Navigating the New AU-C 600 Group Audit Rules Managing Responsibilities and Risk in Engagements Involving Multiple Auditors and Components

Transcription

1 Presenting a live 110-minute teleconference with interactive Q&A Navigating the New AU-C 600 Group Audit Rules Managing Responsibilities and Risk in Engagements Involving Multiple Auditors and Components TUESDAY, MAY 14, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Trevor Stewart, Senior Research Fellow, Rutgers University, New Brunswick, N.J. Ahava Goldman, Senior Technical Manager, AICPA, New York Philip Santarelli, Chief Risk Officer, Parente Beard, Philadelphia For this program, attendees must listen to the audio over the telephone. Please refer to the instructions ed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at ext. 10.

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5 Navigating the New AU-C 600 Group Audit Rules Seminar May 14, 2013 Trevor Stewart, Rutgers University Philip Santarelli, Parente Beard Ahava Goldman, AICPA

6 Today s Program Introduction And Review Of AU-C 600 [Trevor Stewart] Risk Assessment And Quality Control [Philip Santarelli] Engagement Acceptance And Continuance [Ahava Goldman] Understanding The Group And Its Components [Philip Santarelli] Significant Components, And Work On Them [Trevor Stewart] Component Auditors [Ahava Goldman] Materiality [Trevor Stewart] Communications [Ahava Goldman] Additional Aspects Of Group Audits [Ahava Goldman] Slide 8 Slide 13 Slide 14 Slide 25 Slide 26 Slide 32 Slide 33 Slide 41 Slide 42 Slide 48 Slide 49 Slide 54 Slide 55 Slide 62 Slide 63 Slide 68 Slide 69 Slide 74

7 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 7

8 Trevor Stewart, Rutgers University INTRODUCTION AND REVIEW OF AU-C 600

9 Group Audits DISCLAIMER: This publication has not been approved, disapproved or otherwise acted upon by any senior technical committees of, and does not represent an official position of, the American Institute of Certified Public Accountants. It is distributed with the understanding that the contributing authors and editors, and the publisher, are not rendering legal, accounting, or other professional services in this publication. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Copyright 2011 by American Institute of Certified Public Accountants, Inc. New York, NY All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please copyright@aicpa.org with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC American Institute of CPAs 9

10 Context Of AU-C 600 International Auditing and Assurance Standards Board (IAASB) developed ISA 600 in response to: Complexity of group audits Varying group audit practice round the world Concerns about rigor and consistency by regulators and others Including the European Commission, the International Organization of Securities Commissions, and the U.S. Public Oversight Board s Panel on Audit Effectiveness, and others Need to reflect application of risk assessment and quality control principles in group audit context AICPA s Auditing Standards Board (ASB) developed AU-C 600 as part of ASB s clarity project Mostly consistent with ISA 600 Major substantive difference is that AU-C 600 allows the group auditor to reference the work of a component auditor under certain circumstances something that is not allowed under ISA 600. Circumstances broadened by SAS 127 (2013) Standard clarifies group auditor s responsibilities when part of the work is performed by other auditors (component auditors). Standard intended to reflect best practice 10

11 Scope Of Standard Is Quite Broad Group financial statements: Financial statements that include the financial information of more than one component. The term group financial statements also refers to combined financial statements aggregating the financial information prepared by components that are under common control (even if there is no common parent). Component: An entity or business activity for which a group or component management prepares financial information that is required by the applicable financial reporting framework to be included in the group financial statements. Group: All the components whose financial information is included in the group financial statements. A group always has more than one component. 11

12 The Group Audit Process References are to paragraph numbers in AU-C 600 Acceptance/Continuance (14-16, A14-A18, A21) Can the auditor can serve as group auditor and can sufficient appropriate evidence be obtained? No Withdraw (or disclaim if required to report by law or regulation) (16, A21) Yes Determine engagement terms (17) Develop audit strategy (18-19) Understand the group (20-21) Understand component auditors (22-23) Yes Will reference be made to component auditor in group audit report? (24-30, A52-A54) No Provide % audited by component auditor (27, A55-A57) Get permission from component auditor if its name is to be used (28) Reference component auditor s report Determine type of work for component Determine involvement in component audit (56-57) Issue standard audit report (30, A59) Additional steps by group auditor Set materiality for group and relevant components (31, A60-A64) Respond to assessed risks (32, A65) Audit the consolidation process (33-38, A53-A66) Perform subsequent events procedures (39, A667) Communicate with component auditor (40-41) Evaluate communication from component auditor (42) Evaluate sufficiency and appropriateness of audit evidence (43-44, A68) Communicate with group management and those charged with governance (45-48, A70-A79) Document the process (49) Adapted from Thomas & Wedemeyer, Clarifying the Standard for Group Audits, Journal of Accountancy, March

