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Clarified Auditing Standards: Audits of Group Financial Statements – Part 3

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Oct 15th 2015
CPA Firm Support Services, LLC
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This article focuses primarily on circumstances when the group auditor plans to take responsibility for the component auditors' work and issues a standard group audit report.

The group engagement team must determine the extent of the involvement with component auditors' work when they assume responsibility for component auditors' work. Issuing a standard report requires the group engagement team to be involved in the component auditors' work. Otherwise, the group auditor should make reference to the component auditors' reports in the report on the group financial statements.

For significant components, assuming responsibility for component auditors' work underAU-C Section 600, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors), requires the group auditor to be involved in the risk assessment procedures for the component and to be informed of relevant subsequent events of the component. Additional procedures may include:

  • Making client acceptance and continuance decisions.
  • Expanding the group engagement team's risk assessment process.
  • Determining materiality levels for both the group and component financial statements.
  • Developing the group audit strategy considering the results of risk assessment procedures at the group and component levels, and pervasive group internal controls over financial reporting systems and the consolidation process.
  • Selecting significant components and their financial statement classifications to be subjected to auditing procedures.
  • Making and documenting communications between the group engagement team and component auditors.
  • Evaluating audit evidence obtained from the group and component audits to form an opinion on the financial statements.

Ordinary Steps in Audit Planning

1. Complete or update basic documentation necessary to demonstrate an understanding of the group entity's business and environment, including a Client Acceptance and Continuance Form, a General Ledger Analysis Worksheet documenting unusual matters, internal-control flowcharts, internal-control questionnaire, and systems walk-through memo or other documentation. Document any and all inquiries of management or client personnel.

2. Assess control risk by group financial statement classifications, combine with inherent risk documentation, and assess the level of risk of material misstatement for material financial statement classifications. Use the assessed risk at financial statement level from factors documented on a Client Acceptance and Continuance Form and other documentation to establish planning materiality, tolerable misstatement (performance materiality), and the lower limit for individually significant items at the financial statement level. Use the assessed risk of material misstatement at the assertion (financial statement classification) level to establish tolerable misstatement (performance materiality) and the lower limit for individually significant items at the financial statement classification level. Design a sampling or nonsampling plan using materiality levels for financial statement classifications. Develop and document the audit strategy for material financial statement classifications.

3. Document planning activities and decisions in a Planning Document or other documentation. Hold a meeting with the in-charge accountant, engagement leader, and other members of the group engagement team to discuss planning results, brainstorm, and finalize the group audit strategy. Tailor the audit plan (program) based on the results of risk assessment procedures.

4. Hold a planning and brainstorming meeting with all group engagement personnel. Make work assignments and provide necessary training for staff personnel. Prepare an engagement letter and prepare planning communication with persons charged with group-entity governance.

Specific Group Audit Planning Procedures

1. The group engagement team must develop a group audit strategy and audit plan (program), including the determination of the extent to which the work of component auditors will be used. The group audit partner is responsible for the review of the group and component audit strategies and audit plans.

2. Key members of the group engagement team, and component auditors as considered necessary, are required to brainstorm and discuss risks of material misstatement due to error or fraud. These discussions may include:

  • Knowledge of components, their environments, business risks, and groupwide controls.
  • Potential risks of material misstatements due to error or fraud at the group and component levels.
  • Any biased practices by group or component management.
  • Incentives or pressures that may cause any member of management, boards of governance, or other group or component employees to commit or rationalize committing fraud.
  • The risk group or component management may override controls.
  • Uniformity of accounting policies used by components and how any differences are identified and adjusted.
  • Any fraud or noncompliance with laws or regulations.

3. The group audit strategy should include the determination of materiality levels for the group financial statements.

4. Component materiality should be determined and documented taking into account all component units, the aggregate of which should normally be less than group materiality levels.

5. The group auditor is required to design appropriate responses to risks of material misstatement due to error or fraud at the group level and to determine such responses are designed at the component level as necessary.

6. A Planning Document should be prepared summarizing decision-making for the group audit and the involvement with the work of the component auditors.

The next part of this article will discuss the performance and completion phase of group audits.

More Information
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  • Performing Auditing Tests of Balances Procedures
  • Staff Training Series for Entry-Level Accountants, New In-Charge Accountants and Engagement Leaders
  • Key Accounting Issues for Non-Profit Organizations
  • A Practical Potpourri of Time Savings on Audits
  • The Financial Reporting Framework for Small- and Medium-Sized Entities

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Related articles:

Clarified Auditing Standards: Audits of Group Financial Statements – Part 1
Clarified Auditing Standards: Audits of Group Financial Statements – Part 2

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