ISA 600 (Revised) The Audit of Group Financial Statements
Proposed revised International Standard on Auditing issued for comment by the International Auditing and Assurance Standards Board of the International Federation of Accountants
Comments from ACCA
July 2005
Executive Summary
The Association of Chartered Certified Accountants (ACCA) is pleased to comment on the proposed revised International Standard on Auditing 600 (Revised) The Audit of Group Financial Statements (proposed ISA 600), issued for comment by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants.
ACCA supports the issue of an ISA dealing with the audit of group financial statements, as these are an important aspect of financial reporting. Proposed IAS 600 is more comprehensive and hence more functional than the extant ISA 600, which deals only with using the work of another auditor.
We welcome the decision of IAASB to re-expose proposals first aired in December 2003, and note that proposed ISA 600 has responded to concerns expressed in our earlier response. In particular, we are pleased that proposed ISA 600 no longer legitimises the existing practices relating to divided responsibility for the audit opinion.
We welcome the explicit confirmation that proposed ISA 600 is also applicable to the involvement of other auditors, even where group financial statements are not prepared.
Although we note that the treatment of the differences between ‘related auditors’ and ‘other auditors’ has been amended, we call for further improvements to increase the emphasis given to risk assessment and so mitigate the danger that the group auditor will place undue reliance on a related auditor.
General Comments
ACCA supports the issue of an ISA dealing with the audit of group financial statements, as these are an important aspect of financial reporting. The decision to move to a more comprehensive treatment of the subject than is given in extant ISA 600 provides for standards and guidance that are more functional.
PRECEDING EXPOSURE DRAFTS
We welcome the decision of IAASB to re-expose its proposals following changes made to the approach in an earlier exposure draft. This demonstrable commitment to consultation is important to developing standards of the highest quality. Together with the transparency and oversight of the IAASB process, this gives auditors and those who rely on their work considerable confidence in the value of global auditing standards.
ACCA was please to comment on proposed revised ISA 600 The Work of Related Auditors and Other Auditors in the Audit of Group Financial Statements and proposed IAPS The Audit of Group Financial Statements, issued for comment in December 2003. We note that IAASB has considered carefully the responses to those proposals and is not seeking further repetition of comments previously made.
We are pleased to note that proposed ISA 600 no longer legitimises the existing practices relating to divided responsibility for the audit opinion. We support the approach in proposed ISA 600 that the group auditor’s procedures are the same, whether sole or divided responsibility is accepted.
We are also pleased that a proposed division of auditors into two categories ‘related auditors’ and ‘other auditors’, has been amended and that proposed ISA 600 has gone some way towards addressing the need for a less rigid approach. We comment below on the current proposals.
In our previous comments, we drew attention to the need to address the general case of ‘components’ rather than dealing with them only in relation to group financial statements. We comment further on this below because of its renewed relevance in the light of the clarity project .
RELATED AUDITORS AND OTHER AUDITORS
The extant ISA 600 defines the term ‘other auditor’ as including affiliated firms, whether using the same name or not, and correspondents, as well as unrelated auditors. Proposed ISA 600 now uses three terms. ‘Other auditor’ is divided into two categories: ‘related auditor’ and ‘unrelated auditor’. The definition of ‘related auditor’ is different from that in the December 2003 exposure draft through the addition of a condition that the auditor not only operates under, but now also complies with, common monitoring policies and procedures. Further guidance has been provided on how reliance may be affected by factors that could be present in a multinational group, and by differences in audit methodologies and quality control policies and procedures.
Although we welcome these improvements, we do not believe that they go far enough to mitigate the danger that the group auditor will place undue reliance on a related auditor. We recommend that proposed ISA 600 be revised to address this and to increase the emphasis given to risk assessment. In this regard, we endorse the suggestions made in the letter of comment of the European Federation of Accountants, of which ACCA is an active member.
