HKSA 600 - Group Audits

HKSA 600 - Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors)

INTRODUCTION

Scope of this HKSA

HKSA 600 deals with special considerations that apply to group audits, in particular those that involve component auditors. The standard applies to audits of group financial statements for periods beginning on or after 15 December 2009.

Key points:

HKSAs apply to group audits

Focus on situations where component auditors are involved

May be adapted for other audits involving other auditors (e.g., inventory count observation at remote locations)

Applies even when component auditor is required by statute/regulation to express an opinion on component financial statements

Effective Date

Effective for audits of group financial statements for periods beginning on or after 15 December 2009.

OBJECTIVES (Paragraph 8)

The objectives of the auditor are:

(a) To determine whether to act as the auditor of the group financial statements; and

(b) If acting as the auditor of the group financial statements:

(i) To communicate clearly with component auditors about the scope and timing of their work on financial information related to components and their findings; and

(ii) To obtain sufficient appropriate audit evidence regarding the financial information of the components and the consolidation process to express an opinion on whether the group financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.

DEFINITIONS (Paragraphs 9-10)

Term	Definition
Component	An entity or business activity for which group or component management prepares financial information that should be included in the group financial statements
Component auditor	An auditor who, at the request of the group engagement team, performs work on financial information related to a component for the group audit
Component management	Management responsible for the preparation of the financial information of a component
Component materiality	The materiality for a component determined by the group engagement team
Group	All the components whose financial information is included in the group financial statements (always has more than one component)
Group audit	The audit of group financial statements
Group audit opinion	The audit opinion on the group financial statements
Group engagement partner	The partner or other person in the firm who is responsible for the group audit engagement and its performance, and for the auditor's report on the group financial statements
Group engagement team	Partners, including the group engagement partner, and staff who establish the overall group audit strategy, communicate with component auditors, perform work on the consolidation process, and evaluate the conclusions drawn from the audit evidence
Group financial statements	Financial statements that include the financial information of more than one component (also includes combined financial statements)
Group management	Management responsible for the preparation of the group financial statements
Group-wide controls	Controls designed, implemented and maintained by group management over group financial reporting
Significant component	A component identified by the group engagement team (i) that is of individual financial significance to the group, or (ii) that, due to its specific nature or circumstances, is likely to include significant risks of material misstatement of the group financial statements

Reference to "the consolidation process" includes:

Recognition, measurement, presentation, and disclosure of financial information of components by way of consolidation, proportionate consolidation, or equity/cost methods

Aggregation in combined financial statements of components that have no parent but are under common control

REQUIREMENTS

1. Responsibility (Paragraph 11)

The group engagement partner is responsible for the direction, supervision and performance of the group audit engagement in compliance with professional standards and applicable legal and regulatory requirements, and whether the auditor's report that is issued is appropriate in the circumstances.

Critical Rule: The auditor's report on the group financial statements shall not refer to a component auditor, unless required by law or regulation to include such reference. If such reference is required, the auditor's report shall indicate that the reference does not diminish the group engagement partner's or the group engagement partner's firm's responsibility for the group audit opinion.

2. Acceptance and Continuance (Paragraphs 12-14)

Determining Whether Sufficient Appropriate Audit Evidence Can Be Obtained

The group engagement partner shall determine whether sufficient appropriate audit evidence can reasonably be expected to be obtained in relation to:

The consolidation process

The financial information of the components

For this purpose, the group engagement team shall obtain an understanding of the group, its components, and their environments sufficient to identify components that are likely to be significant components.

Where component auditors will perform work, the group engagement partner shall evaluate whether the group engagement team will be able to be involved in the work of those component auditors to the extent necessary to obtain sufficient appropriate audit evidence.

When Restrictions Exist (Paragraph 13)

If the group engagement partner concludes that:

(a) It will not be possible to obtain sufficient appropriate audit evidence due to restrictions imposed by group management; and

(b) The possible effect will result in a disclaimer of opinion on the group financial statements

The group engagement partner shall either:

(a) In the case of a new engagement, not accept the engagement, or in the case of a continuing engagement, withdraw from the engagement (where withdrawal is possible); or

(b) Where law or regulation prohibits declining or withdrawing, having performed the audit to the extent possible, disclaim an opinion on the group financial statements

Terms of Engagement (Paragraph 14)

The group engagement partner shall agree on the terms of the group audit engagement in accordance with HKSA 210.

