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1 Grant Thornton International Barry Barber Worldwide Director of Audit and Quality Control 399 Thornall Street Edison, New Jersey Direct July , 2006 Fax August 4, 2006 Mr. James Sylph Technical Director International Auditing and Assurance Standards Board 545 Fifth Avenue, 14th Floor New York, NY Dear Mr. Sylph: Via Grant Thornton International appreciates the opportunity to comment on the Proposed International Standard on Auditing (ISA) 600 (Revised and Redrafted), The Audit of Group Financial Statements, approved for publication by the International Auditing and Assurance Standards Board (IAASB). We support the IAASB s issuance of the proposed revised and redrafted standard and respectfully submit our comments and recommendations below and in the attached appendix. Elimination of the distinction between sole and divided responsibility Because practice varies and the proposal is imposing sole responsibility, we believe it is critical to adequately describe the procedures the group auditor performs to obtain sufficient appropriate audit evidence in relation to another auditor s work on a component. Accordingly, in response to the IAASB s request for specific comments (paragraph 33(b) of the Explanatory Memorandum), we believe the IAASB s approach is justified. We believe the proposal is much clearer because it considers the risk of material misstatement and the magnitude of the portion audited by other auditors. However, additional clarification is necessary with regard to the work to be performed, as discussed below. Distinction between related and unrelated auditors and the definition of group auditor In response to the IAASB s request for specific comments (paragraph 33(a) of the Explanatory Memorandum), we support the elimination of the distinction between related and unrelated auditors.

2 With regard to the definition of members of the engagement team, the IAASB should consider clarifying that the engagement team would include personnel of the group auditor s firm that are in other offices of that firm. In addition, with regard to the definition of other auditors, it may be helpful to note that another auditor may be engaged by either group management, component management, those charged with governance over the group or component, or the group auditor. In many jurisdictions, the group auditor does not engage the other auditor, and paragraphs 22 through 24 seem to imply otherwise. This may cause additional complications in determining the nature, timing and the extent of work to be performed under the direction of the group auditor (paragraph 26) and therefore, additional guidance in this area may be necessary. Acceptance and continuance as group auditor We support the IAASB s approach with regard to the percentage to be applied to a chosen benchmark in identifying components that are of individual financial significance. Access to information Legal and professional impediments will continue to raise issues on access to information. As such, we encourage the IAASB to work with legislators, regulators and the profession to develop a solution with regard to such impediments. We concur with the IAASB s proposal as it relates to client acceptance and reporting (qualified or disclaimer of opinion) when access to information or individuals is restricted. For additional clarity, we proposed certain revisions to paragraphs 12 and 13 in the appendix to this letter that pertain to the issuance of a disclaimer when sufficient appropriate audit evidence cannot be obtained. Distinction between components that are not significant in the aggregate and other components We understand the IAASB s response to previous comments to clarify the categories of components. We concur that if a component is of individual financial significance, an audit of the component is required. However, such audit would be performed using group materiality (not component materiality, as indicated in paragraph 23) or a lower materiality level. In addition, we have concerns with regard to the work to be performed as it relates to components that are significant due to their nature and circumstances and components that are not individually significant. We believe that components that are significant due to their nature and circumstances are those that pose a specific risk(s) of material misstatement to the group financial statements. While the response to the risk(s) identified at the group level may be to perform an audit of the component using group materiality or a lower materiality level, it may also be appropriate to respond by performing specified procedures, such as tests of the operating effectiveness of controls and substantive procedures. A separate risk assessment may not be performed (paragraph 27 implies that a risk assessment at the component level is required regardless of the type of work being performed by the other auditor). We also believe that components that are not individually significant are those that do not pose a specific risk of material misstatement to the group financial statements. In determining the procedures to be performed for such components, the group auditor considers the possibility that misstatements of lesser amounts could, in the aggregate, be quantitatively material to the group financial statements. The group auditor responds to this risk by performing or requesting another auditor to perform further audit procedures at the component level to respond to the risk at the group level. These would ordinarily include inquiries, analytics and substantive procedures. An audit of a particular component may be performed if the group auditor believed 2

