Professional Scheme
Relevant to Paper 3.1

In 2003 the International Audit and Assurance Standards Board (IAASB) approved six International Standards on Auditing (ISAs) for public exposure. Three of these have already been issued as standards1. This article considers developments in standards for group audits. ISA 600 Using the Work of Another Auditor and SAS 510 The relationship between principal auditors and other auditors are very comparable except on the issue of sole versus division of responsibility.

ISA 600, which was first published more than 10 years ago, deals with:

• acceptance as principal auditor
• the principal auditor's procedures
• the principal auditor's consideration of the significant findings of other auditors
• cooperation between auditors
• reporting considerations
• division of responsibility.

Since then entities have become increasingly global. The increase in acquisition and merger activities means that group financial statements are playing a more important role in financial reporting. The International Forum on Accountancy Development (IFAD), World Bank and the International Organisation of Securities Commissions (IOSCO) have called for guidance to fill the gap in existing ISAs in the wake of recent corporate failures.

The IAASB's conclusions on the project to date, as revised by comments received on the first Exposure Drafts2, are summarised below.

Scope and format of pronouncements
The IAASB initially concluded that:

• ISA 600 (Revised) should deal with definitions, other auditors, cooperation between auditors, access to information and reporting responsibilities etc
• a new IAPS should provide additional guidance on the application of ISAs to the audit of group financial statements including, for example, multi-location audits.

Although a need for guidance exists where two or more auditors are appointed as joint auditors, a project proposal has still to be prepared for consideration by the IAASB.

Regulatory framework for group audits
IFAC's 'Code of Ethics for Professional Accountants' will apply to the group audit. As the proposed pronouncements are provided in the context of ISAs and International Auditing Practice Statements (IAPSs), group financial statements are to be audited in accordance with ISAs. Other auditors are therefore to be instructed to conduct their work in accordance with ISAs. However, both group and other auditors should also comply with any national requirements applicable to the audit of group financial statements.

ISA 600 (Revised) will distinguish 'related auditors' (ie those from the group auditor's firm or a network firm that operates common monitoring policies and procedures and the same audit methodology) from 'other auditors'.

The IAASB's initial conclusion that the division of responsibility provision in the current ISA 600 would be retained as a result of the legal frameworks of certain countries, eg the US and in South America, has been overturned in light of significant comments received on the first Exposure Draft. It is now being recommended that:

• no distinction be made between sole and divided responsibility such that the group auditor's procedures should be the same regardless
• where national law of standards allow a group auditor to refer to another auditor in the group auditor's report, such reference:
  
  1. should be in a separate emphasis of matter paragraph (ie explanatory paragraph as per SAS 600)
  2. does not affect the group auditor's procedures.

A group auditor will not be able to refer to another auditor instead of qualifying the group auditor's report based on scope limitation. This brings ISA 600 reporting requirements in line with those of SAS 510.

IAPS
The Exposure Draft proposed that it be applied by group auditors with sole responsibility. However, as the distinction between sole and division of responsibilities is being removed the IAPS will apply in all cases.

The purpose of the IAPS is to provide practical assistance to auditors in applying ISAs to the audit of group financial statements. It does not establish new requirements for, or exemptions from, the requirements of ISAs. Thus it may be regarded as insufficient in meeting calls for more rigour. Indeed, comments on the Exposure Draft recommend that guidance be moved from the IAPS to the ISA to strengthen the group auditor's procedures.

Related parties
The project considered whether the group pronouncements should address the concept of 'business empires' (ie horizontal groups, economic dependency). However, although the draft IAPS emphasises the importance of assessing risks regarding related parties, there is only one passing reference to special purpose entities (that their existence should be considered) and no reference to 'business empires'. Additional guidance is still to be drafted and exposed with ISA 550 (Revised) Related Parties.

Materiality
The ED IAPS recommends that the group auditor:

• establishes group materiality (ie based on the group financial statements) to evaluate the effect of misstatements of the components' financial information and the consolidation on the group financial statements
• establishes group planning materiality (also based on the group financial statements) to determine the nature, timing and extent of audit procedures to be performed on the group financial statements
• uses group planning materiality to determine planning materiality for each component (that does not exceed, and in practice can be lower than, group planning materiality)
• communicates component planning materiality and a threshold below which misstatements are regarded as clearly inconsequential and need not be communicated to the group auditor.

Guidance on this matter has been limited because it is to be reconsidered when ISA 320 (Revised) Audit Materiality is completed.

Concluding remarks
The EDs were issued in December 2003 (originally planned for October 2003). That a revised proposed ISA and IAPS is to be re-exposed by the end of the 2004 is a reflection of how an IAASB taskforce to a project acknowledges the comments received from respondents to their initial proposals. Students should take note of the relative merits and consequences of the different standpoints adopted and be able to express their own opinions supported by reasoned arguments.

References

1. ISA 220 Quality Control for Audit Engagements, ISA 240 The Auditor's Responsibility to Consider Fraud in an Audit of Financial Statements, ISA 300 Planning the Audit.
2. ISA 600 (Revised) The Work of Related Auditors and Other Auditors in the Audit of Group Financial Statements and IAPS The Audit of Group Financial Statements.

Kim Smith is examiner for Paper 3.1