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

Harlow Group has a parent and six subsidiaries. The group engagement partner is planning the audit under ISA 600 (Revised). Which statement best describes how group materiality and component materiality relate?

Component materiality (performance materiality) must be set below group materiality, because uncorrected and undetected misstatements in several components could add up to a material amount for the group. It is determined with the group team's involvement, not independently, and applies whoever audits the component.

  1. AComponent materiality is set by the component auditor independently, without reference to group materiality
  2. BComponent materiality must be set lower than group materiality so that aggregated uncorrected misstatements across components do not exceed group materialityCorrect
  3. CComponent materiality must equal group materiality for every component to ensure consistency
  4. DComponent materiality is only needed for components that are audited by a network firm

Explanation

Under ISA 600 (Revised), the group team determines component performance materiality, and it must be lower than group materiality to address the risk that aggregated misstatements across components could be material to the group. Setting it equal to group materiality would ignore aggregation risk. Component auditors do not set it independently, and the requirement applies regardless of who performs the work.

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