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Hello Sir, I have some question about the group auditor/group audit
1.if the uncorrected misstatement in the component FS, and additional procedure need to be determined, will it be usually the group auditor will perform itself or ask the component auditor perform it or both also can? (eg. designing and performing further audit procedure)
2. How the group auditor assess and determine the component materiality level for each subsidiary? is it based on the risk of material misstatement which assesses by the group auditor? is it same as based on the materiality of Revenue, PBT and total asset for each component?
3. What is the difference between these two? Can you give an example for easier to understand it?
-“An audit of specified account balances related to identified significant risks”
-” Specified audit procedures relating to identified significant risks”Thank you very much 🙂
There is a very good article re group accounts which should answer Qs 1&2 https://www.accaglobal.com/an/en/student/exam-support-resources/professional-exams-study-resources/p7/technical-articles/group-auditing.html
If still not clear by all means ask me again.
Re 3 – a specified account balance would be trade receivables whereas a specified procedure would be external confirmation.5. Is it have a mistake in example 1 which the unadjusted error of subsidiary 1 should be $1m rather than $10m which would result in unmodified opinion will be issued?
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6.The $600 is it one of the example of “Materiality for the consolidation package as a whole”?
You are correct, I will have to remind ACCA that this typo still needs correction. It should indeed be $1m compared against $1.2m so immaterial.
I’ll have to get back to you on last Q on Monday when I can properly access the article.Sir,I still have some doubt after reading the article,hope you can clarify it to me.Thank you.
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” require that the auditor relying on the third party’s work has obtained their own understanding of the specialist area in question ”1. Does the specialist area refer to the area that needs an expert to involved in?How to obtain the understanding of it?
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“observing final clearance meetings between the component auditor and the management of the company.”2. What is the final clearance meetings? How can be observed if the subsidiary is an oversea company and no branch in there?
————————————————————————————————————“Materiality for the consolidation package as a whole”
3.What is the consolidation package? How the materiality level different to “Level of reduced materiality for sensitive figures and “Performance materiality”?
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” This will omit many of the disclosures that will be in the eventual entity financial statements.” (It is common in larger group audits for the financial statements to be prepared using a consolidation package of information that is sent to the parent company by each component company. )
4.Why it will be omitted the disclosure in the entity financial statements?
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5. Is it have a mistake in example 1 which the unadjusted error of subsidiary 1 should be $1m rather than $10m which would result in unmodified opinion will be issued?
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6.The $600 is it one of the example of “Materiality for the consolidation package as a whole”?
I have already answered 5. – yes it is a “typo” (typographical mistake).
Consolidation package is just the package of proforma financial statement information which the component auditor(s) provides for each component – for the exercise of the process of consolidation of the group financial statements.Don’t get too bogged down in understanding every word and phrase – just “visualise” the issue. For the financial statements of each legal entity on which there is an auditor’s report there will be materiality for the financial statements as a whole and performance material for the planning and performance of the audit. For group (consolidated) financial statements the group audit partner must determine overall materiality for the group financial statements and uses component materiality to consider the relative significance of each component. You are not going to have to deal with a group with 100s of components in the AAA exam – just a group with a couple of subsidiaries and possibly an associate – all of which will most likely be material – otherwise there won’t be much to write about them (!)
I will come back to you tomorrow with further comments when I can access the article alongside reading this post.
1. YES – “specialist area”, “specialism”, “area of expertise” all mean the same thing.
How to obtain the understanding of it – how does the auditor obtain an understanding of anything? Make inquiries of appropriate persons/review documentation/inspect assets, etc, etc,
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2. Clue is in the description “observing final clearance meetings between the component auditor and the management of the company.” – i.e. it is going to be the meeting at which the auditor “clears” outstanding points.
“How can be observed if the subsidiary is an oversea company and no branch in there?” – it can’t but read what it says before the bullet “This work MIGHT include:” – it clearly won’t include it where it is not practicable – but nowadays any meetings could be attended/observed remotely through “skype” or similar.
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————————————————————————————————————4. Because otherwise the package to be completed would be too big (!)
If you were to download an IFRS checklist (e.g. from here https://www.iasplus.com/en/publications/global/models-checklists/2019/ifrs-checklist) you will see that to be comprehensive a package would have to request information that may or may not be relevant to every component. So, as the article states, the consolidation package will be tailored.———————————————————————————————————-
5. Answered
———————————————————————————————————–6. $600 is performance materiality for each component. It is showing why this has to be determined by the group auditor – because the group auditor has the “big picture”. If the component auditors were to work to what may be material only to the individual subsidiary’s financial statements they would overlook amount that may be material to the consolidated financial statements.
“Materiality for the consolidation package AS A WHOLE” is going to be similar to materiality for the group/consolidated financial statements.
Sir, appreciate your helping ,I have much more understanding now
“For group (consolidated) financial statements the group audit partner must determine overall materiality for the group financial statements and uses component materiality to consider the relative significance of each component.”
1. The component materiality refers to above is determined by the component auditor?
2.What is group materiality used for? as if the performance materiality of each component will be much lower than the group performance materiality , then the aggregate unadjusted error for each component will not exceed the materiality for group/consolidated FS?
Thank you.
1. No
2. YesDefinition: Component materiality – the materiality for a component determined by the GROUP engagement team.
Using Example 1 in the article – if the component auditor of subsidiary 1 was left to determine its own materiality it would not consider $1m to be material (as it is less than $1.2m). The GROUP auditor therefore has to communicate to the component auditors that $600k will be considered material to the group/consolidated financial statements. It is clealry “contrived” in this example – by virtue of the loss in the subsidiary 2 – but it illustrates the point that the group engagement partner must oversee the planning and performance of the audit of the components.
Thank you for your replying, I am confusing with the terms
So the component materiality refers to the performance materiality which determined by the group auditor and communicate to the each component auditor, is it correct?
And why the group auditor only determined performance materiality for each component but not financial statement materiality which determined by each component themselves?
Thank you.
No – please look at the numbers in the example – component materiality is for the component as a WHOLE. Performance materiality used for individual audit areas must be less.
The group auditor reports on the consolidated financial statements and the financial statements of the parent.
The component auditors report on the single entity financial statements of the components.The group auditor has no responsibility for the audit/audit opinions on the single entity financial statements.
It may help you to visualise a simple group structure (e.g. look at the one in exhibit 2 here https://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/p7/exampapers/int/SD19_AAAINT_QP.pdf)
Each legal entity has an auditor responsible for the audit opinion on the individual/single-entity financial statements.
Thank you Sir,I’m understand now
So the component materiality and performance materiality for each component will be different or will be the same if determined by the group auditor and based on what factor to determine it?
Thank you.In Example 1 in the article, 600 is less than 1,200 (S1) and 800 (S2). As the article explains – 600 is the maximum component materiality that the group auditor communicates to the component auditor. The purpose of communicating this amount is for the component auditor to use it (!) This is what it says in ISA 600 about significant components:
“… the group engagement team, or a component auditor on its behalf, shall perform an audit of the financial information of the component using component materiality”.ISA 600 goes on to say “Different component materiality may (i.e. NOT necessarily) be set for different components.”
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