Exposure Draft ISA 600 – Group Audits
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The document summarizes an exposure draft of proposed revisions to ISA 600 on group audits. It provides an overview of the journey to revising the standard, including key milestones. It discusses public interest issues addressed in the revisions and linkages to other IAASB standards. The exposure draft focuses on a risk-based approach to group audits and enhances requirements on planning, materiality, documentation and other areas. It provides more guidance on situations with restricted access. The document outlines next steps in the process leading to a final revised standard.
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Exposure Draft ISA 600 – Group Audits
- 1. Exposure Draft ISA 600 – Group Audits Webinar, June 11, 2020 Len Jui, IAASB Member and Task Force Chair Josephine Jackson, IAASB Member and Task Force Member Jasper van den Hout, IAASB Principal and Lead Staff
- 2. Overview The Journey So Far Public Interest Issues Linkages with Other Standards Scope and Applicability Planning and Performing a Group Audit Engagement Structure of the Standard Acceptance and Continuance, including Restrictions on Access Understanding the Group and Its Environment Materiality Documentation Other Matters Way Forward Page 2 |
- 3. The Journey So Far Page 3 |
- 4. Information gathering ITC Project Proposal Project Update Exposure Draft Project Timeline Work commenced on group audits in January 2015 Project proposal approved in December 2016 Project update issued in September 2017 Invitation to Comment issued in December 2015 Task Force commenced work in early 2019. ED-600 was issued on April 27, 2020.
- 5. Public Interest Issues Page 5 |
- 6. Public Interest Issues Page 6 •Keeping the IAASB’s standard on group audits fit for purpose •Encouraging proactive management of quality at the engagement level Reinforcing the need for robust communication and interactions during the audit •Fostering an appropriately independent and challenging skeptical mindset of the auditor Public Interest
- 8. Stand Back Requirements Key foundational standards: ISQM 1, ISA 220, 230, 240, 315 (Revised 2019), 320, 330 ISA 600 Page 8 Special Considerations Standard
- 9. Proposed ISA 220 (Revised), ISA 315 (Revised 2019) and ISA 330 • ED-600 is based on proposed ISA 220 (Revised) as presented to the Board in March 2020 – Engagement team definition – Leadership responsibilities for managing and achieving quality on a group audit – Being able to be involved in the work of the component auditor – Relevant ethical requirements, including those related to independence – Engagement resources – Engagement performance • Greater alignment with ISA 315 (Revised 2019) and ISA 330 – Understanding the entity and its environment, the applicable financial reporting framework and the entity’s system of internal control – Identifying, assessing and responding to the risks of material misstatement – Evaluating the sufficiency and appropriateness of audit evidence obtained Page 9
- 10. Scope and Applicability Page 10 |
- 11. Page 11 • Group financial statements – Definition is the ‘entry point’ into ED-600 – Definition retains the notion that group financial statements include the financial information of more than one entity or business unit – Definition includes the term ‘consolidation process’ – description of consolidation process enhanced • Component – Reflects the ‘auditor’s view’ for purposes of planning and performing the group audit – Definition uses terms ‘location, function or activity’ • Scalability Special Considerations Standard
- 12. Planning and Performing a Group Audit Engagement Page 12
- 13. Focus of Extant ISA 600 Significant Component A Group FS Equity Revenue Costs/ Expenses Liabilities Significant Component B Non-significant Component C Non-significant Component D Assets Page 13
- 14. Planning and Performing a Group Audit Engagement • Focuses on identifying, assessing and responding to the risks of material misstatement of the group financial statements “The right work done by the right people at the right locations” • Think about – What (identifying and assessing risks of material misstatements) – How and when (developing the strategy to respond to assessed risks) – By whom and where (determining which resources will perform procedures to obtain evidence) • Greater alignment with the requirements in ISA 315 (Revised) and ISA 330 • Greater focus on the group engagement team’s responsibility, with the assistance of component auditors as needed Page 14
- 15. Risk-Based Approach Component A Group FS Equity Revenue Costs/ Expenses Liabilities Component B Component C Component D Assets Page 15
- 16. LocationsFew Many Nature of business/ operations Single line of business in same industry Different lines of business in different industries System of internal control, including information system Common or centralized Unique, de-centralized Considerations in Applying the Risk-Based Approach Likelihood of involvement of component auditors None or lower Greater Page 16
- 17. Risk-Based Approach: Responsibilities and Involvement Component Auditors • Group engagement team takes responsibility but may assign procedures to component auditor – Component auditor may be involved given that they may have a more in-depth knowledge of the component and the component’s business activities • Component auditor may be involved throughout the audit • Responding to risks of material misstatements: group engagement team may request component auditor to – Design and perform further audit procedures on the entire financial information of the component – Design and perform further audit procedures on one or more classes of transactions, account balances or disclosures – Perform specific further audit procedures as identified and communicated by the group engagement team Page 17
- 18. • Emphasized in a requirement the importance of communicating the group engagement team’s expectations and the component auditor’s responsibilities – Communications shall take place at the appropriate points in time throughout the group audit and reflect the component auditor’s involvement in various phases of the group audit • Added application material based on guidance in ISA 260 (Revised) – Matters that may contribute to effective two-way communication – Factors that may influence the form of communication – Appropriate timing for communications • Added application material on possible need to communicate with component auditors regarding non-compliance or suspected non-compliance with laws and regulations Page 18 Risk-Based Approach: Two-Way Communication
