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Audit file issues – group audits and component auditors

Mercia Blog - Audit File Issues

Mercia carries out hot and cold audit file reviews for a significant number of firms and there are often themes or audit areas which we observe as part of those reviews which cause firms difficulty. One such issue concerns group audits and, in particular, reliance on the work of component auditors.

Background

ISA 600 sets out the specific considerations which apply in respect of group audits and, on the involvement of component auditors.  It is important to bear in mind that the group auditor is responsible for the audit opinion on the group accounts regardless of the presence of group entities which may have separate auditors.

Initial considerations

The presence of component audits makes it essential to consider the practicality of the group auditor’s position and whether or not it will be possible to gather sufficient evidence on those other group companies.  This very much depends on the “significance” of the component in relation to the group as a whole.  The determination as to whether a component is significant is very much a matter of professional judgment; the guidance in ISA 600 suggests that a figure in excess of 15% of a particular benchmark may be appropriate as a guide to determining significance.

Practical issues

Planning the group audit is critical and the extent of the group auditor’s involvement in the audit of the component entity should increase as the significance of that component increases.  On a number of file reviews I have carried out there was insufficient evidence of this involvement and/or the procedures carried out were ineffective.  Many group auditors appreciate the need to communicate with component auditors and will usually issue group instructions and questionnaires but these are often a tick box exercise rather than being a meaningful process designed to ensure an appropriate level of involvement in the audit of the component entity.  In addition, there is often a lack of evidence of critical appraisal of the adequacy of the component auditor’s work.

What do I need to do as group auditor?

In addition to the basic need to assess the competence and standards applied by component auditors, there are a number of critical areas:

  • Review the component auditor’s risk assessment and audit planning to ensure that the intended procedures are adequate to provide the necessary assurance in the risk areas identified.
  • Review the responses received from the component auditor carefully. I have observed that in some cases the component auditor’s questionnaire responses are simply filed and not given appropriate consideration. For example, on a recent file review, the component auditor indicated that the company’s title to significant land and buildings in that foreign subsidiary had not been subject to a confirmation of title.  However, this had not been considered by the group auditor.
  • Consider the need to look at the component auditor’s work in detail, including face to face meetings with the component auditor. This is an area which is often not considered.  There can be cost implications if there is a significant geographical spread in terms of the components in question.  However, this is not an acceptable reason to place blanket reliance on a component auditor and there will be occasions where the significance of the component makes the need to look at the component auditor’s work in detail unavoidable.  If the client is unwilling to facilitate this, the group auditor may need to consider whether it constitutes a limitation of the scope of their work.

How can we help?

We offer a wide range of independent reviews to help you comply with the many regulations now facing accountants and auditors.  Our experienced team are able to review your audit files to assess audit quality and compliance with audit regulations and standards.

We are also able to offer regulatory reviews in specialist areas such as Practice Assurance and Designated Professional Body Investment Business.

For more information, visit our website.