2336 Responsibilities of the component auditor in different types of work to be performed on the financial information of components

Apr-2018

OAG Guidance

The group engagement team might ask the component team to conduct an audit of either

• the component’s complete financial statements, including disclosures; or

• special purpose financial information prepared for the purposes of the group consolidation (which is less than a complete set of financial statements and disclosures, such as standard company forms).

In doing so, the component auditor needs to comply with all the requirements of the various CASs, adapted as necessary to meet the needs of the group engagement team, considering that some of these requirements may be achieved using the assistance of the group engagement team, or other component auditors in the group.

It may also be the case that the component is already required to report separately (for statutory, regulatory, or other third party requirements). In this situation, and where the audit for the separate report will be completed in time to meet the group reporting timetable (OAG Audit 2335, block Components Subject to Audit by Statute, Regulation or Other Reason) the audit of a complete set of financial statements is to be performed using materiality determined in relation to the financial information of the component (stand-alone component materiality), unless such materiality is higher than the materiality determined in the context of the group audit. In some circumstances, the statutory audit report on the financial statements of a component might be sufficient for the group audit purposes, in which case the component auditor would not need to prepare a separate report.

To the extent the existing third-party financial statements need to be either (i) adjusted for differences in the accounting financial framework for use in connection with the consolidated financial statements or (ii) translated or remeasured (in the case of highly inflationary economies) from the local currency, special reports may be required.

If no separate third-party reporting is required, and the component audit is being performed for purposes of the group only, an audit of a complete set of financial statements or an audit of special purpose information may be performed using materiality determined either in relation to the financial information of the component or in the context of the group audit.

In performing an audit of component financial information for the purpose of the group audit, all material account balances, classes of transactions and disclosures that are above component performance materiality need to be audited, regardless of whether such account balances, classes of transactions, or disclosures are within the scope of the group audit or not (i.e., if the consolidated account balances, classes of transactions and disclosures are below group performance materiality). However, when the audit is performed for the purpose of group reporting (and not for statutory or other third party reporting), some of the account balances, classes of transactions and disclosures that need to be audited for the component audit may be audited by the group engagement team, on a consolidated level (for example, goodwill and tax accounts). In this case, and if so instructed by the group engagement team, the component auditor may not need to audit such accounts. The component auditor needs to evaluate the impact of not performing audit procedures on such account balances, classes of transactions or disclosures on his/her ability to obtain sufficient appropriate audit evidence on other account balances, classes of transactions or disclosures that coincide with the accounts audited by the group engagement team. If the component auditor considers there are interrelations between the accounts which are audited at a consolidated level and other significant accounts at the component, the component auditor needs to assess the ability to obtain audit evidence from the group auditor. If the group engagement team is unable to share audit evidence, the component auditor needs to consider if that entails a scope limitation on the component auditor’s work.

Other Materiality Considerations When Non-OAG Firms are Involved

When performing an audit that supports both the group audit and a statutory audit, materiality levels determined within the context of the component’s financial information may be different (lower or higher) than the one communicated by the group engagement team. Under such circumstances, the component auditor performs the work to the lower materiality level as the work for statutory purposes is ordinarily performed concurrently with the work for the group audit. When reporting identified misstatements (either to the group engagement team, management or those charged with governance), the de minimis SUM posting level relevant to the circumstances is applied (e.g., for reporting to the group engagement team, only misstatements over the de minimis SUM posting level identified by the group engagement team are communicated).

If the component auditor has statutory audit reporting responsibilities and therefore uses materiality levels which are greater than those communicated by the group engagement team, the group engagement team has to be notified of this and agree with the materiality levels used.

When OAG is reporting to a non-OAG group engagement team, and OAG is the continuing auditor of the component (e.g., we are not only performing this work to report to the non-OAG group engagement team, but we will also audit the component’s financial statements and issue a report to a third party), we need to carefully consider whether it is appropriate to conduct materiality restricted procedures (regardless of the nature of the financial information) to provide clearance to the group engagement team when we will subsequently be issuing an audit report to our client. Typically a materiality restricted engagement is only appropriate when the group engagement team assumes full responsibility for the work and the report to the group engagement team is not used or referred to in any other way. When considering the appropriateness of conducting materiality restricted procedures, we need to consider whether the materiality determined by the non-OAG group engagement team is so high in relation to component’s financial information, that we are not likely to be in a position to have a sufficient basis on which to form an opinion on the component financial information. In addition, we need to agree with the non-OAG group engagement team on the materiality that would enable us to report, or to agree on another type of engagement that might be more appropriate (e.g. agreed upon procedures). To the extent possible, we would typically perform the work requested by the non-OAG group engagement team at the same time and as part of the work we perform for the statutory audit (although such procedures would typically go beyond the requirements for the group engagement team) to prevent subsequent discovery of facts that may materially alter our opinion as provided to the non-OAG group engagement team.

Similarly, when a OAG group engagement team asks a non-OAG component auditor to perform an audit of the component’s special purpose financial information for consolidation using materiality determined for the component in the context of the group (e.g., higher than would be established for an unrestricted audit of the financial statements of the component), non-OAG component auditors may decline to accept this type of engagement, or request that the materiality set for the component be changed, unless their reporting is solely to the OAG and not for issuance to the component, the OAG assumes full responsibility for the results of their work, and their report to the OAG is not used or referred to in any other way.

Reporting Considerations

Refer to the guidance in OAG Audit 2345 for additional reporting considerations.

The following table outlines what a component auditor would be expected to perform in audits of financial information of components. Such procedures may vary based on the extent of work performed by the group engagement team.

