Group audits: formula sheet

Key formulas

Scope of ISA 600 (Revised)

Applies to all audits of group financial statements, including where component auditors are used

It also applies where the group team does all the work itself.

Component

Component = entity or business unit (or function or activity) whose financial information is included in the group financial statements

It is defined by the financial information included, not by legal form.

Group engagement team

Group engagement team = group engagement partner + staff who establish the overall group audit strategy, communicate with component auditors, perform work on the consolidation process and evaluate conclusions

A component auditor is a person outside the group engagement team. Staff of the group auditor's firm who perform work on a component as part of the group engagement team are team members, not component auditors.

Component auditor

Component auditor = a person outside the group engagement team who performs audit work on a component for the group audit

Not part of the group engagement team. Can be from a network firm or another firm, and in some cases from the same firm.

Responsibility principle

Group engagement partner responsible for direction, supervision, performance and the opinion

Not reduced by the use of component auditors.

Reference in report

No reference to component auditor in the auditor's report, unless required by law or regulation

If law or regulation requires a reference to a component auditor, the auditor's report must indicate that the reference does not reduce the group engagement partner's or firm's responsibility for the group audit opinion.

Acceptance test

Accept only if the group team expects to obtain sufficient appropriate evidence on the group financial statements

This applies at acceptance and each continuance. If it fails and cannot be fixed, decline or withdraw as the law allows.

Group engagement partner responsibility

Group opinion responsibility = group engagement partner, whether or not component auditors are used

The auditor's report must not refer to the component auditor as a way of reducing responsibility.

Component auditor evaluation

Competence + Independence + Regulatory and ethical environment + Ability to communicate and get access

Use these four areas to structure any answer on whether to rely on a component auditor.

Understanding the group

Structure + Components + Business and environment + Reporting framework + Group-wide controls + Consolidation process

A checklist for what must be understood before assessing risk.

Scoping prompt

Components: significant by size, significant by risk, or other

The type of work depends on the category. Do not state fixed percentage cut-offs unless the question gives them.

Component materiality rule

Component materiality < Group materiality

Set lower so that the aggregate of uncorrected and undetected misstatements across components stays below group materiality. Not a fixed percentage.

Indicative size test for significance

Component benchmark ÷ Group benchmark × 100

A rule-of-thumb only. A large share suggests the component is financially significant. ISA 600 (Revised) gives no fixed percentage, so state your threshold as a judgement.

Group performance materiality

Group performance materiality < Group materiality

Set to reduce the risk that aggregated uncorrected and undetected misstatements exceed group materiality.

Component performance materiality

Component performance materiality < Component materiality

Set by the group engagement team, or evaluated by it where the component auditor sets it. It is lower than component materiality to reduce aggregation risk.

Scoping decision

Significant by size or by risk → audit (full or specific balances); Not significant → analytical procedures or limited work, plus a coverage check

Risk-based. A small component can still be significant if it carries a significant risk. 'Significant component' is the previous ISA 600 term, still widely used in exam answers.

Responsibility rule

Group opinion = group engagement partner's responsibility, with no reference to component auditors in the report

Using component auditors never reduces the group partner's responsibility.

Assessment checklist

Competence + capabilities + independence + ethics + regulatory environment

Use this as a prompt list when a scenario names a new or unfamiliar component auditor.

Involvement rule

Higher component risk or weaker auditor → more group team involvement

Involvement is a judgement. It can include risk assessment discussions, further procedures, or reviewing working papers.

Communication cycle

Instructions out → confirmation of cooperation → reporting back → group evaluation

Communication must be two-way and timely.

Goodwill at acquisition (NCI at fair value or proportionate share of net assets)

Goodwill = Consideration transferred + Non-controlling interest (at fair value or share of net assets) + Fair value of previously held interest − Fair value of identifiable net assets at acquisition

Use this to recompute goodwill when auditing. Check each input to evidence.

Unrealised profit in inventory (sale of goods within group)

Unrealised profit = Intragroup goods still held at year end × Profit margin of the seller

Use margin on selling price, or convert mark-up: margin = mark-up ÷ (100% + mark-up).

Intragroup balances

Receivable in one entity = Payable in the other entity (after allowing for items in transit and currency differences)

Differences must be reconciled and explained before elimination.

Group evidence rule

Group opinion supported only if evidence on the consolidation and components is sufficient and appropriate

Sufficiency is quantity. Appropriateness is relevance and reliability.

Limitation on scope: opinion choice

Material but not pervasive → qualified (except for). Material and pervasive → disclaimer of opinion.

