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Group audit

In audit, an auditor who audits a company that belongs to a group may find itself to be the group auditor. The group auditor is usually the auditor that audits all the companies in the group or the auditor that does the majority of the audit work in the group. In cases where the group auditor does not audit all the companies, the group auditor will have to rely on the work of other auditors in forming an opinion of the group accounts.

Group Audit
The other auditors in the group are known as component auditors. Component means a division, branch, subsidiary, joint venture, associated or other entity whose financial information is included in the group accounts. The audit opinion for the group accounts which include the accounts audited by the component auditor falls on the group auditor. The group auditor is responsible for the opinion expressed on the group accounts

Group Audit
ISA 600 outlines the procedures that the group auditor needs to exercise when becoming the group auditor. However if the financial information by the other auditor is immaterial, this standard is not applicable.

Group Audit
Consolidated financial statements are prepared for the parent company and its subsidiaries. In cases where consolidated accounts need to be presented, the holding company is responsible for the preparation of the accounts. The auditor of the holding company is responsible for auditing the preparation of group accounts. In practice, the holding company auditor normally audits all or most of the subsidiaries within the group.

Responsibilities of Group Auditor

When acting as group auditor: a. Communicate clearly with the component auditors about the scope and timing of their work on financial information related to components and their findings

b. To obtain sufficient and appropriate audit evidence on the financial information audited by the component auditors
c. The partner in charge of the group auditor is responsible for direction, supervision and performance of the group audit work to ensure the group work was done in accordance to professional standards and applicable legal/regulatory requirements

Responsibility of the group auditor

In general, the auditors report on the group financial statements shall not refer to the component auditor, unless required by law or regulation to include such reference

Acceptance and continuance

The auditor should consider whether the auditors own participation is sufficient to be able to act as the group auditor.
Before accepting the role as the group auditor, the auditor should evaluate: a. contribution portion in relation to the total audit work done. The group auditors work must be material enough of the total group audit b. whether sufficient audit evidence can reasonably be expected to be obtained in relation to the consolidation process and the financial information audited by the component auditor c. group auditors degree of knowledge regarding the business of the components

Acceptance and continuance

d. whether the group auditor will be able to get involved in the work of the component auditor to the extent necessary to obtain sufficient and appropriate evidence

Principal auditor that do not contribute sufficiently to the audit work for the companies in the group would have restricted access to information of the companies not audited by him and ultimately affect the sufficient and appropriate audit evidence need to form an opinion for the consolidated financial statements.

Overall audit strategy and audit plan

The group auditor shall establish an overall group audit strategy and shall develop a group audit plan.
This includes picking the appropriate audit strategy and developing the overall audit plan.

Understanding the group, its components and their environments

The group auditor is responsible for assessing risks and identifying material misstatements for the group audit. Therefore, the group auditor must: a. enhance its understanding of the group, its components and their environments b. obtain understanding of the consolidation process, including the instructions given by group management to components c. Confirm or revise its initial identification of components that are likely to be significant d. assess the risks of material misstatement for the group financial statements

Understanding the component auditor

In trying to understand the component auditor, group auditor must determine: a. component auditor understands and will comply with the ethical requirements that are relevant to the group audit especially components auditor independence component auditors competence group auditor will be able to be involved the component auditors work in order to obtain sufficient and appropriate evidence

b. c.

Understanding the component auditor

d. whether the component auditor operates in a regulatory environment that actively oversees auditors

In circumstances where the conditions under (a) to (d) cannot be met satisfactorily, the group auditor shall obtain sufficient and appropriate audit evidence directly without relying on the work of the component auditor.

The group auditor is responsible for: a. Overall materiality level b. Identify particular classes of transactions, account balances or disclosures that needed lower materiality levels and determine the materiality levels for these transactions/accounts c. To ensure that aggregate misstatements for the component companies do not exceed the overall materiality level for the group d. Together with the component auditor determine the materiality level at the component level

Degree of involvement in component auditors work

Significant components Minimum work required: a. discussing with component auditor or management the business activities of the component companies b. discussing with the component auditor the susceptibility of the component financial information due to error or fraud c. review the component auditors documentation of significant risk of material misstatement

Group may choose to be involve directly in the audit of component companies or request component auditor extend their audit work
Insignificant components Group auditor may perform analytical procedures at group level

Post balance sheet events

The group auditor or the component auditor should perform specific procedures to identify post balance sheet events between year end date and audit report date If the component performs other services besides the financial audit, and in the process discover post balance sheet events, the group auditor may request for the information

Communication with the component auditor

The group engagement team is required to communicate its requirements o the component auditor on a timely basis The communication should include: a. work to be performed b. use for the work c. form and content of the component auditors communication to the group auditor d. component auditors confirmation on their cooperation with the group auditor

Communication with the component auditor

e. f. g. h. i. j. k. ethical requirements that are relevant to the group audit in particular auditors independence identified significant risks that the group auditor need to pay special attention to related party transactions prepared by the component management a list of uncorrected misstatements of the financial statements which are significant description of any significant deficiencies in the internal control of component companies other matters that may be relevant to the group audit component auditors overall findings, conclusions or opinions

Audit evidence
Evaluate adequacy of components auditors work: a. discuss significant matters and determine if it was necessary to further extend the audit procedures b. the extended work can either be done by group auditor or group auditor can request component auditors perform the extra work
Sufficiency and appropriateness of audit evidence: a. evaluate the effect of uncorrected misstatements in the component companies books b. identify instances where sufficient audit evidence could not be obtained

The group auditors must include in their working papers: a. who are the components and their auditors b. the significance of the component auditors work to the group financial statements c. procedures performed and conclusions made about the components financial statements eg: document results of discussions with the other auditor or review the written summary of the components auditors audit procedures d. how they dealt with audit qualifications or adverse remarks found in the components auditors report

When the group auditor could not use the work of component auditor and alternative procedures could not be performed resulting in insufficient audit evidence, the group should express a qualified or disclaimer opinion on the components financial information The group auditor is not responsible for the work entrusted to the component auditors except in circumstances which should have aroused his suspicion about the reliability of the work done by the component auditors

Goodwill on Consolidation
The group audit must review the goodwill apportionment of the subsidiaries into the consolidated financial statements. Goodwill valuation is in accordance to FRS. Compare investment in subsidiary to subsidiarys total of paidup shares and retained earnings