3. Overall Audit Strategy and Audit Plan (Paragraphs 15-16)

The group engagement team shall establish an overall group audit strategy and develop a group audit plan in accordance with HKSA 300

The group engagement partner shall review the overall group audit strategy and group audit plan

4. Understanding the Group, Its Components, and Their Environments (Paragraphs 17-18)

The group engagement team shall:

(a) Enhance its understanding of the group, its components, and their environments, including group-wide controls, obtained during the acceptance or continuance stage

(b) Obtain an understanding of the consolidation process, including the instructions issued by group management to components

Purpose of understanding:

Confirm or revise initial identification of components likely to be significant

Assess the risks of material misstatement of the group financial statements, whether due to fraud or error

5. Understanding the Component Auditor (Paragraphs 19-20)

If the group engagement team plans to request a component auditor to perform work, the group engagement team shall obtain an understanding of:

(a) Whether the component auditor understands and will comply with the ethical requirements relevant to the group audit and, in particular, is independent

(b) The component auditor's professional competence

(c) Whether the group engagement team will be able to be involved in the work of the component auditor to the extent necessary to obtain sufficient appropriate audit evidence

(d) Whether the component auditor operates in a regulatory environment that actively oversees auditors

Critical Rule (Paragraph 20)

If a component auditor does not meet the independence requirements that are relevant to the group audit, or the group engagement team has serious concerns about the other matters listed in paragraph 19(a)-(c), the group engagement team shall obtain sufficient appropriate audit evidence relating to the financial information of the component without requesting that component auditor to perform work on the financial information of that component.

6. Materiality (Paragraphs 21-23)

The group engagement team shall determine:

(a) Materiality for the group financial statements as a whole when establishing the overall group audit strategy

(b) If applicable, materiality level(s) for particular classes of transactions, account balances or disclosures where misstatements of lesser amounts could reasonably be expected to influence economic decisions of users

(c) Component materiality for those components where component auditors will perform an audit or a review for purposes of the group audit. Component materiality shall be lower than materiality for the group financial statements as a whole

(d) The threshold above which misstatements cannot be regarded as clearly trivial to the group financial statements

Performance Materiality (Paragraph 22)

Where component auditors will perform an audit for purposes of the group audit, the group engagement team shall evaluate the appropriateness of performance materiality determined at the component level.

Statutory Audits of Components (Paragraph 23)

If a component is subject to audit by statute, regulation or other reason, and the group engagement team decides to use that audit, the group engagement team shall determine whether:

(a) Materiality for the component financial statements as a whole; and

(b) Performance materiality at the component level

meet the requirements of this HKSA.

7. Responding to Assessed Risks (Paragraphs 24-31)

General Approach (Paragraphs 24-25)

The group engagement team shall:

Determine the type of work to be performed on the financial information of the components

Determine the nature, timing and extent of its involvement in the work of the component auditors

If relying on group-wide controls or if substantive procedures alone are insufficient, test the operating effectiveness of those controls

Determining the Type of Work - Significant Components

For components significant due to individual financial significance (Paragraph 26):

The group engagement team, or a component auditor on its behalf, shall perform an audit of the financial information of the component using component materiality.

For components significant due to specific nature or circumstances (Paragraph 27):

The group engagement team shall perform one or more of the following:

(a) An audit of the financial information of the component using component materiality

(b) An audit of one or more account balances, classes of transactions or disclosures relating to the likely significant risks

(c) Specified audit procedures relating to the likely significant risks

Components that Are Not Significant Components (Paragraphs 28-29)

Paragraph 28: For components that are not significant components, the group engagement team shall perform analytical procedures at group level.

Paragraph 29: If sufficient appropriate audit evidence is not expected from:

Work on significant components

Work on group-wide controls and consolidation process

Analytical procedures at group level

Then the group engagement team shall select components that are not significant components and perform (or request a component auditor to perform) one or more of:

An audit of the financial information using component materiality

An audit of one or more account balances, classes of transactions or disclosures

A review of the financial information using component materiality

Specified procedures

The group engagement team shall vary the selection of components over a period of time.

Involvement in Work Performed by Component Auditors

Significant Components - Risk Assessment (Paragraph 30):

If a component auditor performs an audit of a significant component, the group engagement team shall be involved in the component auditor's risk assessment. At a minimum, this shall include:

(a) Discussing with the component auditor or component management those business activities significant to the group

(b) Discussing with the component auditor the susceptibility of the component to material misstatement due to fraud or error

(c) Reviewing the component auditor's documentation of identified significant risks

Further Audit Procedures (Paragraph 31):

If significant risks have been identified in a component, the group engagement team shall:

Evaluate the appropriateness of the further audit procedures to be performed

Determine whether it is necessary to be involved in the further audit procedures

8. Consolidation Process (Paragraphs 32-37)

Paragraph 32: The group engagement team obtains an understanding of group-wide controls and the consolidation process, including instructions issued by group management to components.

Paragraph 33: The group engagement team shall design and perform further audit procedures on the consolidation process, including evaluating whether all components have been included in the group financial statements.

Paragraph 34: The group engagement team shall evaluate the appropriateness, completeness and accuracy of consolidation adjustments and reclassifications, and evaluate whether any fraud risk factors or indicators of possible management bias exist.

Paragraph 35: If the financial information of a component has not been prepared in accordance with the same accounting policies applied to the group financial statements, the group engagement team shall evaluate whether appropriate adjustments have been made.

Paragraph 36: The group engagement team shall determine whether the financial information identified in the component auditor's communication is the financial information that is incorporated in the group financial statements.

Paragraph 37: If a component has a different financial reporting period-end from the group, the group engagement team shall evaluate whether appropriate adjustments have been made.