13 Topics We Will Discuss Today Risk assessment and quality control (Phil) Engagement acceptance and continuance (Ahava) Understanding the group and its components (Phil) Significant components and work effort on components (Trevor) Component auditors (Ahava) Materiality and component materiality (Trevor) Communication (Ahava) Additional aspects of group audits (Ahava) 13

14 Philip Santarelli, Parente Beard RISK ASSESSMENT AND QUALITY CONTROL

15 Change in focus Concepts The group audit itself rather than the interactions with other auditors Moves toward a more unified approach focusing on the group financial statements rather than pieces of it; moves away from the coverage concept, How much does the principal auditor cover versus the other auditor? Modernizes the approach to bring in the risk assessment standards and their application in a group audit setting In many cases, the RA concepts are repeated in the standard, in order to calibrate procedures to a group setting. 15

16 Special Considerations For Risk Assessments And Quality Control In general, all of the clarified audit standards are applicable in a group audit setting. What the group auditor needs to do is to sit back and consider what special risks may be present in a group audit setting. This involves considering not only the structure and context of the group itself, but also what risks are created when working with component auditors. The group auditor must always be mindful of the responsibility inherent in the group audit report. Although references may be made, the opinion on the group is not diminished. 16

17 Special Considerations When It Comes To Quality Control AU-C 220, Quality Control for an Engagement Conducted in Accordance With Generally Accepted Auditing Standards, applies to group audits. What are some special considerations when working with component auditors? Relevant ethical requirements: Group auditor must be satisfied that component auditors possess competence and capabilities, even when making reference to their report. Component auditors may have different ethical standards, depending on jurisdiction. Component auditors may be less regulated or unregulated as to audit quality. That is, no peer review system may be in place. Component auditors may be unfamiliar with U.S. GAAS. 17

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19 Special Considerations When It Comes To Quality Control (Cont.) Acceptance and continuance of clients Acceptance decisions should include a thorough understanding of the group and how component auditors may be involved. How much of the group audit can be conducted by the group auditor? While not a requirement, it may be a consideration, based on the composition of the group Does a group with 90% of its operations being conducted in an emerging market, and a U.S. parent, lend itself to acceptance? What has changed within the group that may affect continuance? Has a material component been added in a jurisdiction where the group auditor is not comfortable 19

20 Has group management imposed requirements which create a concern as to: Special Considerations When It Comes To Quality Control (Cont.) Certain group auditors must be utilized, and the group auditor is uncomfortable with abilities. Group management indicates that communication with component management must be limited. The group has added a component that operates in an industry with which the group auditor is not familiar. In general, a different mindset must be adopted, with a different perspective to properly make acceptance and continuance decisions. 20

21 Engagement performance Special Considerations When It Comes To Quality Control (Cont.) Can the component auditor conduct its work in a way that meets engagement performance standards that a firm has established? If not determinable, can the group auditor add sufficient measures to become comfortable? 21

22 Special Considerations When It Comes To Risk Assessments Generally follows the concepts in AU-C 330 (clarified SAS 107) as applied to the group financial statements, including groupwide controls Once more, the group auditor must broaden the mindset to deal with specific risk issues that come into play by the nature of the group. The most significant of theses is the consolidation process and how the financial statements come together (which we will discuss in more detail a bit later). 22

23 Special Considerations When It Comes To Risk Assessments (Cont.) Other considerations unique to groups: Identifying all of the components Identifying risks at components in order to determine significance Risks in components that arise due to accounting capabilities How much risk is added due to differing financial reporting framework? The greater the distance from U.S. GAAP, the more risk of misstatement. What are cultural issues at components that may add risk due to poor tone at the top of the entity? Depending on the number, size and location of the components, the risk assessment process may be much more complicated. 23

