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

Zephyr Group has group materiality of $3,000,000. Component Q has been identified as having a significant risk of material misstatement arising from complex revenue recognition on long-term contracts, though Q is only 2% of group assets and 4% of revenue. The group team plans to rely solely on group-level analytics for Q. Which is the best assessment of this plan?

The plan is inappropriate. Scoping depends on risk as well as size, so a small component with a significant risk of material misstatement needs audit work responsive to that risk, such as specified procedures on the revenue contracts. Group-level analytics alone would not suffice.

  1. AAppropriate, because Q falls below the commonly used 10% benchmark for financial significance
  2. BAppropriate, because component scoping is based only on size and not on risk
  3. CInappropriate, because for a component with a significant risk related to the group financial statements, the group team must design responses such as audit work on that risk, even if the component is not financially significantCorrect
  4. DInappropriate, because the group team must always replace analytics with a full audit of every component with a revenue risk

Explanation

ISA 600 (Revised) requires the group team to consider both size and risk when scoping. A component with a significant risk of material misstatement of the group financial statements requires audit procedures responsive to that risk, even if it is small. Size alone is not a basis for relying on analytics. However, a full audit is not always required, as specific procedures on the risk may be sufficient, so the last option is too absolute.

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