COMPONENTS
In our previous comments, we drew attention to the need to address the existence of ‘components’ as the general case of which groups are a part. We welcome, therefore, the inclusion (in paragraph 2) of a statement that the standards and guidance in proposed ISA 600, adapted as necessary in the circumstances, also apply where other auditors are involved in the audit of the financial statements of a single entity.
We are concerned, however, that the title of proposed ISA 600 does not draw attention to its wider application. Ordinarily we do not favour long titles but on this occasion suggest either that the title be extended or that additional cross-references be made to ISA 600 (during the clarity project) to promote awareness of its wider application.
The clarity project could also usefully address the difficulties of using the term ‘component’ in two principal ways: as defined in proposed ISA 600 and with its normal meaning as in: ‘a component of internal control’.
COOPERATION OF OTHER AUDITORS
In some jurisdictions, legislation requires that other auditors cooperate with group auditors (at least within the jurisdiction). We believe that the public interest would be served if a mechanism could be found in ISA to place such an obligation generally on other auditors.
OTHER MATTERS
The explanatory memorandum calls for comments on whether:
• considerations in the audit of small entities have been dealt with appropriately
• special considerations in the audit of public sector entities have been
appropriately included
• there are any foreseeable difficulties in application in a developing
nation environment, and
• there are any potential translation issues.
We have no concerns in respect of the matters referred to in the above bullet points.
Comments on Substantive Changes
The explanatory memorandum forming part of the exposure draft contains four questions, which we answer below.
1. Is the approach to the work of other auditors practical, having regard to the elimination of the divided responsibility option?
In general, we believe that auditors will be able to meet these requirements with few difficulties other than practical ones arising because of professional secrecy laws in some countries (see our answer to 3 below) and the different levels of awareness and expectation among clients and other auditors.
We believe that the requirements in paragraph 36 are unrealistic, as auditors will not normally be able to comply with them.
Paragraph 36(a) requires the auditor to confirm whether the quality control system of an unrelated auditor’s firm complies with ISQC 1. This may have been intended to have the effect of requiring the auditor to obtain only a written representation to that effect, but as currently worded it is more onerous.
Paragraph 36(b) requires a confirmation relating to ‘recent monitoring reports’ while guidance in paragraph 37 refers to ‘obtaining a copy’. Such reports are normally confidential and this should be recognised in the guidance.
ACCA does not provide confirmations of the sort mentioned in the fourth bullet point of paragraph 35. We consider that this would also be true for most professional accountancy bodies. It may not be possible to do more than establish that an audit firm is listed in a publicly available register as at a particular date.
As set out above, in the section headed ’Related auditors and other auditors’, we believe that more guidance is needed on how the group auditor determines audit risk and responds to it. In addition, some industries require specialist audit skills. For a group audit involving a component where that is the case, the group auditor may lack the necessary skills to increase his or her involvement in the work of the specialist auditor.
The requirements in paragraphs 86 and 103 relate to the same audit evidence and should be dealt with together. It seems odd to place the requirement to take action on a report before the requirement that the report be obtained.
2. Are the revised standards and guidance on accepting or continuing an engagement to audit group financial statements appropriate?
We agree with the approach in proposed ISA 600.
The requirements in paragraph 10 are not explained in the surrounding paragraphs and we suggested that, as a minimum, a cross-reference to paragraph 59 be made. Ideally, changes made to address our concerns as set out above in the section headed ’Related auditors and other auditors’ would put paragraph 10 in better context.
3. Do the revised standards and guidance on access to information, given various laws of jurisdictions, give rise to any unnecessary foreseeable difficulty?
Access to working papers and other information could fall foul of professional secrecy laws in some jurisdictions. In particular, cross-border transfer may be problematic.
4. Is the proposal to move the guidance originally contained in the proposed IAPS to the proposed ISA appropriate? (Any suggestions to the contrary would have to be accompanied by a description of an alternative, and how that alternative maintains the requirements of the proposed ISA.)
We find the revised presentation acceptable.