24 Special Considerations When It Comes To Risk Assessments (Cont.) Ultimately, the group auditor as part of the process must make a determination as to whether to make reference to the component auditor or take responsibility. Whereas under AU-543 there were implied considerations, under AU- C 600 there are implicit considerations that must be addressed. Specific requirements with respect to the conduct of the audit In accordance with U.S. GAAS or PCAOB standards, or in a manner that is equivalent Issuance of an unrestricted audit report If reporting on a different financial reporting framework, it is similar to U.S. GAAP. The group engagement team has sufficient evidence to determine that the reconciling adjustments are appropriate. 24

25 When Making Reference To A Component Auditor When the group auditor decides to make reference, sufficient competent evidence should be obtained by: Requesting component auditor to acknowledge: That they will cooperate Independence Significant identified RMM Review of matters related to elimination of intercompany transactions, including communicating with component auditor in this regard Reading the components financial information and component audit report (if issued) to identify significant findings or issues 25

26 Ahava Goldman, AICPA ENGAGEMENT ACCEPTANCE AND CONTINUANCE

27 Acceptance And Continuance Previously framed as, Can the auditor act as a principal? Decision based on coverage and participation Coverage: How much of the revenue or how much of the balance sheet is being audited by principal? - SEC: Generally, the principal auditor is expected to have audited or assumed responsibility for reporting on at least 50% of the assets and revenues of the consolidated entity. - Many firms adopted this guidance as a threshold issue. Government audits also considered who audited the primary government or primary operating fund. Other considerations: Knowledge of overall f/s and importance of components directly audited to whole American Institute of CPAs 27

28 Acceptance And Continuance (Cont.) AU-C 600 asks: Can sufficient audit evidence regarding the consolidation process and component financial information be obtained on which to base an opinion? - By group engagement team directly - Thru involvement with the work of component auditors, or - By making reference to audit of component auditor Previous considerations are still relevant. Result under AU 543 or AU-C 600 wouldn t necessarily differ. American Institute of CPAs 28

29 Acceptance And Continuance (Cont.) Required to obtain understanding of group, its components and their environments sufficient to identify components likely to be significant Precluded from accepting or required to withdraw if management-imposed scope limitation will result in disclaimer of opinion Exception if the entity is required to have an audit For example, employee benefit plans American Institute of CPAs 29

30 Acceptance And Continuance (Cont.) What if: 1. Management won t allow confirmation of a material accounts receivable from a partly-owned subsidiary, but the auditor is able to obtain sufficient appropriate audit evidence by performing other procedures? Allowed to accept, won t result in disclaimer 2. The auditor is unable to have access to equity method component management, auditor or those charged with governance; but has F/S, auditor s report and group management s information? Allowed to accept, circumstantial not management-imposed. 3. Management won t allow the auditor to confirm a material loan to a former employee of a fully-owned subsidiary, and the auditor is unable to obtain sufficient appropriate audit evidence by performing other procedures? Not allowed to accept, unless audit required by law American Institute of CPAs 30

31 Acceptance And Continuance (Cont.) Engagement letter As required by AU-C 210, Terms of Engagement Additional matters may include addressing: - Whether reference will be made to component auditor - Unrestricted communication between the group engagement team and component auditors - Communication to the group engagement team of important communications between: o The component auditors, those charged with governance of the component, and component management, including communications on significant deficiencies and material weaknesses in internal control o Regulatory authorities and components related to financial reporting matters American Institute of CPAs 31

32 Acceptance And Continuance (Cont.) Engagement letter Additional matters may include addressing: - To the extent the group engagement team considers necessary: - Access to component information, those charged with governance of components, component management and the component auditors (including relevant audit documentation sought by the group engagement team) - Permission to perform work, or request a component auditor to perform work, on the financial information of the components American Institute of CPAs 32

33 Philip Santarelli, Parente Beard UNDERSTANDING THE GROUP AND ITS COMPONENTS

34 Understanding The Group, Components And Environment Application of AU-C 315 (clarified SAS 109) to the group audit environment Group Components Groupwide controls Consolidation process Determine significant components Assess RMM 34

35 Consolidation Process Obtain an understanding of the process Design and perform procedures on the consolidation process to respond to assessed RMM related to the consolidation, including whether all components are included Test operating effectiveness of the controls when deemed efficient, or when necessary due to nature of the risks Evaluate completeness and appropriateness of consolidation adjustments and eliminations; evaluate fraud risk factors or indications of management bias 35

