2361 Review of the work performed by component auditors

Dec-2023

OAG Guidance

The purpose of the review of the component auditor’s audit documentation is to determine whether the work of the component auditor is adequate for purposes of the group audit i.e., whether sufficient appropriate audit evidence has been obtained with regards to the component’s financial information and its impact on the group financial statements.

The audit plan for the group audit needs to include sufficient time and appropriate resources for the group engagement team to review the work of the component auditors and for the component auditors to facilitate this review.

The review is an ongoing process, which begins at the planning phase when the risk assessment and planned audit procedures are reviewed and discussed (OAG Audit 2332), continues with timely discussions of significant matters and judgments that arise from the component auditor’s work throughout the engagement, and is completed once the component auditor’s work is completed, the component auditor’s communication is received and through to the completion of the group audit.

The group engagement team undertakes procedures, including appropriate review of the component auditor's work, to satisfy their responsibility for maintaining quality on the group audit overall.

Whether the component auditor is another OAG audit team or an external firm/auditor will not affect the requirement for the group auditor to be involved in the work of the component auditor. However, it may affect the nature and extent of the procedures the group engagement team determines to be needed in respect of reviewing the component auditors’ work,  for example, because the external component auditor is not subject to our Office policies and procedures. See OAG Audit 2362 for further guidance.

The elements of the component auditor's documentation and communication that the group engagement leader and team review may vary depending on engagement circumstances, as well as the content of the component auditor's communication. The group engagement leader's review of the component auditor's documentation and communication, as applicable, takes into consideration the minimum review responsibilities set out in OAG Audit 1162.

The determination of the nature and extent of the group engagement team's review procedures is a matter of professional judgment and is based on risk characteristics of both the:

• Component (e.g., the relative significance of the component to the group financial statements, both due to size and risk); and

• Component auditor (e.g., the reputation of and our prior experience with the component auditor, the industry experience of the component auditor and whether the component auditor is from the OAG).

The nature, and extent of the group engagement team's review procedures may be affected by the knowledge gained of the component auditor a (i.e., their competence), whether the group engagement team has access to the component auditor's files (i.e., no legal, regulatory or other professional obligations that prevent such access), the component auditor's responses to the group engagement team's inquiries and work already reviewed.

The nature and extent of the review may also vary for different elements of the component auditor's work (e.g., the nature and extent of review may be greater in areas of elevated or significant risks).

The group engagement leader's review of the component auditor's work and documentation may also provide evidence that the reviewer from the component engagement team who was assigned review responsibilities performed their review in a manner that meets the group engagement leader's expectation. Refer to OAG Audit 2343 for further guidance.

The group engagement team's review of the component auditor's working papers is performed by a member of the group engagement team with sufficient knowledge and experience such that they would be able to understand the work performed and consider the sufficiency of the work and the appropriateness of significant judgments made by the component auditor. What documentation the group engagement leader and/or engagement team will review is a matter of their professional judgment. Further guidance on reviewing audit documentation is included in OAG Audit 3070. 

The group engagement team documents in their own working papers the nature, timing and extent of their review of the component auditor's work.

The group engagement team's working papers also document the group engagement team's involvement throughout the engagement, particularly as it relates to significant matters, consultations, resolving differences of opinion and evaluating the impact of exceptions noted during testing, as appropriate. In doing so, the group engagement team considers whether:

• The work performed by the component auditor is consistent with the audit strategy and plan agreed during the planning phase (or as updated for circumstances arising during the engagement).

• The audit evidence obtained by the component auditor supports the significant judgments made and conclusions reached by the component auditor and whether the group engagement team agrees with those significant judgments and conclusions.

• The documentation and conclusions documented are consistent with the group engagement team's expectations taking into account prior communications with the component auditor.

• Appropriate consultations were undertaken and documented.

• All significant open matters have been resolved.

Site and component visits

The following guidance is intended to provide incremental guidance for teams to consider when deciding to complete in-person visits to sites and component teams and reviewing component auditor working papers.

In-person visits to client sites and component auditors have a number of benefits:

• Improving understanding of client operations

• Corroborating statements and representations made by group management

• Improving risk assessment procedures and conclusions

• Developing relationships with component auditors

• Reviewing audit strategy decisions and working papers of component auditors

There is no minimum cadence for in-person site visits prescribed by either the auditing standards or OAG policy. Teams should document their rationale for which sites will be visited in person. Generally site visits would be more frequent where components are more significant or unique risks exist.

1. When should the group engagement team review the working papers of a component auditor?

The group engagement team should apply professional judgment when deciding when to review component auditor working papers, and document the rationale in the audit file.. Factors that should be taken into consideration in making the decision of whether or not the group auditor should review the component auditor’s working papers are:

• Significance of the component to the group financial statements;

• Whether there are significant risks at the component level;

• Prior years results of the component auditor’s working papers review, if applicable;

• Whether the component auditor is another OAG team or an external firm/auditor (see block “OAG versus external firm/auditor Component Auditor” below);

• Prior experience with and reputation of the component auditor;

• Component auditor’s knowledge and expertise related to the client’s industry;

• Past adjustments and errors in the component’s financial statements; and

• Number of years since the working papers have last been reviewed.

