to significant risks
Are the responses appropriate?
Direct involvement by group engagement team in responding
to the significant risks may be necessary based on
understanding of component auditor
Significant Components Audited by
Component Auditors
Significant Components and Work Effort on Components
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Only when sufficient appropriate audit evidence willnot be obtained through work on significant
components, group-wide controls and consolidation
process, and analytical procedures at group level
If so, select one or more components that are not
significant and obtain additional audit evidence through
one or more specified actions
E.g. Perform an audit or review of the individualcomponents financial information
Vary selection of such components over a period of time
Significant Components and Work Effort on Components
Is Further Work Required on Components?
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An auditor of a component is a component auditor onlywhen it has been asked by the group engagement team
to perform work on the component for the group audit
Can be an auditor in another firm or an auditor in another
office of the same firm or network
Understand 2 further matters besides component
auditors competence and independence
Whether group engagement team can be involved incomponent auditors work as necessary
Whether component auditor is subject to regulatory
oversight
Component Auditors
What is a Component Auditor?
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Nature, timing and extent of work tounderstand component auditors depend on a
number of factors, e.g.
Previous experience with or knowledge ofcomponent auditors
Degree to which group engagement team and
component auditors are subject to commonpolicies and procedures
E.g. in quality control, audit methodology
Component Auditors
Understanding Component Auditors
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Standard now requires 4 different types ofmateriality to be determined
Group materiality
If relevant, materiality levels for particular classes oftransactions, account balances or disclosures
Component materiality where an audit or a review of
a component is necessary
Threshold above which misstatements cannot be
treated as clearly trivial to the group
Materiality
Materiality
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Materiality for a component necessary for groupengagement partner to form an opinion on group
financial statements
Not for component auditor to form an opinion on
components financial information
Should be lower than group materiality so that
misstatements in components in the aggregate will
not exceed group materiality
Should be set for each component for which an
audit or review is required
What is Component Materiality?
Materiality
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Standard places greater emphasis on effectivecommunication between group engagement team and
component auditors
Effective involvement in component auditors work required
by the standard otherwise not possible Vital to ensure expectations on both sides are clear
Standard recognizes need for effective communication with
TCWG and management
Opens up dialogue with TCWG on significant matters
Enables TCWG and management to be made aware of matters
relevant to discharging their respective responsibilities for
financial reporting process, a matter of public interest
Importance of Effective Communication
Communication
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Communication now broader and more specific
Guiding principles when communicating downstream
Will component auditors be clear as to nature and extent of
work requested of them on the components and whether group
engagement team will be involved in their work?
Will component auditors be clear as to required form of
reporting to group engagement team and reporting deadlines?
Standard requires specific matters to be communicatedto component auditors
E.g. component materiality, form and content of reporting
Communication should be timely
Communication with Component Auditors
Communication
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Nature and extent of component auditorscommunication upstream driven by 2 key
considerations
Group engagement teams specific requirements E.g. significant risks identified by component auditors;
previously unidentified related parties
Whether any specific matters have been identified that
are relevant to the group audit or that would merit
group engagement teams attention
A broad responsibility for component auditors
Communication with Component Auditors
Communication
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Communicate matters relevant to group managementsresponsibility for preparing group financial statements
E.g. Deficiencies in group-wide controls; fraud
An opportunity to also communicate, through group
management, matters group engagement team has
identified that are relevant to component managements
responsibility to prepare component financial statements
Group engagement team should not rely on componentauditors communication with component management
to discharge responsibility to communicate with group
management
Communication with Group Management
Communication
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Explain to TCWG nature and extent of Audit work required on components
Group engagement teams involvement in component
auditors work
Rationale
Sets clear expectation among TCWG that overall
responsibility for group audit rests with group engagement
team
Helps them understand where audit effort is being
directed so that they may provide assistance with any
issues that may arise
Communication with TCWG
Communication
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Additi l A t
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Standard requires
Subsequent events work on components that are
audited
Documentation of specific matters, e.g.
Analysis of components, including identification of
significant components
Type of work to be performed on the components Nature, timing and extent of group engagement teams
involvement in component auditors work on
significant components
Subsequent Events and Documentation
Additional Aspects
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Note
This set of support slides does not amend or override
the ISAs, the texts of which alone are authoritative.
Reading the slides is not a substitute for reading the
ISAs. The slides are not meant to be exhaustive andreference to the ISAs themselves should always be
made. In conducting an audit in accordance with
ISAs, the auditor is required to comply with all the
ISAs that are relevant to the engagement.
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Copyright November 2009 by the International Federation of Accountants
(IFAC). All rights reserved. Permission is granted to make copies of this work
provided that such copies are for use in academic classrooms or for personal use
and are not sold or disseminated and provided that each copy bears the
following credit line: Copyright November 2009 by the International
Federation of Accountants (IFAC). All rights reserved. Used with permission of
IFAC. [email protected] for permission to reproduce, store, or
transmit this work. Otherwise, written permission from IFAC is required to
reproduce, store, or transmit, or to make other similar uses of, this work, except
as permitted by law. Contact [email protected].
International Federationof Accountants
ISBN: 978-1-60815-050-2
www.ifac.org
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]