3 it would most efficient and effective to reduce risk to an acceptable level. A complete audit or review of the component would be rare and ordinarily less effective. Accordingly, if this is what was intended with regard to the categories of components, we urge the IAASB to consider the clarity of the requirements in relation to the work being performed by the other auditor. The requirements in paragraphs 22 through 25 should be the minimum requirements necessary to respond to the identified risks (see the appendix to this letter for proposed language). Application guidance should also be developed to provide further explanation as to the categories of components and the work to be performed. The responsibilities of other auditors We believe the other auditor s work constitutes audit work for the group. Therefore, the IAASB should clarify its intent with regard to the work to be performed. We believe our suggested revisions to paragraphs 22 through 25 in the appendix to this letter provide better clarity with regard to the minimum requirements that are necessary to address the risks at the group level. Objective and scope We believe that there may be confusion with regard to the applicability of the proposal as it relates to group audits performed by a single auditor. For example, some auditors may believe the proposal applies not only when other auditors perform work on a component but also when no other auditor is involved in the group audit. This view is based on the proposed standard not specifically indicating that it only applies when another auditor is involved. In addition, paragraphs 1, 22 and 23 seem to confirm this interpretation. On the other hand, the objective stated in paragraph 6 appears only to pertain to the group auditor s use of the work of another auditor. Accordingly, in response to the IAASB s request for specific comments (paragraph 33(c)(i) of the Explanatory Memorandum), we urge the IAASB to clarify the scope and as necessary, the objective of the proposal. We also suggest clarifying whether or not a component (as defined in paragraph 7) includes an investee (other than a portfolio investment) accounted for by the equity or cost method. * * * * We would be pleased to discuss this letter with you or another member of the IAASB staff. Please contact me at (732) if you have any questions. Very truly yours, Grant Thornton International Barry Barber Worldwide Director of Audit and Quality Control 3

4 APPENDIX OTHER PARAGRAPH-LEVEL COMMENTS The following offers paragraph-level comments for your consideration. Unless otherwise indicated, suggested new language is shown in boldface; suggested deleted language is shown by double strikethrough. Paragraphs 12 and 13 We recommend combining these two paragraphs, as paragraph 13 may be misinterpreted on a standalone basis. In addition, to provide additional clarity with regard to a disclaimer of opinion, we propose the following revision. If the group engagement partner concludes that it will not be possible to obtain sufficient appropriate audit evidence and the possible effect of this inability is material and pervasive to the group financial statements, such that the group auditor is likely to disclaim an will result in a disclaimer of opinion on the group financial statements Paragraphs 14 and A16 We fear that as a default procedure the group auditor will only obtain a written representation from the other auditor. Therefore, the IAASB should consider whether to clarify the guidance provided in paragraph A16 by stating that such representations alone are not sufficient to obtain an understanding of the other auditor. An additional source of information that may also be used to obtain information is the auditor s publicly available inspection reports (or discussing with the other auditor its monitoring of its quality control system, including the results thereof). Paragraph 19 We believe this paragraph is unclear with regard to the difference between materiality and tolerable error to be applied at the component level. In addition, this paragraph does not take into consideration the type of work being performed by the other auditor. For example, a component may only be subjected to specified procedures or an audit could be performed using group materiality. Thus, the paragraph would be better if it stated that component materiality cannot exceed group materiality. In addition, a component may be a component of more than one group. If the group auditor is involved in setting materiality for work to be performed at the component level, then the component auditor may work with multiple group auditors in determining an appropriate materiality (and the type of work to be performed). This situation will be particularly difficult if the proposal applies to equity investments (as we have previously indicated, should be clarified). We agree with the position that the group auditor should be involved in this decision. However, we suggest additional guidance on this point in the communication section of the standard. Paragraph 24 To clarify that these are incremental procedures, we suggest the following revision: the group auditor shall also select Paragraphs 22 through 25 In connection with our letter, we have the following suggested revisions to clarify the categories of components and the work to be performed. We intentionally wrote these paragraphs to only include the minimum procedures necessary to address the risks at the group level and to align with the risk assessment standards; thereby eliminating the notion of a complete audit and a review of the component. If the IAASB agrees with the following proposal, additional revisions would be needed to paragraphs 27, 28 and A27. Further, application material should also be developed to clarify the types of further audit procedures. This guidance could stress that the auditor is not precluded from performing additional procedures (such as an audit of the component). Significant Components For a component that is significant due to its individual financial significance to the group, the group auditor, or another auditor at the request of the group auditor, shall perform an audit 4

