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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Group audits

Harlow Group has a parent and 12 subsidiaries. Kestrel & Co is the group auditor and has set group financial statements materiality at $2,000,000. Under ISA 600 (Revised), which statement best describes how component materiality should be set for a component on which audit work will be performed?

Component materiality is set by the group engagement team at a level lower than group financial statements materiality. This addresses aggregation risk, so that misstatements across all components, corrected or not, do not in total exceed group materiality. It is a judgement, not a formula or management's choice.

  1. AIt must equal group materiality so that component auditors apply a consistent threshold across the group
  2. BIt is set lower than group materiality, so that the aggregate of uncorrected and undetected misstatements in all components does not exceed group materialityCorrect
  3. CIt is set by each component's local management, based on the component's own profit before tax
  4. DIt is set at the sum of group materiality divided by the number of components, with no judgement allowed

Explanation

ISA 600 (Revised) requires the group engagement team to determine component materiality for components where audit work is performed. It must be lower than group materiality so that aggregation risk is addressed. Setting it equal to group materiality would allow the sum of misstatements across components to exceed group materiality. Management has no role in setting it, and a mechanical division is not required, as judgement is applied.

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