- 19. Similarities between Extant and Risk-Based Approach • Obtain sufficient appropriate audit evidence to provide a basis for the opinion on the group financial statements • Understanding the entity and its environment, including the group structure, business activities, and internal control • Involvement of component auditors • Responsibilities of the group engagement partner Page 19
- 20. Structure of the Standard Page 20 |
- 21. • Considerations when component auditors are involved – ED-600 includes in each section of the standard a sub-section on considerations when component auditors are involved – Clarifies the interactions between the group engagement team and component auditors throughout the different stages of the group audit • Going concern, related parties and subsequent events – Added paragraphs on going concern and related parties into Risk Assessment and Response to Assessed Risks of Material Misstatement sections Page 21 Structure of the Standard
- 22. Acceptance and Continuance, including Restrictions on Access Page 22
- 23. Acceptance and Continuance • Aligned with proposed ISA 220 (Revised) • Overarching requirement to determine whether sufficient appropriate audit evidence can be obtained – Based on requirement in extant ISA 600 – Including preliminary determination whether component auditors need to be involved • New requirement for when sufficient appropriate audit evidence can not be obtained after acceptance or continuance • Added requirement that group management needs to acknowledge and understand its responsibility in accordance with ISA 210 to provide the engagement team with unrestricted access to information and, to the extent possible, relevant persons within the group Page 23
- 24. Page 24 Access to People • Unable to access component auditor • Unable to access (component) Those Charge With Governance, (component) management Access to Information • Audit documentation need to be kept in component jurisdiction • Audit documentation are not allowed to be shared electronically • Restrictions to travel to a country • Access component auditor’s audit work papers is restricted because of war, other unrest or outbreaks of infectious diseases “ISA 600 (Revised) can’t enforce access to people and information, but it can help by developing guidance for situations where access to people or information is restricted” Types of Access Issues
- 25. • ED-600 differentiates between – Restrictions on access outside the control of group management – Restrictions on access imposed by group management • ED-600 includes extensive application material on how the group engagement team may be able to overcome restrictions on access to people and information, for example when – Laws or regulations restrict sending relevant audit documentation across borders – The group has a non-controlling interest in an entity that is accounted for by the equity method – War, civil unrest or outbreaks of disease restricts access – Access to component management or those charged with governance of the component is restricted Page 25 Restrictions on Access to People and Information
- 26. Understanding the Group and Its Environment Page 26
- 27. Understanding the Group and Its Environment • ED-600 expands on how ISA 315 (Revised 2019) is to be applied in relation to an audit of group financial statements – focuses on the additional complexities – Wide variety of group structures and businesses that may exist across multiple geographical locations or jurisdictions – Multiple lines of business, which may be in different industries (e.g., a captive insurance company for a manufacturing entity) – Different accounting policies and practices across the entities or business units – Consolidation process • Appendix 3 provides examples of controls that may be helpful in obtaining an understanding of the group’s system of internal control in a group environment Page 27
- 28. Common Controls and Centralized Activities • ED-600 does not refer to group-wide controls – Term was thought to be confusing – Auditors sometimes placed undue reliance on group-wide controls • ED-600 addresses controls in a group audit more broadly through introducing the concepts of – Common controls: controls that are intended to operate in a common manner across multiple entities or business units – Centralized activities (e.g. shared service centers) • Most application material related to group-wide controls is retained and new application material is added – Why obtaining an understanding of common controls may be important – How the group engagement team may determine the commonality of a control across the group Page 28
- 30. • Added new definition of aggregation risk – Addresses calls for greater clarity about the concept of aggregation risk – Aggregation risk is particularly important to understand and address in a group audit • Changed definition of ‘component materiality’ to ‘component performance materiality’ – Both terms are used in extant ISA 600, but IAASB believes this may have led to confusion • Enhanced requirements and application material – Group engagement team determines component performance materiality and communicates it to component auditors – Component performance materiality must be lower than group performance materiality – Clearly trivial threshold at component level cannot exceed threshold at group level – Factors to take into account in setting component performance materiality Page 30 Materiality Considerations in a Group Audit
- 32. • Key enhancements made include the following – Added a new requirement to document significant matters related to access to people and information, and how those matters were addressed – Deleted the requirement relating to an analysis of components and the type of work to be performed on components (addressed by ISA 300) – Added a requirement for documentation of the group engagement team’s evaluation of, and response to, findings of the component auditor with respect to matters that could have a material effect on the group financial statements • Expanded the related application material to address input from the Board and through outreach, including when the group engagement team is restricted from, incl. component auditor's documentation in its audit file • IAASB is also considering FAQs/Staff guidance to address implementation issues related to the documentation requirements (including on restrictions) Page 32 Documentation
