OVERVIEW OF A

GROUP AUDIT
CHAPTER 13
 LEARNING OBJECTIVES

1. Grasp the scope and contents of ISA 600

2. Know the meaning of component, component auditor, and group engagement partner.
3. Trace the requirements and considerations acceptance of a group audit client.
4. Recognize how audit strategy is determined for a group audit.
5. Identify what components of a group company might be.
6. Recognize the required communications between group auditor, component auditor, and those
charged with governance.
7. Fathom what is involved in consolidation.
8. Comprehend the reporting and documentation requirements of a group auditor.
9. Grasp what is required to understand the component auditor.
10. Have a handle on materiality considerations in a group audit.
11. Comprehend the work performed by a component auditor.
 LEARNING OBJECTIVES

12. Understand the use of group audit instructions on international audits.

13. Discern the differences between the various documents used in planning an audit.
14. Describe the contents of a group audit instructions.
15. Understand what is included in audit scope and coverage.
16. Discuss the meaning of critical and significant audit areas.
17. Discuss the issues involved in the audit planning memorandum.
18. Evaluate critical and significant audit areas in the audit planning process.
19. Distinguish between an audit planning memorandum and an audit programee.
20. Describe the components of the audit programee.
21. Identify components of the completion memorandum.
22. Distinguish between how critical and significant audit areas are described in the completion
memorandum and in the audit planning memorandum.
 INTRODUCTION

This chapter takes you through the documents and procedures of an international audit,
based on group audit instructions.
ISA 600 deals with special consideration that apply to group audits, in particular those
involve component auditors.
A component auditor is the auditor who, at the request of the group engagement team,
performs works on the financial information related to a component.
A component is an entity or business activity which financial information is included in
the group financial statements.
The group engagement partner is responsible for the direction, supervision, and
performance of the audit engagement and the auditors report.
 ACCEPTANCE AND CONTINUANCE

In the case of a new engagement the understanding of the group to be audited

may be obtained from group management and from the previous auditor, component
management or component auditors. Important matters to be considered are:
The structure of the group (consolidated company)
Significant components (of the consolidated company)
The use of service organizations
A description of group-wide controls
The complexity of the consolidation process
Component auditors not being part of the network of the group auditor
Having unrestricted access to relevant persons and information
Ability to perform work on the financial information on the components
 OVERALL AUDIT STRATEGY AND AUDIT PLAN

Understanding the Group Being Audited, Its Components, and Their Components
Matters to be considered by the group engagement team are:
Industry, regulatory and other external factors
The applicable financial reporting framework
The nature of the entity
Objectives and strategies and related business risks
Measurement and review of the entitys performance
Instructions issued by group management to components: accounting manual, reporting
package, and a timetable.
Identification and assessment of risks of fraud: the key members of the engagement team (may
include component auditors) are required to discuss the susceptibility of an entity to material
misstatement of the financial statements due to fraud or error, specifically the risks due to fraud
or error, specifically emphasizing the risks due to fraud.
The previous matters to be considered possess a more generic character. Matters specific to
a group, including the consolidation process, are:
Group-wide controls: regular meetings between group management and component
management, monitoring of components operations and their financial results, etc.
Consolidation process: matters relating to the applicable reporting framework, matters relating to
the consolidation process and matters relating to consolidation adjustments.
 OVERALL AUDIT STRATEGY AND AUDIT PLAN

Identifying Components
The group engagement team may apply a percentage to a chosen
benchmark as an aid to identify significant components, which also
involves professional judgement.
The group engagement team may also identify a component as likely to
include significant risks of material misstatement of the group financial
statements due to its specific nature or circumstances: risks that require
special audit consideration.
In other words, a component can be significant based on size
(quantitative consideration) or based on risks (qualitative consideration).
 OVERALL AUDIT STRATEGY AND AUDIT PLAN

Understanding the Component Auditor

The group engagement team must obtain an understanding of the following:
Whether the component auditor understands and will comply with the ethical
requirements that are relevant to the group audit and, in particular, is independent.
The component auditors professional competence.
Whether the group engagement team will be able to be involved in the work of the
component auditor to the extent necessary to obtain sufficient appropriate evidence.
Whether the component auditor operates in a regulatory environment that actively
oversees auditors.
In addition, the group engagement team considers factors such as:
The significance of the component, its materiality, and the identified significant risks.
The level of work to be requested of the component auditor.
The complexity of the component.
Whether the component auditor is part of the network of the group auditor.
.
 OVERALL AUDIT STRATEGY AND AUDIT PLAN

Type of Work to be Performed for Components

Significant components Audit of financial statements (component materiality)