In situations where the group engagement team decides it is not necessary to review the component auditor’s working papers, but also doesn’t just want to rely on the standard group reporting, the group auditor instead may request the component auditor to provide an extended Memorandum of Work Performed that includes a summary of comfort description on certain or all financial statement line items, including exceptions, to be satisfied that the work performed is sufficient appropriate audit evidence.

2. Can the group auditor send a representative to review the working papers of component auditors?

There may be circumstances when the group auditor may consider sending a representative (rather than a member of the group audit team) to review the working papers of a component auditor, if the working paper review cannot be performed remotely. Sending a representative might be considered when:

• An external component auditor (external firm/auditor) is located in a different region that has an OAG office in that region, the group auditor may ask a representative from the OAG office in that region to review the working papers of the external component auditor (external firm/auditor). See block "OAG versus external firm/auditor Component Auditor" for further considerations when this may be advantageous.

• In these circumstances, the representative should document in the group audit file the following:

• Confirmation of their independence and compliance with ethical requirements including integrity, objectivity, professional competence and due care, confidentiality and professional behaviour;

• Knowledge of the auditing and accounting standards; and

• The representative’s knowledge about the client to evidence the ability to identify issues/circumstances that are inconsistent with group information, risk assessment or expected strategy. This can be achieved by documenting the representative’s understanding of the risk and response as well as the group’s risk assessment, including fraud.

To meet the requirements of CAS 220, the group engagement team should set-up a coaching meeting with the representative to provide the representative with clear instructions on what to review and document, including the nature and extent of the review  and to discuss the bullet points above. The minutes of the coaching meeting should be retained in the audit file as evidence of the group engagement team / group engagement leader confirming the knowledge and competency of the representative.

3. Can we review the working papers of a component remotely?

Whether or not a group audit team will be granted remote access to a component auditor’s working papers is dependent upon the circumstances of the component auditor. It is important that group audit teams inquire early with their component auditors whether or not remote file access can be provided.

In addition to the question whether or not remote file access can be provided, the engagement team should consider the following factors when determining whether remote file access an efficient way to determine if the component auditor has performed sufficient work:

• Need to review external working papers.

• Complexity of the file and how much interaction with the component audit team is necessary to navigate the file and understand the issues encountered.

• History of issues noted in the past to allow for immediate remediation work while physically present

• Need or expectations to talk to local management to obtain the appropriate level of understanding of either the components business or any accounting/auditing issues, for the purpose of assessing the appropriateness of our risk assessment as well as judgments made or conclusions reached by management or the component auditor.

4. What is the best way to document our component auditor review?

Guidance related to the review of working papers of component auditors and example review procedures are outlined in block “Example Review Procedures” below. However, these procedures should not be used as a checklist and the group engagement team should tailor the procedures depending on the specific circumstances of the component and/or the assessment of the component auditor.

The audit documentation that will be relevant to the group audit will vary depending on the circumstances and the focus should generally be on audit documentation that is relevant to the significant risks of material misstatement of the group financial statements.

OAG Guidance

Component auditor from another OAG audit team

If the component auditor is from the OAG, the extent of the review may be affected by our previous experience with the component auditor, or by our discussions or correspondence with the component auditor and his/her responses to our interoffice instructions.

Component auditor from an external firm

When the component auditor is not from the OAG, the group engagement team needs to be conscious of the fact that we cannot expect them to use OAG audit methodology; although, we expect the work to be in compliance with CASs, as per OAG Audit 2326.

The group engagement team may need to obtain the assistance of another OAG audit team to review the work of the component. This can be useful because an OAG audit team in the same group or office as the component auditor could have a better understanding of the business environment of the component, and the statutory requirements and will be more familiar with the language that may be used in some or all of the component auditor's documentation. In these circumstances, the group engagement team verifies that comprehensive instructions relating to the procedures are provided to the review team in advance, and that the review team has a sufficient understanding of the group financial reporting framework and applicable GAAS.

In certain instances, the group engagement team may also request the component auditor to complete an audit questionnaire or checklist relating to the audit of the component. The questions need to be properly framed in the context of an audit of the component’s financial information as a whole and not in a manner that could be considered as providing separate opinions on individual elements of the component’s financial statements. The completed questionnaire or checklist assists the group engagement team in identifying potential areas to focus their review of the component auditor’s documentation, as well as the extent of the review procedures required (see table below for guidance). Generally, the questionnaire or checklist alone will not provide a basis for the group engagement team to complete their review of the component auditor's work.

OAG Guidance

The table below shows example procedures the group engagement team could, depending on the circumstances, perform in a review of the component auditor’s working papers. This is not to be used as a checklist. Procedures are to be tailored for each situation depending on the specific circumstances of the component and/or the assessment of the component auditor (see OAG Audit 2326, OAG Audit 2328 and OAG Audit 2329).

Note that some of the terms used below are OAG Audit terms, and an external firm/auditor component auditor may use different terms. When performing the review procedures, the group auditor considers whether the substance of the external component auditor’s work is sufficient and appropriate, and not the ways in which the external component auditor’s terminology or form of the work may differ from OAG Audit.

Communication with the component auditor throughout the audit process typically facilitates a more effective and efficient review process.

In accordance with CAS 230, the audit documentation for a group audit engagement needs to be sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the nature, timing and extent of audit procedures performed, the evidence obtained, and the conclusions reached with respect to significant matters arising during the group audit.