36 Consolidation Process (Cont.) Obtaining an understanding Recognition, measurement, presentation and disclosure of financial information of the components. How is information aggregated: Parent and subsidiaries, joint venture, investees accounted for by the equity method Head office with one or more divisions Function, products, services Geographical locations 36

37 Consolidation Process (Cont.) How does group management aggregate this information? Do the entities or business activities that are aggregated for the group financial statements use a common financial reporting system or separate systems? What controls are in place to reduce the risk that errors might occur in the aggregation process and not be detected or corrected in the group financial statements? What controls are in place at the separate entity or business activity level to reduce the risk that errors might occur and not be detected or corrected in the financial information that is aggregated in the group financial statements? Do the group financial statements include an investment accounted for under the equity method of accounting? 37

38 What Adds Risk In A Consolidation? Reconciliations entries to the group financial reporting framework Financial reporting frameworks other than IFRS may create increased risk, due to more differences with U.S. GAAP. Foreign exchange adjustments A complex area of GAAP and depending on the jurisdiction, increased risk may result from a highly inflationary economy Intra-component accounts A noted area for fraud risk Often inadequate periodic reconciliations Highly susceptible to plug entries 38

39 What Adds Risk In A Consolidation? (Cont.) Related-party transactions Generally considered a higher risk area in all audits Should the related party be consolidated? VIE issues Top-side adjustments made to reflect acquisition accounting Highly acquisitive entities are subject to a high risk of error in applying acquisition accounting. Typically, step-up adjustments are not pushed down to target company. Group must maintain a second set of ledgers to manage the adjustments. Deprecation schedules Amortization Valuation accounts 39

40 What Adds Risk In A Consolidation? (Cont.) Reconciliation of component tax provisions to group tax provision Differing tax rates by jurisdiction Dealing with inter-component tax treaties Determining appropriateness of permanent deferral of tax on repatriated foreign earnings Different tax bases due to acquisitions Share-based compensation across components Share awards based in equity of a foreign subsidiary Evaluate impact of different component year-ends 40

41 Consolidation Process Dealing with investments that are not consolidated Cost method investments subject to impairment Equity method investments: Dealing with equity method goodwill Depending on the size and complexity of the group, the biggest risk in the engagement may lie in the consolidation process itself. Individual components are fairly stated, and the consolidation is not. 41

42 Trevor Stewart, Rutgers University SIGNIFICANT COMPONENTS, AND WORK ON THEM

43 Significant Components AU-C 600 introduces important concept of a significant component. A component individually is financially significant to the group (i.e., size). A component is likely to include significant risks of material misstatement of the group financial statements, due to its specific nature or circumstances (i.e., specific risks). Significance determines the nature of the work to be performed. Work effort is focused on components with greatest risks. 43

44 Work Effort On Significant Components For a component that is significant due to size, an audit of the component s financial information is required. For a component that is significant due to specific risks, one or more of the following is required: An audit of the component s financial information An audit of one or more account balances, classes of transactions or disclosures affected by the significant risks Specified audit procedures responsive to the significant risks For components that are not significant, one should perform analytical procedures at the group level. 44

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46 Audit Of Component Financial Information Not the same as audit of statutory financial statements For example, component auditor may not need to audit: Items that will be audited centrally, if so informed by group engagement team Disclosures required for statutory purposes, but not for group audit purposes Audit to component materiality (materiality for statutory audit may be lower) Group engagement specifies the form of reporting expected from component auditor. Standard does not mandate a form of reporting. 46

47 Significant Components Audited By Component Auditors If significant components are audited by component auditors, the group engagement team must be involved in: Component auditor s risk assessment Have all the significant risks been identified? Group auditor involvement depends on understanding of component auditor, but standard specifies minimum work required. Component auditor s responses to significant risks Are the responses appropriate? Direct involvement by group engagement team in responding to the significant risks may be necessary, based on understanding of component auditor. 47

