2341 Communicating instructions to component auditors

Dec-2023

CAS Guidance

When this CAS expressly intends that a requirement or responsibility be fulfilled by the engagement partner, the engagement partner may need to obtain information from the firm or other members of the engagement team to fulfil the requirement (e.g., information to make the required decision or judgment). For example, the engagement partner is required to determine that members of the engagement team collectively have the appropriate competence and capabilities to perform the audit engagement. To make a judgment on whether the competence and capabilities of the engagement team is appropriate, the engagement partner may need to use information compiled by the engagement team or from the firm's system of quality management (CAS 220.A23).

Within the context of the firm’s system of quality management, engagement team members from the firm are responsible for implementing the firm’s policies or procedures that are applicable to the audit engagement. As engagement team members from another firm are neither partners nor staff of the engagement partner’s firm, they may not be subject to the firm’s system of quality management or the firm’s policies or procedures. Further, the policies or procedures of another firm may not be similar to that of the engagement partner’s firm. For example, policies or procedures regarding direction, supervision and review may be different, particularly when the other firm is in a jurisdiction with a different legal system, language or culture than that of the engagement partner’s firm. Accordingly, if the engagement team includes individuals who are from another firm, different actions may need to be taken by the firm or the engagement partner to implement the firm’s policies or procedures in respect of the work of those individuals (CAS 220.A24).

In particular, the firm's policies or procedures may require the firm or the engagement partner to take different actions from those applicable to personnel when obtaining an understanding of whether an individual from another firm (CAS 220.A25):

• Has the appropriate competence and capabilities to perform the audit engagement. For example, the individual would not be subject to the firm's recruitment and training processes and therefore the firm's policies or procedures may state that this determination can be made through other actions such as obtaining information from the other firm or a licensing or registration body. Paragraphs 26 and A62-A66 of CAS 600 contain guidance on obtaining an understanding of the competence and capabilities of component auditors.

• Understands the ethical requirements that are relevant to the group audit engagement. For example, the individual would not be subject to the firm's training in respect of the firm's policies or procedures for relevant ethical requirements. The firm's policies or procedures may state that this understanding is obtained through other actions such as providing information, manuals, or guides containing the provisions of the relevant ethical requirements applicable to the audit engagement to the individual.

• Will confirm independence. For example, individuals who are not personnel may not be able to complete independence declarations directly on the firm's independence systems. The firm's policies or procedures may state that such individuals can provide evidence of their independence in relation to the audit engagement in other ways, such as written confirmation. 

If effective two-way communication between the group engagement team and the component auditors does not exist, there is a risk that the group engagement team may not obtain sufficient appropriate audit evidence on which to base the group audit opinion. Clear and timely communication of the group engagement team's requirements forms the basis of effective two-way communication between the group engagement team and the component auditor (CAS 600.A57).

The group engagement team's requirements are often communicated in a letter of instruction. Appendix 5 contains guidance on required and additional matters that may be included in such a letter of instruction. The component auditor’s communication with the group engagement team often takes the form of a memorandum or report of work performed. Communication between the group engagement team and the component auditor, however, may not necessarily be in writing. For example, the group engagement team may visit the component auditor to discuss identified significant risks or review relevant parts of the component auditor’s audit documentation. Nevertheless, the documentation requirements of this and other CASs apply (CAS 600.A58).

Where a member of the group engagement team is also a component auditor, the objective for the group engagement team to communicate clearly with the component auditor can often be achieved by means other than specific written communication. For example (CAS 600.A60):

• access by the component auditor to the overall audit strategy and audit plan may be sufficient to communicate the group engagement team’s requirements set out in paragraph 40; and

• a review of the component auditor’s audit documentation by the group engagement team may be sufficient to communicate matters relevant to the group engagement team’s conclusion set out in paragraph 41.

Required and Additional Matters Included in the Group Engagement Team’s Letter of Instruction (CAS 600 Appendix 5)

Matters required by this CAS to be communicated to the component auditor are shown in [underlined] text.

Matters that are relevant to the planning of the work of the component auditor:

• A request for the component auditor, knowing the context in which the group engagement team will use the work of the component auditor, to confirm that the component auditor will cooperate with the group engagement team [CAS 600.40(a)].

• The timetable for completing the audit.

• Dates of planned visits by group management and the group engagement team, and dates of planned meetings with component management and the component auditor.

• A list of key contacts.

• The work to be performed by the component auditor, the use to be made of that work [CAS 600.40(preface)], and arrangements for coordinating efforts at the initial stage of and during the audit, including the group engagement team's planned involvement in the work of the component auditor.

• The ethical requirements that are relevant to the group audit and, in particular, the independence requirements [CAS 600.40(b)], for example, where the group auditor is prohibited by law or regulation from using internal auditors to provide direct assistance, it is relevant for the group auditor to consider whether the prohibition also extends to component auditors and, if so, to address this in the communication to the component auditors.

• In the case of an audit or review of the financial information of the component, component materiality (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures), and the threshold above which misstatements cannot be regarded as clearly trivial to the group financial statements [CAS 600.40(c)].

• A list of related parties prepared by group management, and any other related parties that the group engagement team is aware of, and a request that the component auditor communicates on a timely basis to the group engagement team related parties not previously identified by group management or the group engagement team [CAS 600.40(e)].

• Work to be performed on intra-group transactions and unrealized profits and intra-group account balances.

• Guidance on other statutory reporting responsibilities, for example, reporting on group management’s assertion on the effectiveness of internal control.

• Where time lag between completion of the work on the financial information of the components and the group engagement team’s conclusion on the group financial statements is likely, specific instructions for a subsequent events review.

Matters that are relevant to the conduct of the work of the component auditor:

• The findings of the group engagement team's tests of controls of a processing system that is common for all or some components, and tests of controls to be performed by the component auditor.

• Identified significant risks of material misstatement of the group financial statements, due to fraud or error, that are relevant to the work of the component auditor, and a request that the component auditor communicates on a timely basis any other significant risks of material misstatement of the group financial statements, due to fraud or error, identified in the component and the component auditor’s response to such risks [CAS 600.40(d)].

• The findings of internal audit, based on work performed on controls at or relevant to components.

• A request for timely communication of audit evidence obtained from performing work on the financial information of the components that contradicts the audit evidence on which the group engagement team originally based the risk assessment performed at group level.

• A request for a written representation on component management's compliance with the applicable financial reporting framework, or a statement that differences between the accounting policies applied to the financial information of the component and those applied to the group financial statements have been disclosed.

• Matters to be documented by the component auditor.

Other information

• A request that the following be reported to the group engagement team on a timely basis:

  • Significant accounting, financial reporting and auditing matters, including accounting estimates and related judgments.
  • Matters relating to the going concern status of the component.
  • Matters relating to litigation and claims.
  • Significant deficiencies in internal control that the component auditor has identified during the performance of the work on the financial information of the component, and information that indicates the existence of fraud.

• A request that the group engagement team be notified of any significant or unusual events as early as possible.

• A request that the matters listed in paragraph 41 be communicated to the group engagement team when the work on the financial information of the component is completed.