Components likely to include Audit of the financial information

significant risks Audit of one or more account balances, classes of
transactions or disclosures relating to the significant risks
Specified audit procedures relating to the significant risks

Not significant components Analytical procedures

If insufficient audit evidence is available, the group
engagement team selects non-significant components and
performs or requests the component auditor to perform one
or more of the following procedures: audit of the financial
information, audit of one or more account balances, classes
of transactions or disclosures, a review of specific
procedures.
 COMMUNICATION
Information Required in Group Auditor Communication to the Component Auditor
The group engagement team sets out the work to be performed, the use to be
made of that work and the form and content of the communication with the group
engagement team.
Confirmation that the component auditor will cooperate with the group
engagement team
Work to be performed by the component auditor
Ethical requirements that are relevant to the group, in particular the independence
requirements
Component materiality and the threshold above which misstatements cannot be
regarded as clearly trivial to the group financial statements
Identified significant risks of material misstatements of the group financial
statements due to fraud or error that are relevant to the work of the component
auditor
List of related parties
Timetable
Dates of planned visits
List of key contacts
Work to be performed on intra-group transactions
Guidance on other statutory reporting responsibilities (for example on the
effectiveness of internal control)
Specific instructions for subsequent events
 COMMUNICATION
Findings of the group engagement teams tests of control activities of a
processing system that is common for all or some components and tests of
controls to be performed by the component auditor
Findings of internal audit
Request for timely communication of audit evidence that contradicts the
audit evidence on which the group engagement team originally based the
risk assessment at group level
Request for a written representation on component managements
compliance with the applicable financial reporting framework
Matters to be documented
Request for reporting: significant accounting, financial reporting and
auditing matters, going concern issues, litigation or claim events, significant
deficiencies in internal control and information that indicates the existence
of fraud
Request for notification of any significant or unusual events
Request that the component auditor shall communicate, when the work on
the financial information of the component is completed, matters relevant to
the group engagements teams conclusion with regard to the groups audit.
 COMMUNICATION

The Component Auditor Must Communicate to the Group Auditor

In conformity with the ISA 600 standard the component auditor shall
communicate matters relevant to the group engagement teams conclusion with
regard to the group audit.
Component auditors compliance with ethical requirements, including
independence and professional competence.
Component auditors compliance with group engagements requirements
Identification of the financial information of the component
Information on non-compliance with laws and regulations that could give rise
to a material misstatement at group level
List of uncorrected misstatements (unless below the threshold for clearly
trivial)
Indicators of possible management bias
Description of any identified deficiencies in internal control
Other significant matters that the component auditor communicated or
expects to communicate with those charged with governance, including
fraud or suspected fraud
Any other matters that may be relevant to the group audit, or that the
component auditor wishes to draw to the attention of the group engagement
team
Component auditors overall findings, conclusions or opinion
 COMMUNICATION

Group Auditor Communication with Management and Those Charged

with Governance
The following matters shall be communicated by the group
engagement team to those charged with governance of the group:
An overview of the type of work to be performed on the financial
information of the components.
An overview of the nature of the group engagements team
planned involvement in the work performed by the component
auditors on the financial information of significant components.
Instances where the group engagement teams evaluation of the
work of a component auditor gave rise to a concern about the
quality of that auditors work.
Any limitations on the group audit.
Fraud or suspected fraud involving group management,
employees who have significant roles in group-wide controls or
others where the fraud resulted in a material misstatement of the
group financial statement.
 CONSOLIDATION

The group auditor is required to obtain an understanding of the

consolidation process, including the instructions issued by group
management to components.
The consolidation process includes:
Recognition,
Measurement,
Presentation and disclosure financial information od the components in
the group financial statements by way of consolidation,
Proportionate consolidation, or
The equity or cost methods of accounting.
 SUBSEQUENT EVENTS

Subsequent events are events occurring between the date of

the financial statements and the date of the auditors report,
and facts that become known to the auditor after the date of the
auditors report.
In performing subsequent event procedures the component
auditor needs to gain an understanding of the controls and
procedures component management and group management
have in place that affect the component.
REPORTING
The group engagement partner must evaluate
the effect on the group audit opinion of any
uncorrected misstatement and inability to
obtain sufficient appropriate audit evidence.
This evaluation allows her to determine
whether the group financial statements as a
whole are materially misstated.
DOCUMENTATION
In Addition to documentation required by ISA 230 and
other ISAs the group engagement team shall include in
the audit documentation the following matters:
An analysis of components
The nature, timing and extent of the group
engagement teams involvement in the work
performed by component auditors on significant
component
Written communications between the group
engagement team and the component auditors
about the group engagement teams requirements
REVIEW THE GROUP AUDIT INSTRUCTIONS

