CA Final · Advanced Auditing, Assurance and Professional Ethics

Group Audits: formula sheet

Full chapter guide

Key formulas

Group engagement partner: Group engagement partner = partner responsible for the group audit engagement and for the auditor's report on the group financial statements; Decided by who signs the report on the group, not by size of firm or fees.
Component auditor: Component auditor = auditor who performs work on the financial information of a component for the group audit; The group engagement partner remains responsible for the group audit and decides how to direct and use the component auditor's work.
Component: Component = entity or business activity for which group or component management prepares financial information that is required to be included in the group financial statements; A component is a unit of the group, not an auditor. Branch, division, subsidiary, joint venture and associate are illustrations only, not the definition.
Related standards: Joint audits: SA 299. Opening balances in initial audit engagements (including use of the predecessor auditor's report or working papers): SA 510. Group audits and component auditors: SA 600 (Revised); Use this only to match the standard to the situation. Do not present it as a formal list of scope exclusions for SA 600 (Revised).
Effective date: SA 600 (Revised): effective date as stated in the ICAI-issued standard; Quote a date only if you have confirmed it from the ICAI text or the question gives it. Do not guess or quote a date from old notes.
Core rule: Principal auditor must consider whether his own participation is sufficient to act as principal auditor; This is the acceptance test in the standard. It is a judgment, not a numerical cut-off.
Factor 1: Materiality: Materiality of the portion of financial information audited by the principal auditor; Compare what you audit with what others audit, in terms of assets, revenue, profit or other relevant measures.
Factor 2: Knowledge: Degree of the principal auditor's knowledge of the business of the components; Includes the nature of operations, industry and environment of the components audited by others.
Factor 3: Risk: Risk of material misstatement in the financial information of components audited by the other auditor; Higher risk calls for more involvement from you.
Factor 4: Additional procedures: Additional procedures performed on the other auditor's components, resulting in significant participation by the principal auditor; These are the extra steps the standard describes for work done by other auditors.
Memory aid: M-K-R-P = Materiality, Knowledge, Risk, Procedures; Use it to structure answers. Apply each letter to the facts given.
Competence assessment: Professional competence + independence + working relationship → basis for reliance; Use this as a memory frame. Inquire about the other auditor's professional qualifications, experience, independence and, where relevant, the quality control environment they work in.
Extent of procedures: Extent of procedures depends on: materiality of component + risk of material misstatement + knowledge of the other auditor; The principal auditor uses judgment. There is no fixed number of procedures.
Coordination: Principal auditor informs → other auditor confirms: requirements, ethics, reporting, timing; Communicate in writing where practical, so the other auditor knows what work is expected of them.
Review of work: Review of other auditor's audit procedures, findings and conclusions → sufficiency decision; If the work is not sufficient, perform additional procedures, or ask the other auditor to do so. If still not sufficient, it is a scope limitation: qualified opinion or disclaimer, depending on materiality and pervasiveness.
Responsibility rule: No reference to the other auditor in the report → full responsibility stays with the principal auditor; reference to the other auditor's work → division of responsibility indicated in the report, not a qualification; Under SA 600 as adopted in India, if the principal auditor does not refer to the other auditor, the full responsibility for the opinion stays with the principal auditor. If the report refers to the other auditor's work, the reference indicates a division of responsibility. It is not to be read as a qualification. Check the reporting provisions in the related SA 600 topics.
Responsibility rule: Opinion on the whole = principal auditor's responsibility alone; Using or referring to the other auditor never reduces this responsibility.
Reporting options (extant SA 600): Satisfied with other auditor's work → report without reference, OR refer to the other auditor's report and indicate the magnitude of the portion audited; If you refer, state the division of responsibility. Whichever option you choose, your responsibility is not reduced.
Division of responsibility: If you refer → state that another auditor audited a portion, and indicate the magnitude of that portion; Magnitude is usually given as total assets, revenue or similar figures for that portion.
Cannot use other auditor's work: Work not usable + insufficient additional procedures possible → qualified opinion or disclaimer (scope limitation); Qualified if the possible effect is material but not pervasive. Disclaimer if it is material and pervasive.
Other auditor's modified report: Other auditor's modification → assess nature and significance to the whole → modify your report only if it is significant; A modification in a small portion may not require any change to your report.

