Many of today’s audits are audits of group financial statements (group audits), including audits of the largest and most complex organizations around the world. Group audits are often more complex and challenging than single-entity audits because a group may have many entities or business units across multiple jurisdictions, and component auditors may be involved.
International Standard on Auditing (ISA) 600, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors) is the IAASB’s standard dealing with special considerations that apply to group audits.
To explore the issues related to its extant standard on group audits, the International Auditing and Assurance Standards Board (IAASB) commenced a project in 2015. In December 2015, the IAASB released the Invitation to Comment (ITC), Enhancing Audit Quality in the Public Interest: A Focus on Professional Skepticism, Quality Control and Group Audits, to obtain stakeholder views on key issues regarding quality control, group audits, and professional skepticism. Respondents from a wide range of stakeholders and jurisdictions generally agreed that the IAASB should take action to address the issues presented in the ITC.
In December 2016, the IAASB approved a project proposal to revise ISA 600 and the quality control standards. In October 2017, the ISA 600 Task Force prepared a project update describing the issues under consideration in the revision of ISA 600 and the relationship of those issues to other projects that address the IAASB’s international standards.
The IAASB is now seeking input on its Exposure Draft of proposed ISA 600 (Revised), which was issued on April 27, 2020.
The proposed standard introduces an enhanced risk-based approach to planning and performing a group audit. This approach appropriately focuses on the group engagement team’s responsibility for identifying and assessing the risks of material misstatement of the group financial statements, and designing and performing further audit procedures to respond to those assessed risks. The proposed standard recognizes that component auditors can be, and often are, involved in all phases of a group audit. In these circumstances, the proposed standard highlights the importance of the group engagement team’s involvement in the work of component auditors.
Other key changes and enhancements include the following:
- Scope of the Standard — Clarified the scope of the standard through enhancements to the introductory paragraphs and definitions. The clarifications are intended to address whether, and how, the standard applies for shared service centers, entities with branches and divisions and non-controlled entities (e.g., equity-accounted investees and investments carried at cost).
- Adaptability and Scalability — Introduced a principles-based approach that is adaptable to a wide variety of circumstances and is scalable for audits of groups of different complexity. For example, the proposed standard includes separate sections to highlight the requirements and application material for circumstances when component auditors are involved.
- Linkages with Other Standards — Clarified and reinforced that all ISAs need to be applied in a group audit. This was accomplished by establishing stronger linkages to the other ISAs, in particular to proposed ISA 220 (Revised), Quality Management for an Audit of Financial Statements, ISA 315 (Revised 2019), Identifying and Assessing the Risks of Material Misstatement and ISA 330, The Auditor’s Responses to Assessed Risks.
- Managing and Achieving Quality in a Group Audit — Clarified how the requirements in proposed ISA 220 (Revised) apply to manage and achieve audit quality in a group audit. This includes whether sufficient and appropriate resources are available to perform the engagement, and responsibilities for the direction and supervision of the engagement team and the review of its work. It also includes the role and responsibilities of the engagement partner, particularly sufficient and appropriate involvement of the engagement partner throughout the audit, and to retain the emphasis on the engagement partner’s responsibility for managing and achieving quality at the engagement level.
- Professional Skepticism — Emphasized the importance of exercising professional skepticism throughout the group audit.
- Two-Way Communication — Reinforced the need for robust communication and interactions between the group engagement team, group engagement partner and component auditors.
- Restrictions on Access to People and Information — Included enhanced guidance on how to address restrictions on access to people and information. This includes restrictions on access to component management, those charged with governance of the component, component auditors, or information at the components.
- Materiality — Clarified how the concepts of materiality and aggregation risk apply in a group audit.
- Documentation — Enhanced the documentation requirements and included application material to emphasize the linkage to the requirements in ISA 230, Audit Documentation. The application material also clarifies what the group engagement team may need to document in different situations, including when there are restrictions on access to component auditor documentation.
Invitation to Provide Comments
The proposed standard benefits from the input of a wide range of stakeholders, including preparers, those in governance roles, standard setters, practitioners, regulators and those in the public sector. Respondents are asked to comment on the clarity, understandability and practicality of application of the requirements and related application material of the ED. In consideration of the impact of the COVID-19 pandemic, the IAASB departed from the Board’s normal 120-day comment period for public consultations and is asking for comments by October 2, 2020.
On June 11, the IAASB hosted a 90-minute webinar, in which the background of the project was explained and the key proposed revisions to ISA 600 (Revised) were discussed.
The IAASB will host a second webinar on August 13, 2020 from 8:00 am – 9:30am EDT, during which questions will be addressed in regard to proposed ISA 600 (Revised). You can submit any questions you may have to firstname.lastname@example.org till July 24, 2020. To register for this webinar, please click here.