5 using either group materiality; or a lower materiality level determined by the other auditor where the circumstances in paragraph 29 apply. For a component that is significant because it poses a specific risk (or risks) of material misstatement of the group financial statements, the group auditor, or another auditor at the request of the group auditor, shall design and perform further audit procedures on the component to respond to the identified risks at the group level. Such procedures shall include tests of the operating effectiveness of controls, when relevant or required, and substantive procedures, whose nature, timing, and extent are responsive to the assessed risks of material misstatement at the assertion level. Components that Are Not Individually Significant If the work performed on the financial information of significant components will not result in the group auditor obtaining sufficient appropriate audit evidence to reduce audit risk for the group financial statements to an acceptably low level, the group auditor shall select components that are not individually significant for which the group auditor, or another auditor at the request of the group auditor, shall perform further audit procedures to respond to the assessed risks at the group level. For the individual components selected, such procedures shall include substantive analytical procedures, tests of details, or a combination of substantive analytical procedures and tests of details. For components not selected for the period under audit, the group auditor shall perform analytical procedures at the group level. The group auditor shall consider the results of such analytical procedures along with other information gathered to determine whether additional audit evidence should be obtained. Paragraph 25 We suggest clarifying what it means to perform analytical procedures at the group level as it pertains to the component. See our recommended revisions above. Paragraph 26 This paragraph confuses the timing of the procedures performed during planning, throughout the engagement, and upon conclusion. We believe the group auditor should, in all circumstances, evaluate the other auditor s memorandum or report of work performed. The group auditor should also, throughout the engagement, perform one or more of the actions listed in this paragraph. Currently, the actions are performed only when considered necessary. In addition, application material should be developed to provide the group auditor with guidance on the extent of the actions to be performed. For example, paragraphs A14 and A15 provide guidance on the extent of involvement as it pertains to the group auditors previous experience with the other auditor, the adherence to common policies and procedures, and the consistency and similarity of legal, professional, educational and cultural matters. Other factors that could influence the extent of involvement include the risk of material misstatement and the work being performed by the other auditor. A reference to paragraphs A14 and A15 might be helpful. Paragraphs 26(c) and 27 In connection with our letter, the IAASB should clarify its intent to require risk assessment procedures for all significant components, regardless of the work being performed by the other auditor. Further, to clarify what is required, it may be necessary to reference paragraph 27 in paragraph 26(c) and to provide application guidance to clarify the risk assessment procedures. Paragraphs 41 through 45 Although obvious, these paragraphs should clarify that the group auditor also needs to consider the effect of the component auditor s findings and conclusions on the group 5

6 auditor s opinion. Currently, the paragraphs focus on obtaining sufficient appropriate audit evidence, on disagreements, and on uncorrected misstatements. However, there may be other matters discussed in the other auditor s memorandum or report that would be relevant and would impact the group auditor s opinion. Paragraph 43 Because there is no application guidance with regard to the evaluation of whether sufficient appropriate audit evidence has been obtained, we suggest including a reference to ISA 500, Audit Evidence. It may also be helpful to include a discussion on evaluating the sufficiency and appropriateness of the scope of the work performed taken as a whole. Paragraph 50(b) and A34 We believe the IAASB should clarify the documentation requirements as it relates to work performed on a component for purposes of the group audit. For example, if the other auditor performed an audit of the component, their file assembly period may differ from the file assembly period for the group auditor, based on the date of the respective auditor s reports. Some auditors may believe that the component auditor must follow the file assembly period of the group auditor, thereby permitting a longer assembly period on the component. We believe the group auditor s documentation should be sufficient for purposes of the group audit and it should not extend to reliance on the maintenance of the other auditor s workpapers. The other auditor s workpapers would be maintained in accordance with the professional standards within which their work was performed. Paragraph A8 This paragraph refers to circumstances that may cause access to information to be restricted. The IAASB should consider adding an example of such circumstances, for instance national laws relating to confidentiality and data privacy. In that regard, we note that access may be restricted by the component auditor, which is not mentioned herein. Further, the guidance provided in this paragraph as it relates to sufficient appropriate audit evidence seems a bit contradictory to the remainder of the proposal and therefore, may be applied incorrectly or abused. Paragraph A11 In the second bullet, consider clarifying that the communication is unrestricted to the extent permitted by law or regulation. Further, in the third and fourth bullets, consider replacing should be made available with should be communicated. Appendix 5 Consider adding an exchange of information relating to related parties consistent with paragraph 38(d). 6