Audit of group financial statements (part II)

 Group auditor actions if some components of the group are audited by an auditor other than the group auditor.

If the component auditor is the other company than the group auditor company the group auditor should do the following steps:

(a)   To obtain an understanding of the following matters relating to component auditor:

·   Whether the component auditor understands and will comply with the ethical requirements that are relevant to the group audit and is independent.

·       The component auditor professional competence.

·      Whether the component auditor operates in a regulatory environment that actively oversees auditors.

(b)   To communicate to the component auditor on a timely basis the following requirements:

·       The work to be performed, the use to be made of that work, and the form and content of the component auditor communication with the group engagement team.

·       A component`s auditor confirmation about cooperation with the group engagement team.

·   In the case of an audit or review of the financial information of the component, the component materiality, and the threshold above, misstatements cannot be regarded as clearly trivial to the group financial statements.

·     Identified significant risks of material misstatement of the group financial statements, due to fraud or error, which are relevant to the work of the component auditor.

·      A list of related parties prepared by group management.

 (c)  To request the component auditor to communicate matters relevant to the group audit:

·       Whether the component auditor has complied with ethical requirements that are relevant to the group audit, including independence and professional competence.

·      Information on instances of non-compliance of the component with laws or regulations that could give rise to a material misstatement of the group financial statements.

·       A list of uncorrected misstatements of the financial information of the component.

·   A list of related parties not previously identified by group management or the group engagement team.

·       Indicators of possible management bias.

·       Description of any identified significant deficiencies in internal control at the component level.

·       The component auditor overall findings, conclusions, or opinion.

 And finally, the auditor report on the group financial statements shall not refer to a component auditor, unless required by law or regulation to include such a reference.

Auditor responses to assessed risks of material misstatement relating to group financial statements.

The auditor responses to assessed risks of material misstatement relating to group financial statements include following aspects- responses to assessed risks of material misstatement of financial statements of components, responses to assessed risks of material misstatement of consolidation process and procedures to identify subsequent events.

Financial statements of components

The group engagement team shall determine the type of work to be performed by the group engagement team, or the component auditors on its behalf, on the financial information of the components.

For a component that is significant due to its individual financial significance to the group, the group engagement team, or a component auditor shall perform an audit of the financial information of the component using component materiality by doing one or more of the following:

(a) An audit of the financial information of the component using component materiality.

(b) An audit of one or more account balances, classes of transactions or disclosures relating to the likely significant risks of material misstatement of the group financial statements

(c) Specified audit procedures relating to the likely significant risks of material misstatement of the group financial statements.

For components that are not significant components, the group engagement team shall perform analytical procedures at group level.

 Consolidation process

The group engagement team shall design and perform further audit procedures on the consolidation process to respond to the assessed risks of material misstatement of the group financial statements arising from the consolidation process. This shall include:

·       Evaluating whether all components have been included in the group financial statements.

·  Evaluate the appropriateness, completeness and accuracy of consolidation adjustments and reclassifications, and shall evaluate whether any fraud risk factors or indicators of possible management bias exist.

·     Evaluate whether the financial information of that component has been appropriately adjusted for the purposes of preparing and presenting the group financial statements.

·      Determine whether the financial information identified in the component auditor’s communication is the financial information that is incorporated in the group financial statements.

·    Evaluate whether appropriate adjustments have been made to financial statements with a financial reporting period-end that differs from that of the group.

  Subsequent events

The group engagement team or the component auditors shall perform procedures to identify events at those components that occur between the dates of the financial information of the components and the date of the auditor report on the group financial statements, and that may require adjustment to or disclosure in the group financial statements.

Evaluating the sufficiency and appropriateness of audit evidence obtained as a result of the audit of the group financial statements.

 The group engagement team evaluates whether sufficient appropriate audit evidence has been obtained from the audit procedures performed on the consolidation process and the work performed on the financial information of the components. It is done by reviewing the group engagement team and the component auditor documentation. Often the focus is on audit documentation that is relevant to the significant risks of material misstatement of the group financial statements (this depends on component auditor firm review procedures).

 The group engagement partner shall evaluate the effect on the group audit opinion of any uncorrected misstatements and any cases where there is an inability to obtain sufficient appropriate audit evidence.

The evaluation of the aggregate effect of any misstatements (either identified by the group engagement team or communicated by component auditors) allows the group engagement partner to determine whether the group financial statements as a whole are materially misstated.

Audit documentation related to the audit of group financial statements.

The auditor shall include in the audit documentation related to the audit of group financial statements the following matters:

(a)   An analysis of components, indicating those that are significant, and the type of work performed on the financial information of the components.

(b)   The nature, timing, and extent of the group engagement team involvement in the work performed by the component auditors on significant components.

(c)   Written communications between the group engagement team and the component auditors about the group engagement team requirements.

Also, the auditor must include in the audit documentation:

·       The nature, timing and extent of the audit procedures performed (The identifying characteristics of the specific items or matters tested; who performed the audit work and the date such work was completed; who reviewed the audit work performed and the date of such review).

·       The results of the audit procedures performed, and the audit evidence obtained; and

·  Significant matters arising during the audit, the conclusions reached thereon, and significant professional judgments made in reaching those conclusions.