Quick revision

The group engagement partner is responsible for the group audit engagement and its performance, and signs the report on the group financial statements.
Component auditors audit or review the financial information of components for the group audit. The group engagement team directs and reviews their work.
This page follows the revised SA 600. Use the terms group engagement partner and component auditor in your answers.
First decision: can the group engagement team reasonably expect to obtain sufficient appropriate audit evidence, through the consolidation process and the work on components?
Understand the group, its components, its environment and the consolidation process. This is the basis for risk assessment.
Identify significant components, for example those of individual financial significance or those likely to include significant risks because of their nature or circumstances.
Component materiality is set for the work on components. It is set by the group engagement team, not left to the component auditor.
Before relying on a component auditor, consider their relevant ethical requirements including independence, and their professional competence.
Communicate clearly to the component auditor the work you need and the form of their report. Then evaluate their communication and decide whether more involvement in their work is needed.
If you cannot obtain sufficient appropriate audit evidence for the group, consider the effect on your opinion.
There is no division of responsibility. The group engagement partner is solely responsible for the group opinion. The report does not refer to the component auditor unless law or regulation requires it. If it does, it must say the reference does not reduce the group engagement partner's or the firm's responsibility.
Always write answers in provision, facts and conclusion order. Case MCQs have no negative marking, so attempt every one.

Common mistakes

Treating the larger or more senior firm as the one responsible for the group audit. Fix: Decide by whose report covers the group financial statements that include other auditors' components.
Applying SA 600 (Revised) to joint auditors. Fix: Joint auditors share one audit and are dealt with under SA 299. SA 600 (Revised) applies where a group audit uses component auditors.
Applying a fixed percentage such as 50% as the test. Fix: State that the standard sets no numerical threshold. Materiality is one factor out of four and the decision is a judgment.
Discussing only materiality of the portion audited. Fix: Always cover all four factors, even briefly. Marks are given for each factor.
Treating the other auditor's report as final without any review. Fix: State that the principal auditor must assess competence and review the work. The extent depends on significance and risk, but some procedures are always needed.
Applying the same procedures to every component. Fix: Link the extent of procedures to the component's materiality and risk. Say that a small, low-risk component needs less than a large, high-risk one.
Writing that reference to the other auditor reduces the principal auditor's responsibility. Fix: Say that the division is only a description of who audited what. Your responsibility for the opinion on the whole remains with you.
Treating reference as always compulsory or as never allowed. Fix: State the extant SA 600 position: when satisfied, you may report without reference or refer and state the division of responsibility, indicating the magnitude of the portion. Then add that responsibility is not reduced either way.

Exam tips

Start every case answer by naming the group engagement partner's firm and the component auditors. It shows the examiner you have the roles right.
Write the definitions of group engagement partner, component auditor and component in the standard's own terms, then apply them to the facts.
Name the right standard for the arrangement, for example SA 299 for joint auditors and SA 510 for opening balances in an initial audit engagement. This is a favourite trap in MCQs.
If the question asks about applicability or timing, use the date given in the question or the ICAI-issued text. Do not pad beyond that.
Use provision-facts-conclusion form: define the term, apply it to the case, then state the conclusion.
Write the four factors as a short list and tie each to a fact in the case. This is how marks are earned.
Quote the rule in plain words: 'the principal auditor should consider whether his own participation is sufficient to act as principal auditor'.
In case-scenario MCQs, look for the option that reflects a judgment on all factors. Be wary of options that state a fixed percentage or an absolute bar.