2342 Communicating among group engagement teams and component auditors during the audit

Dec-2023

OAG Guidance

Taking stock meetings facilitate the direction and supervision of engagement team members by the group engagement leader and more experienced engagement team members and provide some of the evidence of the group engagement leader’s fulfillment of the CAS 220.30 requirement. It also provides an opportunity for the group engagement leader to be involved throughout the audit in order to manage and achieve audit quality and to have a basis to determine whether significant judgments made, and conclusions reached, are appropriate given the nature and circumstances of the engagement (as required by CAS 220.13.  

Group auditor responsibilities

In the context of a group audit, the group engagement leader may determine that an informal discussion between the group engagement leader and component engagement leader may be the most effective and efficient approach to supervise some component engagement teams and to review their work. In respect of other component engagement teams (e.g., a component engagement teams that performs work on a significant component), the group engagement leader may schedule more formal taking stock meetings as part of their ongoing involvement in the supervision of the component engagement team, including to review the progress of the component engagement and evaluate whether circumstances exist that require adjustment to elements of the group audit strategy and plan.

The group engagement team may become aware of matters that need to be considered by component management in preparing component financial statements or other reports, or that need to be considered by the component auditor in reporting on the component. The group engagement team needs to determine whether those matters have been communicated appropriately to the component auditor.

Documentation

The group engagement leader applies professional judgment in determining how their involvement in the work of the component engagement teams throughout the engagement will be evidenced. Documentation of taking stock meetings (formal and informal) held with the component engagement teams may help the group engagement team to create a record of team meetings that have taken place, the matters discussed, and judgments made, and help to reflect the group engagement leader’s direction and supervision of the component engagement teams. Refer to OAG Audit 7022 for further guidance on the documentation of taking stock meetings.

The audit documentation of the group engagement team will include details of any follow‑up and disposition of the matters discussed. Among other things, the audit documentation would indicate:

• the nature of the matter;
• its accounting, auditing, or reporting significance;
• the persons with whom the matter was discussed; and
• conclusions reached the related rationales and actions taken.

Component auditor responsibilities

The component auditor communicates the following matters to the group engagement team on a timely basis and involves the group engagement team in assessing the matters and determining an appropriate action or response:

• Threats to compliance with independence requirements that have not been brought to the group engagement team’s attention.
• Breaches of ethical requirements, including those related to independence.
• Any important matters or findings that may affect their work or that require special attention by the group engagement team (e.g., uncorrected misstatements or significant accounting, financial reporting or auditing ).
• Matters that may indicate new significant risks identified at the component that may affect the group financial statements and a summary of the component auditor’s responses, and the results of related audit procedures,.
• Matters that may indicate new fraud risks, instances of fraud identified or information that suggests that a fraud may exist that involves component management, employees with significant roles in internal control or that could result in a material misstatement in the financial statements of the component, along with the component auditor’s response and results of the related procedures applied
• Actual or suspected non‑compliance with laws and regulations.
• Names of related parties not previously identified by group management or the group engagement team.
• Matters that may indicate deficiencies in internal controls noted during the engagement.

Note: deficiencies in design effectiveness can be reported prior to testing of operating effectiveness.

• Concerns regarding the sufficiency and appropriateness of engagement resources, including sufficient time to perform the work requested, or if there have been any changes in resources that give rise to concerns as to the overall sufficiency and appropriateness of resources.
• Any engagement‑specific information communicated by the component auditor’s that poses a potential risk to the quality of the planning, performance or reporting of the engagement.

To the extent relevant, the component auditors may also communicate the following matters to the group engagement team:

• Circumstances found that might alter the scope of the work. The approval of the group engagement team needs to be obtained before deviating from the instructions in any material respect.
• Any limitations on the scope of the audit that limits the component auditor’s ability to provide the group engagement team with requested information.
• Differences of opinion that arise within the component engagement team, or between the component engagement team and the engagement quality reviewer (where assigned), or individuals within the Office’s system of quality management, such as those who provide consultation.

Note: The component and group engagement leaders will need to determine that differences of opinion are resolved, and the conclusions reached are documented and implemented on or before the date of the group audit report.

• Consultations on difficult or contentious matters on which the Office’s policies or procedures require consultation; or on other matters that, in the component auditor engagement leader’s professional judgment, require consultation.

Note: The component engagement team involves the group engagement leader at the start and throughout the consultation process. The component engagement leader and the group engagement leader need to be satisfied that appropriate consultation has taken place, and that the nature and scope of, and conclusions resulting from, such consultations are agreed with the parties consulted and that the conclusions agreed have been implemented.