48 Additional Procedures For Group Auditor When Assuming Responsibility For Component Auditor s Work References are to paragraph numbers in AU-C 600 Is component of individual significance to the group? (52, A75) No Is component likely to include significant risks of misstatement to the group FS due to specific nature or circumstances? (53, A76-A78) No Perform analytical procedures at group level for non-significant components (54, A79) Yes Yes Audit component s financial information (52-56) Audit component s financial information; OR audit one or more account balances, transaction classes, or disclosures; OR perform specified audit procedures (53, 57, 58) Adapted from AU-C 600 General Evaluate appropriateness of performance materiality at component level (50, A73-A74) Determine type of work to be performed on financial information of components (51) Evaluate component auditor s communication and adequacy of work (61-62, A90) Communicate with group management and those charged with governance (63) Document the process (64) Is planned scope such that sufficient appropriate audit evidence for group audit opinion can be obtained? (55, A79-A83) No For further selected components: Audit financial information;* or one or more account balances, transaction classes, or disclosures; OR review financial information; OR perform specified audit procedures (55) Yes * Adapted as necessary to to meet the needs of the group engagement team using component materiality Communicate with component auditors (59-60, A86-A89) 48

49 Ahava Goldman, AICPA COMPONENT AUDITORS

50 Understanding The Component Auditor Required regardless of whether reference is made to the component auditor s report Understands relevant ethical requirements, in particular independence, and will comply Professional competence The extent of involvement with the work of the component auditor Whether the group team can obtain information with respect to the consolidation process Whether the component auditor operates in a regulatory environment that actively oversees auditors The group auditor may not place any reliance on work performed, if independence is impaired or there are serious concerns about bulleted items above. American Institute of CPAs 50

51 Component Auditor If the group engagement team identifies components in the financial statements of a single entity, it is a group audit, and AU-C Sect. 600 applies. As defined in AU-C Sect. 600, a component auditor may be part of the group engagement partner s firm, a network firm of the group engagement partner s firm or another firm. Requirements are not substantially different from AU 543. If only performing analytical procedures at group level on component, don t need understanding of component auditor American Institute of CPAs 51

52 Component Auditor (Cont.) Part of your firm (engagement team working on component) Can t make reference Need to be as involved in their work as if your engagement team Other firm no difference if network or not If not making reference, comparable to using work of internal auditors or engagement team members Use the work of component auditor by: Making reference to their audit Assuming responsibility for, and being involved in, their work American Institute of CPAs 52

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54 Using Work Of Component Auditors Factors affecting this decision include: (a) Differences in the financial reporting framework applied in preparing the component and group financial statements (b) Whether the audit of the component financial statements will be completed in time to meet the group reporting schedule (c) Differences in the auditing and other standards applied by the component auditor and those applied in the audit of the group financial statements (d) Whether it is impracticable for the group engagement team to be involved in the work of the component auditor. Making reference is using component auditor work. American Institute of CPAs 54

55 Trevor Stewart, Rutgers University MATERIALITY

56 AU-C 600 Requires Different Types Of Materiality Determinations Group materiality If relevant, materiality levels for particular classes of transactions, account balances or disclosures Group performance materiality Determined just as per AU-C 320 Component materiality when an audit or a review of a component is necessary Component performance materiality Threshold above governs which misstatements cannot be treated as clearly trivial to the group. 56

57 Component Materiality Materiality for a component necessary for group engagement partner to form an opinion on group financial statements Generally greater than that required for the component auditor to form a separate opinion on the component s financial statements Should be lower than group materiality Sufficiently low enough to reduce the risk that the aggregate of uncorrected and undetected misstatements in the group financial statements exceeds group materiality, i.e., to control aggregation risk The sum of component materiality amounts may exceed group materiality (i.e., component materiality may be greater than an arithmetic proportion). Should be set for each component for which an audit or review is required 57

58 So, How Is Component Materiality Determined? Consider a really simple group Two identical independent components Group materiality $100,000 Standard just says component materiality must be less than $100,000 but need not be as low as $50,000. Huge range, within which the extent of component audit and cost thereof could vary by a factor of 2 Widely differing approaches in practice Ad hoc methods being used lack appropriate theoretical support. Significant potential for undue information and audit risk or excessive audit cost 58