Note that the above guidance also applies in cases where the group engagement team is the one performing an audit of the financial information of a component.

OAG Guidance

The group engagement team may ask the component auditor to perform an audit of, and express positive assurance on, particular account balances, classes of transactions or disclosures. The group engagement team typically informs the component auditor of the materiality levels to be used and the extent to which a risk assessment is to be performed at the component. As mentioned in Audit of the Financial Information of a Component, the component auditor needs to consider whether the materiality determined by the group engagement team is so high in relation to the component’s financial information that it is not likely to be in a position to have a sufficient basis on which to form an opinion on the relevant account balances, classes of transactions or disclosures and to agree with the group engagement team on the materiality that would enable the component auditor to report as requested. The component auditor needs to consider other account balances that are interrelated with and could materially impact the account balances or classes of transactions on which it is reporting. When the results of procedures performed on the account balances or classes of transactions on which the component auditor is reporting indicate any matters that could give rise to material misstatements in other account balances or classes of transactions, the component auditor needs to consult with the group engagement team and, if deemed appropriate, the auditing procedures are extended to cover these account balances.

Refer to the guidance in OAG Audit 2345 for additional reporting considerations.

Note that the above guidance also applies in cases where it is the group engagement team who performs an audit of one or more account balances, classes of transactions or disclosures of a component.

Reporting Considerations

The scope paragraph of the audit opinion will refer only to the accounts audited (e.g., “we have audited the fixed assets and depreciation expenses of the company as of . . .”). The form of reporting would include a “presents fairly, in all material respects” conclusion or “in our opinion, based on our audit restricted within the limits of materiality has been prepared to give the information required to be shown in accordance with the policies and instructions contained in . . .”

Refer to the guidance in OAG Audit 2345 for additional reporting considerations.

OAG Guidance

The group engagement team may ask the component auditor to carry out specified procedures in relation to particular account balances or classes of transactions of the component (e.g., observation of inventory counts or confirmations of accounts receivable), or of the effectiveness of its internal controls, similar to an agreed-upon procedures engagement.

It is important that the group engagement team provide sufficient direction as to the procedures required to be performed in their instructions. The group engagement team takes responsibility for audit scope for the component where specified procedures are to be performed by a component auditor, including appropriate details in the overall group audit plan.

When the component auditor is from another OAG audit team, the group engagement team can provide instructions with the knowledge that there is a common understanding of OAG Audit and our policies and guidance regarding the performance of procedures (e.g., types of sampling, sample size guidance). Thus, the directions to the component auditor can be less detailed than they would have to be if we were performing an agreed upon procedures engagement for a client or an external firm / auditor engagement team. If the component auditor is in any doubt about the nature, timing, or extent of work the group engagement team is asking the component auditor to perform, they need to seek further direction from the group engagement team.

When the component auditor is from an external firm / auditor, the group engagement team will need to be more explicit in the nature, timing, and extent of the specified procedures to be performed and different reporting will be required.

Reporting Considerations

The group auditor may request that specific procedures be undertaken to assist in the group audit. Because the nature and scope of these procedures are normally determined in the context of the group financial statements, the procedures are usually insufficient to support expression of an opinion on the particular transactions or items standing alone. The report on performance of the work needs to reflect this fact. The report will indicate only the factual findings as a result of performing the specified procedures, including exceptions and misstatements found (with respect to internal controls, this would include a detail of deficiencies in internal controls). If no exceptions or misstatements are found, the report may simply indicate that “nothing has come to our attention.”

If the work is performed in connection with the audit of the financial statements of the component, the report to the group auditor needs to be dated no later than report on the component’s financial statements to avoid any extension of responsibility beyond that date. If work is undertaken which is unrelated to the audit of the component’s financial statements, such as a subsequent events review to the date of the group auditor’s report, a separate report needs to be issued on that work, dated as of its completion.

Refer to the guidance in OAG Audit 2345 for additional reporting considerations.

OAG Guidance

When the group engagement team determines that additional evidence needs to be obtained for purposes of the group engagement, a review may be an option at a component that is not significant. However, while a review may bring significant matters affecting the financial information to the group engagement team’s attention, it does not provide the extent of evidence that would be obtained in an audit. In general, either an audit or specified procedures will be appropriate to obtain the necessary evidence regarding component financial information. In deciding on the approach, it is important to keep in mind that the objective of a review differs significantly from that of an audit. A review involves less work than an audit and results in only a limited level of assurance that the financial information of the component is free from material misstatement, expressed in the form of negative assurance. The work envisioned in a review may include

• discussions with management to confirm that there have been no significant changes in the business, management, or accounting systems and controls;

• analytical procedures in relation to the

  • Balance sheet,
  • Income statement,
  • Cash flows statement.

• discussion with management regarding:

  • Review of accounting policies to ensure consistency.
  • The existence of any substantial liabilities or onerous contracts.

• other general inquiries.

Where the results of the review indicate any matters that could give rise to material misstatements in the consolidated financial statements, inquiries need to be extended and, where necessary, tests carried out on the relevant aspects of the statements, including consideration of any underlying deficiencies in internal controls. Advise the group engagement team before any extension of inquiries or further testing is performed. This extension may have an effect on the group engagement team’s overall audit approach. Any unusual matters that are noted in this extended review similarly need to be reported to the group engagement team.

Reporting Considerations

The report needs to indicate only the factual findings as a result of performing the review procedures, including exceptions and misstatements found (with respect to internal controls, this would include a detail of control deficiencies). If no exceptions or misstatements are found, the report may simply indicate that “nothing has come to our attention.” Refer to the guidance in OAG Audit 2345 for additional reporting considerations.