- 34. Other Matters • Professional skepticism – Introduction highlights the importance of professional skepticism and professional judgment in performing a group audit engagement – Requirement to “stand back,” prior to forming a group audit opinion, and evaluate whether sufficient appropriate audit evidence has been obtained • Appendices – New appendix that provides additional guidance about the matters that the group engagement team may consider in determining whether, and the extent to which, component auditors are to be involved in the group audit – Appendices 4 and 5 of extant ISA 600 have been deleted • Conforming and consequential amendments Page 34
- 35. Way Forward Page 35 |
- 36. Page 36 | October 2, 2020 Deadline for comments on ED-600 September 2021 In ED-600 the IAASB proposes 18 months after approval of the final standardTargeted approval date of ISA 600 (Revised) Effective date – TBD Second webinar on ED-600 August 13 2020 Way Forward
- 37. Page 37 • When? – August 13, 2020 • Time? – 8:00am – 9:30am EDT • Style? – Question & answer – Questions to be submitted before July 24, 2020 An invitation to register and submit your questions will follow! Next Webinar
- 38. www.iaasb.org For copyright, trademark, and permissions information, please go to permissions or contact permissions@ifac.org. Page 38
Editor's Notes
- Thank Task Force, Staff and Board Work commenced on group audits in January 2015 Based on: Findings from the IAASB’s post implementation review of the clarified ISAs Inspection findings of audit oversight bodies Ongoing stakeholder outreach Included in Work Plan 2015-2016 Invitation to Comment issued in in December 2015 Included three (interrelated) topics: Professional Skepticism Quality Control standards (ISA 220, ISQC 1) ISA 600 The ITC also included a discussion of issues that were considered relevant to more than one of the quality control, group audits and professional skepticism projects Respondents to the ITC agreed on issues identified Varying views on the specific IAASB actions to address these issues Project proposal approved in December 2016 Developed using all information till date. Project update issued in September 2017 Task Force discussed various topics between project proposal and issuance of project update Went to Board on some of the issues (mainly scoping a group audit) Task Force focused its efforts on further liaison with the task forces responsible for revisions to ISQC 1, ISA 220, and ISA 315 (Revised) before progressing the other aspects of the ISA 600 project any further Changes were contingent on changes made to these foundational standards Finite staff resources and Board capacity Project update provided overview of the Task Force’s activities till date. In 2019 the Task Force started to work towards an Exposure Draft of ISA 600 (Revised) Started in 2019 with progressing the revision of ISA 600. Progressed throughout the year. Initial drafting presented in June 2019 Substantial drafting in September 219 First read in December 2019 Approval in March 2020 Went to three CAG meetings: March 2019, September 2019, March 2020 Many key stakeholders represented in CAG Extensive outreach with various stakeholders Regulators, IOSCO, IFIAR, Basel etc. Firms, including SMP and GPPC Liaison IESBA Engagement team definition IESBA’s fees project
- Keeping the IAASB’s standard on group audits fit for purpose Scope of the standard Linkages with other standards Adaptability and scalability Documentation Encouraging proactive management of quality at the engagement level Managing and achieving quality in a group audit Planning and performing a group audit engagement Restrictions on access to people and information Component materiality Fostering an appropriately independent and challenging skeptical mindset of the auditor Fostering the appropriate exercise of professional skepticism Reinforcing the need for robust communication and interactions during the audit Robust communications and interactions between the group engagement team / group engagement partner and component auditors
- Leadership responsibilities for managing and achieving quality on a group audit - GEP should be sufficiently and appropriately involved throughout the group audit engagement … Engagement resources - GEP shall determine that component auditors have the appropriate competence and capabilities, including sufficient time, to perform the assigned audit procedures at the component Engagement performance GEP shall take responsibility for the nature, timing and extent of direction and supervision of component auditors and the review of their work
- Group financial statements Definition retains the notion that group financial statements include the financial information of more than one entity or business unit Entity and business unite are used in extant ISA 600 and are commonly used in practice today Definition includes the term ‘consolidation process’ – description of consolidation process enhanced A consolidation process ‘in accordance with the requirements of the applicable financial reporting framework’ The aggregation of the financial information of branches or divisions Component Reflects the ‘auditor’s view’ for purposes of planning and performing the group audit Not necessarily aligned with how management views the entities or business units comprising the group Definition uses terms ‘location, function or activity’ Intended to be flexible enough to cover the many ways in which the group engagement team might view the group structure in designing the most effective and efficient approach to planning and performing the group audit Scalability Construct of the work effort New approach for planning and performing a group audit which is based on risks instead of identifying significant component This approach makes the standard scalable as the group engagement team now focusses on identifying and assessing risks at the group level and determines that the planned scope of work adequately responds to those risks, rather than the approach in extant ISA 600 whereby the scope of the work is driven primarily by the identification of components and determination of their significance Separate sections when component auditors are involved Clarifies how to navigate the standard when component auditors are involved This provides scalability for circumstances where the group engagement team does not involve component auditors by making it easier to identify which requirements apply and which do not.