SECTIONS
A. General
B. Specific Procedures
C. Company
D. Audit scope, fees and coverage
E. Critical and significant audit concerns
F. Management letters
G. New accounting standards
H. Independence
REVIEW THE GROUP AUDIT INSTRUCTIONS

SECTIONS A (General) and B (Specific Procedures)

The general information is about company and audit

standards required.
Specific Procedures include discussion on:
Reporting package and deadline
Separate report information
Currency exchange considerations
Supplemental statements
Details about the completion memorandum
Potential material weakness in internal control
Written representation of management letter comments
Material differences
Specific detail of the client audited
 REVIEW THE GROUP AUDIT INSTRUCTIONS
SECTIONS C (Company)

Sections C opens information about client.

Details are given about company including when it was
organized, where, products, markets, service, sales force,
type of customers and the industrys marketing strategy.
Details could be important in assessing inherent risk.
 REVIEW THE GROUP AUDIT INSTRUCTIONS
SECTIONS D (Audit Scope, Fees and Coverage)

Schedule of planned scope and coverage

Agreed related amount of audit fees
Timing of audit procedures (considered next)
Deadlines (the audit timetable)
 REVIEW THE GROUP AUDIT INSTRUCTIONS
SECTIONS E (Critical and Significant Audit Concerns)

This is an important section that shows which items you will

need to concentrate on during the audit.
The specific areas of concern are:
Revenue
Research and development costs
Third-party regulation
Acquisitions
Restructure accruals
Management letters
Benchmarking
New accounting standards that need to be applied
REVIEW THE GROUP AUDIT INSTRUCTIONS

SECTIONS F (Management Letters) and G (New

Accounting Standards)

The instructions convey the suggestions for management

letter to be reviewed with managers. You also make sure
that your comments are supported in the working papers
and typed for inclusion in the consolidated management
letter.
The final part of the group audit instructions discusses
benchmarking and the new accounting standards that apply
this year.
REVIEW THE GROUP AUDIT INSTRUCTIONS

SECTIONS H (Independence)

It is requested that you and your audit team have a

sufficient understanding of, and have complied with, the
applicable independence requirements.
 THE AUDIT PLANNING MEMORANDUM
STRATEGY & PLAN PART

After reading the group audit instructions, the first order of

business is to meet with the audit staff and discuss strategy for
the audit. Based on the results of the meeting, your senior staff
auditor will write up an audit planning memorandum that will be
reviewed by senior team members. Your senior split the audit-
planning memorandum into a Strategy Part and a Plan Part.
 THE AUDIT PLANNING MEMORANDUM STRATEGY PART

Contents of Audit Planning Memorandum Strategy Part

I. Introduction
II. Follow-up from last year
III. Insights into the company
IV. Initial risk analysis
V. Internal controls and control procedures
VI. Identification of critical audit objectives
VII. Client service aspects item-action
VIII.Important contacts
IX. Service Audit Team
 THE AUDIT PLANNING MEMORANDUM PLAN PART

Contents of Audit Planning Memorandum Plan Part

I. Introduction
II. Audit approach
III. Critical audit objectives
IV. Significant audit areas and accounting issues
V. Fees
VI. Timetable
VII. Client contacts
VIII.Company service team
AUDIT PROGRAMME
(AUDIT PLAN)
The audit programme start out with
the basic data about value of asset
and revenue
The rest of the audit programme
consist of objectives and
procedures of each critical area
tested.
Major steps of the procedures and their
related audit objectives

INVESTMENT

Audit procedures there are 3 objectives :

1. All dividend, interest and other income is
recorded; gains and lossses on sales and other
dispositions are recognised; premiums and
discounts and related amortisation are recorded.
2. Investment exist and are owned by the entity
3. Valuation method
PROCEDURES :

1. Verify accuracy of relevant

supporting schedules and agree to
trial balance and subsidiary records.
2. Confirm investment held by third
parties.
3. Agree to authorisation in the minutes
of the board of directors
4. Vouch purchases of investments to
supporting ducumentation
a) Review purchase contracts,
due dilligence
b) Review acoounting three
companies
5. Vouch sales of investments to
supporting documentation and
recompute gain or loss on disposal
6. Eximine latest financial statements of
investees
7. Review disclosure
8. Determine the application of correct
rates of exchange for ammounts
denominated in foreign currecy
9. Conclude
 EXPENSE AND PAYABLE

OBJECTIVE :
All unpaid amounts
due to supplier or Accounting
All cash
other goods and principles are
disbursemen
services received appropriate and
ts are valid
prior to year-end are applied
include otherwise and property
consistently
accrued recorded
P
Compare amounts for trade payables, accruals, purchases,
R period expenses, and payments and budgets

