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Exposure Draft ISA 600 – Group Audits

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Exposure Draft ISA 600 – Group Audits

  1. 1. Exposure Draft ISA 600 – Group Audits Webinar, June 11, 2020 Len Jui, IAASB Member and Task Force Chair Josephine Jackson, IAASB Member and Task Force Member Jasper van den Hout, IAASB Principal and Lead Staff
  2. 2. Overview The Journey So Far Public Interest Issues Linkages with Other Standards Scope and Applicability Planning and Performing a Group Audit Engagement Structure of the Standard Acceptance and Continuance, including Restrictions on Access Understanding the Group and Its Environment Materiality Documentation Other Matters Way Forward Page 2 |
  3. 3. The Journey So Far Page 3 |
  4. 4. Information gathering ITC Project Proposal Project Update Exposure Draft Project Timeline Work commenced on group audits in January 2015 Project proposal approved in December 2016 Project update issued in September 2017 Invitation to Comment issued in December 2015 Task Force commenced work in early 2019. ED-600 was issued on April 27, 2020.
  5. 5. Public Interest Issues Page 5 |
  6. 6. Public Interest Issues Page 6 •Keeping the IAASB’s standard on group audits fit for purpose •Encouraging proactive management of quality at the engagement level Reinforcing the need for robust communication and interactions during the audit •Fostering an appropriately independent and challenging skeptical mindset of the auditor Public Interest
  7. 7. Linkages with Other Standards Page 7 |
  8. 8. Stand Back Requirements Key foundational standards: ISQM 1, ISA 220, 230, 240, 315 (Revised 2019), 320, 330 ISA 600 Page 8 Special Considerations Standard
  9. 9. Proposed ISA 220 (Revised), ISA 315 (Revised 2019) and ISA 330 • ED-600 is based on proposed ISA 220 (Revised) as presented to the Board in March 2020 – Engagement team definition – Leadership responsibilities for managing and achieving quality on a group audit – Being able to be involved in the work of the component auditor – Relevant ethical requirements, including those related to independence – Engagement resources – Engagement performance • Greater alignment with ISA 315 (Revised 2019) and ISA 330 – Understanding the entity and its environment, the applicable financial reporting framework and the entity’s system of internal control – Identifying, assessing and responding to the risks of material misstatement – Evaluating the sufficiency and appropriateness of audit evidence obtained Page 9
  10. 10. Scope and Applicability Page 10 |
  11. 11. Page 11 • Group financial statements – Definition is the ‘entry point’ into ED-600 – Definition retains the notion that group financial statements include the financial information of more than one entity or business unit – Definition includes the term ‘consolidation process’ – description of consolidation process enhanced • Component – Reflects the ‘auditor’s view’ for purposes of planning and performing the group audit – Definition uses terms ‘location, function or activity’ • Scalability Special Considerations Standard
  12. 12. Planning and Performing a Group Audit Engagement Page 12
  13. 13. Focus of Extant ISA 600 Significant Component A Group FS Equity Revenue Costs/ Expenses Liabilities Significant Component B Non-significant Component C Non-significant Component D Assets Page 13
  14. 14. Planning and Performing a Group Audit Engagement • Focuses on identifying, assessing and responding to the risks of material misstatement of the group financial statements “The right work done by the right people at the right locations” • Think about – What (identifying and assessing risks of material misstatements) – How and when (developing the strategy to respond to assessed risks) – By whom and where (determining which resources will perform procedures to obtain evidence) • Greater alignment with the requirements in ISA 315 (Revised) and ISA 330 • Greater focus on the group engagement team’s responsibility, with the assistance of component auditors as needed Page 14
  15. 15. Risk-Based Approach Component A Group FS Equity Revenue Costs/ Expenses Liabilities Component B Component C Component D Assets Page 15
  16. 16. LocationsFew Many Nature of business/ operations Single line of business in same industry Different lines of business in different industries System of internal control, including information system Common or centralized Unique, de-centralized Considerations in Applying the Risk-Based Approach Likelihood of involvement of component auditors None or lower Greater Page 16
  17. 17. Risk-Based Approach: Responsibilities and Involvement Component Auditors • Group engagement team takes responsibility but may assign procedures to component auditor – Component auditor may be involved given that they may have a more in-depth knowledge of the component and the component’s business activities • Component auditor may be involved throughout the audit • Responding to risks of material misstatements: group engagement team may request component auditor to – Design and perform further audit procedures on the entire financial information of the component – Design and perform further audit procedures on one or more classes of transactions, account balances or disclosures – Perform specific further audit procedures as identified and communicated by the group engagement team Page 17
  18. 18. • Emphasized in a requirement the importance of communicating the group engagement team’s expectations and the component auditor’s responsibilities – Communications shall take place at the appropriate points in time throughout the group audit and reflect the component auditor’s involvement in various phases of the group audit • Added application material based on guidance in ISA 260 (Revised) – Matters that may contribute to effective two-way communication – Factors that may influence the form of communication – Appropriate timing for communications • Added application material on possible need to communicate with component auditors regarding non-compliance or suspected non-compliance with laws and regulations Page 18 Risk-Based Approach: Two-Way Communication
  19. 19. Similarities between Extant and Risk-Based Approach • Obtain sufficient appropriate audit evidence to provide a basis for the opinion on the group financial statements • Understanding the entity and its environment, including the group structure, business activities, and internal control • Involvement of component auditors • Responsibilities of the group engagement partner Page 19
  20. 20. Structure of the Standard Page 20 |
  21. 21. • Considerations when component auditors are involved – ED-600 includes in each section of the standard a sub-section on considerations when component auditors are involved – Clarifies the interactions between the group engagement team and component auditors throughout the different stages of the group audit • Going concern, related parties and subsequent events – Added paragraphs on going concern and related parties into Risk Assessment and Response to Assessed Risks of Material Misstatement sections Page 21 Structure of the Standard