- Component auditor may be involved throughout the audit Risk assessment procedures Identifying and assessing risks of material misstatements Responding to assessed risks of material misstatements
- Considerations when component auditors are involved ED-600 includes in each section of the standard a sub-section on considerations when component auditors are involved Clarifies the interactions between the group engagement team (GET) and component auditors throughout the different stages of the group audit Other advantages When component auditors are involved, clearer that they are an integral part of the engagement team Enhances scalability as it is easier to see which requirements apply when component auditors are not involved - Considered having all considerations when CA are involved in one section. Going concern, related parties and subsequent events Based on comments from IAASB, IAASB CAG and outreach, added paragraphs on going concern and related parties into Risk Assessment and Response to Assessed RoMM sections Subsequent events requirements in ED-600 are similar to requirements in extant 600
- Added requirement that group management needs to acknowledge and understand its responsibility in accordance with ISA 210 to provide the engagement team with unrestricted access to information and, to the extent possible, relevant persons within the group Clarified that access restrictions can be management-imposed or can arise due to law, regulation or other conditions. When restrictions are imposed by management, it may result in other implications for the audit (e.g., concerns about management integrity) Clarified that laws and regulations may prohibit access to persons within the group
- ED-600 expands on how ISA 315 (Revised 2019) is to be applied in relation to an audit of group financial statements – focuses on the additional complexities … Consolidation process There may be a significant amount of intercompany transactions or elimination entries There may be consolidation software that interfaces with multiple general ledger systems from different entities or business units
- ED-600 does not refer to group-wide controls Term was thought to be confusing - Controls over group financial reporting (including consolidation) - Controls over processes that are the same across the group or a part of the group (e.g. controls at a shared service center) Auditors sometimes placed undue reliance on group-wide controls - Relying on group-wide controls without testing them - Relying on group-wide controls when the extent of the testing has not resulted in sufficient appropriate audit evidence (e.g., to reduce the extent of substantive procedures) - Relying on group-wide controls that are not sufficiently precise
- Added new definition of aggregation risk … Aggregation risk is particularly important to understand and address in a group audit Greater likelihood that audit procedures will be performed on accounts, classes of transactions or disclosures that are disaggregated across components
- ITC Comments The IAASB noted the issues identified in the ITC with respect to documentation for group audit engagements, along with the comments and suggestions provided by respondents to the ITC. In its deliberations, the IAASB discussed the need in particular for additional guidance on: Documentation of significant matters related to restrictions on access to people or information, and how such matters were addressed; Documentation needed to evidence the nature, timing and extent of the group engagement team’s direction and supervision of the component auditors, and the review of their work; and Component auditor documentation that may need to be included the group engagement team’s file.
- Deletion paragraph 4 and 5 Appendix 4 of extant ISA 600, which provides examples of matters that may be included in the component auditor’s conformation to the group engagement team, has not been included in ED-600. The IAASB noted that practice has evolved from the time that extant ISA 600 was issued and many firms have created their own templates for communications with component auditors. The IAASB was of the view that the requirements and application material in ED-600 are organized more clearly and therefore there is no longer a need for Appendix 5, which summarizes the matters that are required by extant ISA 600 to be included in the group engagement team’s letter of instruction, and additional matters that may be included.