Applies when you cannot obtain sufficient appropriate evidence, for example when access to a component is restricted.

Disagreement: opinion choice

Material but not pervasive → qualified (except for). Material and pervasive → adverse opinion.

Applies when you have the evidence but the financial statements are misstated.

Group partner responsibility

Group engagement partner is responsible for direction, supervision, performance and the opinion.

This stays true even when component auditors do significant work. Do not suggest dividing responsibility.

Basis for opinion paragraph

Modified opinion → include a Basis for Qualified / Adverse / Disclaimer paragraph before the opinion details.

Explain the matter and its effect. Quantify it if practicable.

Quick revision

• The group engagement partner is responsible for the group audit opinion, even when component auditors do work.
• Accepting a group audit needs a view on whether sufficient appropriate evidence can be obtained, including access to components and management.
• Understand the group's structure, controls, consolidation process and any group-wide risks before setting the plan.
• Group materiality is set for the consolidated statements. Component materiality is set lower, using judgement, to reduce aggregation risk to an acceptably low level. Component performance materiality is also set.
• Scoping under ISA 600 (Revised) is risk-based: assess the risks of material misstatement of the group statements, then design and perform further audit procedures responsive to those risks. These may include work on a component's financial information, specific balances or transactions, or specified procedures. Group-level analytical procedures can supplement this work.
• Evaluate a component auditor's competence, independence, professional standards and resources before relying on them.
• Communicate clearly with component auditors and review their work in line with the risk involved.
• Audit consolidation adjustments: intragroup eliminations, fair value, goodwill, uniform accounting policies and translation.
• Overseas components raise issues of local law, language, different frameworks, currency and access to records.
• If you cannot obtain sufficient evidence on a component, consider the effect on the opinion, which could be modified.
• Joint audit is a separate arrangement outside ISA 600 (Revised) and is not a group audit. The responsibilities of joint auditors depend on local law and the engagement terms. Agree the split of work and the extent of joint responsibility, and communicate openly. Joint auditors are distinct from component auditors.
• Always tie each point to the scenario, then give a clear recommendation.

Common mistakes

• Saying the component auditor shares responsibility for the group opinion. Fix: State that the group engagement partner alone is responsible for the group opinion. Component auditors report to the group team.
• Treating only separate legal entities as components. Fix: Define a component by the financial information included in the group financial statements. It can be a division, a function or an associate.
• Listing general acceptance factors without using the scenario. Fix: Tie every factor to a fact in the scenario, then state the effect on the decision.
• Saying the group auditor can rely on the component auditor and so has no responsibility for that work. Fix: State that the group engagement partner remains responsible for the group opinion and must be involved in the component work.
• Setting component materiality equal to group materiality. Fix: State that component materiality must be lower than group materiality so that the total of uncorrected misstatements stays below it.
• Dividing group materiality by the number of components and calling it component materiality. Fix: Say it is a matter of judgement based on each component's size and risk. The sum of component materialities may exceed group materiality only if the group team judges that the risk of aggregated misstatements exceeding group materiality is acceptably low.
• Saying the group auditor can place full reliance on the component auditor because they are a network firm. Fix: Still assess competence, independence and ethics, though the network's common policies may inform the assessment. The group partner remains responsible.
• Writing that responsibility is shared or transferred to the component auditor. Fix: State clearly that the group engagement partner is responsible for the opinion and the report does not refer to component auditors.
• Listing generic audit procedures such as inspect invoices without linking them to the consolidation. Fix: Name the consolidation step, such as eliminating intragroup sales, and say which group records you will test.
• Forgetting to test the consolidation adjustments and focusing only on component auditors' work. Fix: Always include procedures on the spreadsheet: agree opening balances, check formulas and review journals posted at group level.

Exam tips

• Start every group audit answer by naming the component, the component auditor and the group engagement team from the scenario.
• Always state that the group engagement partner is responsible for the opinion. This one sentence earns marks in many questions.
• Tie each point to a scenario fact, such as country, size or risk, to score application marks.
• Use the standard's risk-based focus: refer to risks of material misstatement of the group financial statements, not only to individual components.
• Keep a short professional skills line, such as scepticism about the component auditor's work or clear wording for a partner.
• Always use the scenario. A bare list of ISA 600 points earns few marks.
• Open with the group engagement partner's responsibility whenever component auditors appear in the question.
• When a restriction on access appears, discuss alternatives, then give a clear conclusion on accept, decline or withdraw.