  22. 22. Acceptance and Continuance, including Restrictions on Access Page 22
  23. 23. Acceptance and Continuance • Aligned with proposed ISA 220 (Revised) • Overarching requirement to determine whether sufficient appropriate audit evidence can be obtained – Based on requirement in extant ISA 600 – Including preliminary determination whether component auditors need to be involved • New requirement for when sufficient appropriate audit evidence can not be obtained after acceptance or continuance • Added requirement that group management needs to acknowledge and understand its responsibility in accordance with ISA 210 to provide the engagement team with unrestricted access to information and, to the extent possible, relevant persons within the group Page 23
  24. 24. Page 24 Access to People • Unable to access component auditor • Unable to access (component) Those Charge With Governance, (component) management Access to Information • Audit documentation need to be kept in component jurisdiction • Audit documentation are not allowed to be shared electronically • Restrictions to travel to a country • Access component auditor’s audit work papers is restricted because of war, other unrest or outbreaks of infectious diseases “ISA 600 (Revised) can’t enforce access to people and information, but it can help by developing guidance for situations where access to people or information is restricted” Types of Access Issues
  25. 25. • ED-600 differentiates between – Restrictions on access outside the control of group management – Restrictions on access imposed by group management • ED-600 includes extensive application material on how the group engagement team may be able to overcome restrictions on access to people and information, for example when – Laws or regulations restrict sending relevant audit documentation across borders – The group has a non-controlling interest in an entity that is accounted for by the equity method – War, civil unrest or outbreaks of disease restricts access – Access to component management or those charged with governance of the component is restricted Page 25 Restrictions on Access to People and Information
  26. 26. Understanding the Group and Its Environment Page 26
  27. 27. Understanding the Group and Its Environment • ED-600 expands on how ISA 315 (Revised 2019) is to be applied in relation to an audit of group financial statements – focuses on the additional complexities – Wide variety of group structures and businesses that may exist across multiple geographical locations or jurisdictions – Multiple lines of business, which may be in different industries (e.g., a captive insurance company for a manufacturing entity) – Different accounting policies and practices across the entities or business units – Consolidation process • Appendix 3 provides examples of controls that may be helpful in obtaining an understanding of the group’s system of internal control in a group environment Page 27
  28. 28. Common Controls and Centralized Activities • ED-600 does not refer to group-wide controls – Term was thought to be confusing – Auditors sometimes placed undue reliance on group-wide controls • ED-600 addresses controls in a group audit more broadly through introducing the concepts of – Common controls: controls that are intended to operate in a common manner across multiple entities or business units – Centralized activities (e.g. shared service centers) • Most application material related to group-wide controls is retained and new application material is added – Why obtaining an understanding of common controls may be important – How the group engagement team may determine the commonality of a control across the group Page 28
  29. 29. Materiality Page 29 |
  30. 30. • Added new definition of aggregation risk – Addresses calls for greater clarity about the concept of aggregation risk – Aggregation risk is particularly important to understand and address in a group audit • Changed definition of ‘component materiality’ to ‘component performance materiality’ – Both terms are used in extant ISA 600, but IAASB believes this may have led to confusion • Enhanced requirements and application material – Group engagement team determines component performance materiality and communicates it to component auditors – Component performance materiality must be lower than group performance materiality – Clearly trivial threshold at component level cannot exceed threshold at group level – Factors to take into account in setting component performance materiality Page 30 Materiality Considerations in a Group Audit
  31. 31. Documentation Page 31
  32. 32. • Key enhancements made include the following – Added a new requirement to document significant matters related to access to people and information, and how those matters were addressed – Deleted the requirement relating to an analysis of components and the type of work to be performed on components (addressed by ISA 300) – Added a requirement for documentation of the group engagement team’s evaluation of, and response to, findings of the component auditor with respect to matters that could have a material effect on the group financial statements • Expanded the related application material to address input from the Board and through outreach, including when the group engagement team is restricted from, incl. component auditor's documentation in its audit file • IAASB is also considering FAQs/Staff guidance to address implementation issues related to the documentation requirements (including on restrictions) Page 32 Documentation
  33. 33. Other Matters Page 33
  34. 34. Other Matters • Professional skepticism – Introduction highlights the importance of professional skepticism and professional judgment in performing a group audit engagement – Requirement to “stand back,” prior to forming a group audit opinion, and evaluate whether sufficient appropriate audit evidence has been obtained • Appendices – New appendix that provides additional guidance about the matters that the group engagement team may consider in determining whether, and the extent to which, component auditors are to be involved in the group audit – Appendices 4 and 5 of extant ISA 600 have been deleted • Conforming and consequential amendments Page 34
  35. 35. Way Forward Page 35 |
  36. 36. Page 36 | October 2, 2020 Deadline for comments on ED-600 September 2021 In ED-600 the IAASB proposes 18 months after approval of the final standardTargeted approval date of ISA 600 (Revised) Effective date – TBD Second webinar on ED-600 August 13 2020 Way Forward
  37. 37. Page 37 • When? – August 13, 2020 • Time? – 8:00am – 9:30am EDT • Style? – Question & answer – Questions to be submitted before July 24, 2020 An invitation to register and submit your questions will follow! Next Webinar
  38. 38. www.iaasb.org For copyright, trademark, and permissions information, please go to permissions or contact permissions@ifac.org. Page 38