O Verify the mathematical accuracy of relevant supporting

schedules and agree to trial balance and subsidiary records
C
E Review liabilties recorded after the end of the period and
review subsequent cash payments
D
U Vouch purchases of inventory from perpectual recorded

R
Vouch claims for credit for supplier
E
S
 Vouch purchases and other disbursements from voucher
P register to supporting ducuments including relevant data

R Vouch purchases of inventory to and from perpectual

records
O
Trade purchases from receiving reports to supplier
C invoices and voucher register including relevant data

E Determine the application of correct rates of exchange for

amounts expressed in foreign currency
D
U Review classification & description account

R Review acconunting principles

E
S conclude
 REVENUE AND ACCOUNT RECEIVABLE
(CONFIRMATION)

OBJECTIVE :
All revenue from the sale of goods are recorded
accurately
Recorded revenues are in conformity with proper
revenue recognition methods consisntently
applied and adequately disclosed
Cut-off
Trade accounts receivable represent uncollected
sales
All cash collections are accurately recorded
Non-cash credit to receivables are valid and
accurate
Valuation of trade receivables is appropriate
 PROCEDURES :

Confirm recorded receivables ( based on audit objective 4 &

5)
a) Check replies to confirmations and investigate
exceptions :
Positive confirmation
Differences in amounts
a) Send second request where replies to positive request
are not received
b) Investigate undelivered requests returned by post office
c) Where replies are not received to positive requests for
confirmation, apply alternative audit procedures
d) Summarise result of confirmation requests and
alternative procedures
Vouch recorded receivables to subsequent cash receipts
Vouch sales from sales register to shipping records
 INVENTORY AND COST SALES

Inventory is accurately compiled

and priced in conformity with
acceptable methods
OBJECTIVE Cut-off is proper
Valuation of inventories is
apropriate
PROCEDURES :

Test priced inventory listing :

a) Check the mathematical accuracy of the listing
b) Agree test counts with recorded quantities
c) Compare items on final inventory listing to phisical
inventory tags, sheets, or list and vice versa
d) Determine that unused, voided and no quantity tags are
accounted for properly
e) Reconcile totals with general ledger control totals
f) Ascertain that corrections and adjustments to the final
listing are proper
obsolute inventory
cost allocation for inventory
g) Scan the inventory listing and investigate unusual
quantities or amounts
 Vouch purchases of inventory to and
from perpetual record
Vouch sales from perpetual inventory
records
Ascertain that cut-off is proper
Determine the application of correct rates
of exchange for amounts expressed in
foreign currency
Review accounting principles
Review disclosure
Conclude
 ASSET BALANCE /EXPENSE

OBJECTIVE :
Amount prepaid, deffered, or capitalised
are expected to provide future benefits for
matching with expected future income;
amount and related amortisation are
calculated correctly;
write-down on loss provision recorded, if
apropriate.
 PROCEDURES
Test
Verify the
Vouch calculations of
mathematical accuracy
of relevant supporting significant amortisation
schedues and agree to additions and
trial balance and during the unamortised Review
subsidiary records period balances disclosures

Agree Ascertain Test write-

beginning that the offs during
balances in amortisation the period
schedules to period is
prior periods appropriate
workpapers
 All
capitalised
leases are
recorded at
EXPENSE AND the
OBJECTIVE apropriate
CAPITALISED amounts and
BALANCE operating
base, rentals
are
appropriately
 PROCEDURES

Verify
classificatio Recompute
Compare n and expense,
Consider
operating accounting accruals,
performing
lease rent treatment of and
substantive Conclude
expense to leases prepayment
analysis
prior periods accounted s related to
procedures
and budgets for as operating
operating leases
leases
 COMPLETION
MEMORANDUM
 Critical Audit Special Audit
General Acounting Issues
Areas Problems

Manager and Inventories Foereign Financial

partner review Account exchange Investment
Audit schedule receivables Pension plan Nastional
Going concer Revenue Post retirement Enterprise
opinion recognition benefits
Intercompany Group structure
accounts
Account payable
 Others Matters Outstanding Matters Attached Schedules

Illegal and questionable Receipts of forecast to Summary of audit

acts ensure the difference
Management letter appropriateness of book Elimination entries
Summary of unadjusted value of intangible assets
audit differences
Blance sheet,
Receipt of confirmation income statement,
Status of statutory that accounts receivables
finacial statements other income
are collectable schedule
Receipt of certain bank Working papers
confirmation Tax paperx
Receipt of documents
supporting ownership of
subsidiaries
Thanks!
Any questions?