Background

The need for the audit profession in general to improve the quality of group audits is regularly highlighted by external regulatory inspections, and group audits present real challenges, many of which relate to the need to work effectively with other audit firms in a group situation when there are component auditors.

In 2022, the FRC published ISA (UK) 600 (Revised September 2022), which is effective on or after 15 December 2023, so effectively for years ended 31 December 2024 onwards.

The changes have also been made to ensure that the standard better aligns to recently revised standards, such as the quality management standards and the revised ISA (UK) 315 on identifying and assessing risk.

The new and revised requirements strengthen the auditor’s responsibilities related to professional scepticism, planning and performing a group audit, two-way communications between the group auditor and component auditors, and documentation. In this article we consider the key changes and what this will mean for audit firms acting as either a group or component auditor.

The key changes to Group Audits

Some of the main key changes are:

1. Further emphasis on using a proactive risk-based approach to the audit of groups. So, more focus on identifying and assessing the risks of material misstatement, planning the approach to the audit and carrying out procedures that respond to the assessed risks.
2. The definition of the ‘engagement team’ now specifically includes those who perform audit procedures on a component as part of a group audit. The group engagement partner is now responsible for the quality of the component auditors’ work and determining the competence and capabilities of the component auditor.

As such, the new standard treats all parties involved in delivering the audit work across all components of the group as a single engagement team, and there will need to be greater communication between all parties throughout the audit.

1. Enhanced requirements in relation to documenting the exercise of professional scepticism. This includes an evaluation of whether sufficient appropriate audit evidence has been obtained (including by component auditors) to provide a basis for forming an opinion on the group financial statements.
2. The definition of ‘significant components’ has been removed. Emphasis has been given to the consideration of risks of material misstatement at the assertion level of the group financial statements that are associated with components (regardless of where the associated balances sit within the group structure).
3. The group engagement partner also sets component performance materiality.
4. The group engagement partner is responsible for ensuring that the component auditor complies with the FRC Ethical Standard, even where components are located within jurisdictions that do not have to comply with the standard.

Practical considerations 

Although many of the practical issues arising within group audit assignments are already part of working practices, the revised standard brings some into greater focus and increases the responsibility placed on the group engagement partner to obtain sufficient appropriate audit evidence. The following are some examples that audit teams, and their clients, may encounter:

• Earlier Contact and More Contact – With the need for the group engagement team (partner) to direct the group audit, there will be the need to meet with the component auditors much earlier in the audit process (timetable) to agree audit approach and logistics. Retrospective reviews of the component auditors work will not be sufficient.In order to enable this, it maybe that:
  1. The client involves both the component auditor and group auditor, in pre-audit meetings for the component to ensure all parties are involved; and / or
  2. The group auditor invites (involves) the component auditor in meetings with the client throughout the audit so they are fully part of the team, and all components of the group can be covered in discussions with the clients management and finance team.
• Review of Component Auditors Files – The engagement team need to plan the review of the component auditor work carefully, including:
  • Who will perform the review and when.
  • Whether the review can be performed remotely or will require a visit to the component auditor.
  • For many firms, using electronic working papers, it may be possible to view the files remotely via screen-sharing technology.
  • If a visit is required, the engagement team will need to consider logistics.
• Language / Translation – UK audit firms sometimes deal with component auditors who cannot communicate in English. In this case, the UK audit firm will have to obtain its own relevant language skills and translation.
  Or if this is not deemed appropriate, they may need to insist to the client that it goes out to the subsidiary to do audit work directly, or another, more appropriate audit firm, is appointed to the component to enable the necessary effective communication and review to take place.
• Fees – Where group auditors request that component auditors carry out specific procedures, over and above those required for the local audit, component auditors need to consider the impact on their budget, fees and timetable.

Conclusion 

While it is logical to adopt a more proactive risk-based approach, in practice, this is likely to result in more work for the group engagement team and group engagement partner, particularly in light of the enhanced responsibilities for the direction, supervision and review of the work of component auditors.

As auditors of a significant number of groups, Barnes Roffe has extensive experience and expertise of conducting compliant audits both as group auditor and component auditor. If you would like further information or guidance please contact us today.