• Possible qualifications or modifications of the group audit opinion.
• Anticipated overruns of time or cost estimates. Without instructions to the contrary, approval needs to be obtained before significant extra time is spent.
• Anticipated difficulties in meeting deadlines for completion of the work or the submission of required reports (e.g., stand‑alone reports) and Memorandum of Work Performed and Report Clearance Summary.
• Other information that may be relevant to the group engagement team, whether or not specifically requested in the instructions. Sensitive matters need to be communicated privately to the group engagement leader.
• Matters that may require communication to those charged with governance.

The component engagement team needs to advise the group engagement team on a timely basis of any information that, while not affecting its overall findings, conclusions, or opinion on the component, might affect the group financial statements. For example, the component auditor may determine that an account balance not originally in scope has increased or may be misstated, or that the risk of misstatement has changed, any of which might lead the component auditor to recommend that additional work be performed beyond that in the original instructions.

The component engagement team also needs to advise the group engagement team whether they have statutory or other reporting responsibilities in addition to or different from those requested by the group engagement team or is subject to local restrictions.

Responding to Non‑compliance with Laws and Regulations

Where component auditors or other auditors performing audits of a component’s financial statements for purposes other than the group audit (e.g., statutory audit) become aware of non‑compliance or suspected non‑compliance in relation to the component, in addition to responding to the matter, the component auditor or other auditor needs to communicate it to the group engagement leader unless prohibited from doing so by law or regulation.

Where the group engagement leader becomes aware of non‑compliance or suspected non‑compliance in the course of an audit of group financial statements (including as a result of being informed of such a matter by a component auditor or other auditor), in addition to responding to the matter in the context of the group audit, the group engagement leader needs to consider whether the matter may be relevant to one or more components and communicate with auditors performing work at those components unless prohibited from doing so by law or regulation.

Related Guidance

• Guidance on the purpose, attendees, topics for discussion and documentation of taking stock meetings is included in OAG Audit 7022.
• Guidance on the engagement leader’s responsibility for directing and supervising the engagement team is included in OAG Audit 3062.
• Guidance on the engagement leader’s responsibilities regarding consultations is included in OAG Audit 3062.
• Guidance on the engagement leader’s responsibilities regarding differences of opinion is included in OAG Audit 3062.
• Guidance on consideration of laws and regulations is included in OAG Audit 7512.

OAG Guidance

OAG audit teams acting as group engagement teams need to consider communicating to OAG audit teams acting as component auditors a schedule of intercompany balances accounted for centrally by the group entity (or otherwise facilitate access to such information) and the work performed by the group engagement team with regard to such balances. This may provide the OAG audit teams acting as component auditors with evidence over the intercompany balances of the component saving the component auditor from performing evidence gathering activities that have already been performed at the group audit level. This will typically be applicable when the group entity and the component have the same period end and the procedures performed at the group level provide audit evidence regarding the component financial information.

When the group entity and components have different period ends, the group engagement team will likely not gather evidence regarding the intercompany balances as of the component’s period end and therefore communicating the information referred to above to such components would not necessarily be effective.

The communication regarding intercompany balances would normally be performed during the planning and execution phases of the engagement, e.g., during the planning phase the group engagement team may communicate the expected scope of work to be performed by the group engagement team; and provide a schedule of intercompany balances (updated on a periodic basis, if necessary) to the component auditors during the execution phase.

The group engagement team communication between OAG audit teams would ordinarily include the following:

• Detailed listing of intercompany balances for all components at period end (or facilitation of access to such information)
• Results of the evaluation and, where applicable, testing of internal controls (group wide controls and controls related to specific components, if appropriate) over intercompany balances and transactions performed by the group engagement team, including any identified deficiencies in such controls
• Results of the testing of consolidated journal entries to eliminate intercompany balances
• Results of reconciliation of the intercompany balances listing to the underlying intercompany supporting schedules performed by the group engagement team, including reconciling items (if any)
• Instructions on the procedures, which OAG audit teams acting as component auditors are expected to perform at the component for the purposes of group reporting, e.g.:
  • Trace and agree intercompany balances from the detailed listing to the component financial records
  • Determine if there are any reconciling differences and whether adjusting entries are necessary
  • Report any adjusting entries that need to be made at the group level to the group engagement team
  • Follow up any items requested by the group engagement team during the execution of their testing at the group level
• Other relevant procedures performed by the group engagement team or procedures to be performed by the OAG audit teams acting as component auditors as appropriate. For example, the group engagement team may consider communicating specific procedures to be performed by the component auditors to address the risk of fraud; or procedures to verify foreign exchange gains or losses related to intercompany balances and transactions.

Procedures to be performed to obtain sufficient appropriate audit evidence regarding intercompany balances and transactions depend on materiality, results of the risk assessment, group and component controls over intercompany processes and other specific circumstances of the engagement.