59 Component Materiality Methods Assume group materiality = $100,000 and there are two identical components Method Handle Formula Origin / Usage Amount Group materiality FULL 100,000 Group materiality allocated proportional to size PROP 100,000 ½ ISA 600 upper extreme; certain firms ISA 600 lower extreme; sometimes used $100,000 $50,000 Half group materiality, regardless HALF 100,000 ½ Source unknown; certain firms $50,000 Group materiality times square root of relative size Maximum Aggregate Component Materiality (tabulated factor group materiality) allocated in proportion to square root of size General Unified Assurance and Materiality (Bayesian probability) SQRT MACM 100,000 ½ ,000 ½ Zuber, Elliott, Kinney, and Leisenring (1983); certain firms Glover, Prawitt, Liljegren, and Messier (2008); certain firms GUAM Algorithm Stewart & Kinney (2013); new $71,000 $75,000 $63,000- $100,000* * GUAM amount depends on group structure, group auditor s assessment of component risk, and other factors such as statutory audit constraints. 59

60 For More Than You Ever Wanted To Know About Component Materiality: Practitioner summary available The Accounting Review, March Doctoral Dissertation,

61 Excel App For Component Materiality Download or run from

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63 Ahava Goldman, AICPA COMMUNICATIONS

64 With All Component Auditors Obtain confirmation as to: Cooperation with group engagement team Ethical requirements including independence Inform the component auditor as to: Significant RMM of the group financial statements that are relevant to the component auditor Related parties of which the group engagement team is aware Request information relevant to the group team conclusions: Independence The financial information on which the component auditor is reporting Overall findings, conclusions and opinion American Institute of CPAs 64

65 With Component Auditor: Assuming Responsibility Work to be performed, and form and content of component auditor s communication with group engagement team Component materiality, if audit or review to be performed and misstatement threshold Component auditor s compliance with the group engagement team s requirements Non-compliance with laws or regulations at the component or group level that could affect group financial statements A list of corrected and uncorrected misstatements of the financial information of the component American Institute of CPAs 65

66 With Component Auditor: Assuming Responsibility (Cont.) Significant risks of material misstatement of the group financial statements at component level, and the component auditor s responses Indicators of possible management bias regarding accounting estimates and accounting principles Description of any identified material weaknesses and significant deficiencies in internal control at the component level Other significant findings and issues that the component auditor communicated those charged with governance of the component Any other matters relevant to the group audit American Institute of CPAs 66

67 Group Management And TCWG MWs and SDs relevant to the group (component auditor may have identified) Fraud (may be identified by component auditor) Request component auditor be informed of matters significant to their audit if component management is unaware e.g., potential litigation, subsequent events, significant legal agreements, plan for abandonment of material operating assets If group management refuses, talk to those charged with governance If not resolved, consider whether to inform component auditor and whether to withdraw American Institute of CPAs 67

68 With TCWG Of The Group Overview of work to be performed on the components financial information, including why making reference Overview of group engagement team s planned involvement in the work to be performed by the component auditors of significant components Instances of concern about the quality of a component auditor s work Any limitations on the group audit Fraud or suspected fraud involving group American Institute of CPAs 68

69 Ahava Goldman, AICPA ADDITIONAL ASPECTS OF GROUP AUDITS

70 Subsequent Events Group engagement team or component auditors should perform subsequent events procedures through the date of group auditor s report. Practical considerations Timing of component auditor s report Legal/governance structure Group management s process for identifying subsequent events related to components American Institute of CPAs 70

71 Subsequent Events: General Ask component auditors to inform GEP of events they are aware of and occurring between the date of financial information of component and the date of issuance of group audit report, and that may require adjustment to, or disclosure in, the group financial statements. Early communication is key! American Institute of CPAs 71

72 Subsequent Events: Additional Procedures Additional procedures when making reference Understanding group management s process Requesting written representation from component management regarding subsequent events Reading available interim financial information of the component and making inquiries of group management Reading minutes of meetings of the governing board, or any other administrative board with management oversight, held since the financial statement date Reading the subsequent year s capital and operating budgets Inquiring of group management Considering the implications if unable to obtain sufficient appropriate audit evidence regarding subsequent events American Institute of CPAs 72

73 Documentation Documentation should include: An analysis of the components, listing those that are significant and the type of procedures performed on the financial information of the components Written communications between group team and component auditors Nature, timing and extent of involvement of group team with component auditors of significant components, to which not making reference American Institute of CPAs 73

74 Documentation (Cont.) Documentation should include (Cont.): When making reference: - List of those components for which reference is made - The financial statements and audit reports of those components - If not stated in component auditor s report, the basis for determining the component audit met the relevant requirements of GAAS American Institute of CPAs 74