9. Subsequent Events (Paragraphs 38-39)

Paragraph 38: Where audits are performed on the financial information of components, the group engagement team or component auditors shall perform procedures designed to identify events at those components that occur between the dates of the financial information of the components and the date of the auditor's report on the group financial statements.

Paragraph 39: Where component auditors perform work other than audits, the group engagement team shall request the component auditors to notify the group engagement team if they become aware of subsequent events that may require adjustment or disclosure.

10. Communication with the Component Auditor (Paragraphs 40-41)

Group Engagement Team's Communication to Component Auditor (Paragraph 40)

The group engagement team shall communicate its requirements on a timely basis, including:

(a) A request that the component auditor confirms cooperation with the group engagement team

(b) The ethical requirements relevant to the group audit, particularly independence requirements

(c) In the case of an audit or review: component materiality (and if applicable, materiality level(s) for particular classes of transactions, account balances or disclosures) and the threshold above which misstatements cannot be regarded as clearly trivial

(d) Identified significant risks of material misstatement due to fraud or error relevant to the component auditor's work, and a request to communicate any other identified significant risks and the component auditor's responses

(e) A list of related parties prepared by group management, and any other related parties of which the group engagement team is aware, with a request to communicate related parties not previously identified

Component Auditor's Communication to Group Engagement Team (Paragraph 41)

The group engagement team shall request the component auditor to communicate:

(a) Whether the component auditor has complied with ethical requirements, including independence and professional competence

(b) Whether the component auditor has complied with the group engagement team's requirements

(c) Identification of the financial information of the component on which the component auditor is reporting

(d) Information on instances of non-compliance with laws or regulations that could give rise to a material misstatement of the group financial statements

(e) A list of uncorrected misstatements (excluding those below the threshold for clearly trivial misstatements)

(f) Indicators of possible management bias

(g) Description of any identified significant deficiencies in internal control at the component level

(h) Other significant matters communicated or expected to be communicated to those charged with governance of the component, including fraud or suspected fraud

(i) Any other matters that may be relevant to the group audit

(j) The component auditor's overall findings, conclusions or opinion

11. Evaluating the Sufficiency and Appropriateness of Audit Evidence Obtained (Paragraphs 42-45)

Evaluating the Component Auditor's Communication (Paragraph 42)

The group engagement team shall:

(a) Discuss significant matters arising from the evaluation with the component auditor, component management or group management, as appropriate

(b) Determine whether it is necessary to review other relevant parts of the component auditor's audit documentation

Insufficient Work (Paragraph 43)

If the group engagement team concludes that the work of the component auditor is insufficient, the group engagement team shall determine what additional procedures are to be performed, and whether they are to be performed by the component auditor or by the group engagement team.

Overall Evaluation (Paragraphs 44-45)

Paragraph 44: The group engagement team shall evaluate whether sufficient appropriate audit evidence has been obtained from:

Audit procedures performed on the consolidation process

Work performed by the group engagement team and component auditors on the financial information of the components

Paragraph 45: The group engagement partner shall evaluate the effect on the group audit opinion of:

Any uncorrected misstatements (identified by the group engagement team or communicated by component auditors)

Any instances where there has been an inability to obtain sufficient appropriate audit evidence

12. Communication with Group Management and Those Charged with Governance (Paragraphs 46-49)

Communication with Group Management (Paragraphs 46-48)

Paragraph 46: The group engagement team shall determine which identified deficiencies in internal control to communicate, considering:

Deficiencies in group-wide internal control

Deficiencies in internal control at components identified by the group engagement team

Deficiencies brought to attention by component auditors

Paragraph 47: If fraud has been identified or information indicates fraud may exist, the group engagement team shall communicate this on a timely basis to the appropriate level of group management.

Paragraph 48: If a component auditor is required by statute/regulation to express an opinion on component financial statements, the group engagement team shall request group management to inform component management of any matter that may be significant to the component's financial statements but of which component management may be unaware.

Communication with Those Charged with Governance of the Group (Paragraph 49)

The group engagement team shall communicate:

(a) An overview of the type of work to be performed on the financial information of the components

(b) An overview of the nature of the group engagement team's planned involvement in the work of component auditors on significant components

(c) Instances where the evaluation of a component auditor's work gave rise to concern about the quality of that auditor's work

(d) Any limitations on the group audit

(e) Fraud or suspected fraud involving group management, component management, employees with significant roles in group-wide controls, or others where fraud resulted in a material misstatement of the group financial statements

13. Documentation (Paragraph 50)

The group engagement team shall include in the audit documentation:

(a) An analysis of components, indicating those that are significant, and the type of work performed on the financial information of the components

(b) The nature, timing and extent of the group engagement team's involvement in the work performed by the component auditors on significant components, including review of relevant parts of the component auditors' audit documentation and conclusions thereon

(c) Written communications between the group engagement team and the component auditors about the group engagement team's requirements

APPLICATION AND OTHER EXPLANATORY MATERIAL

Components Subject to Audit by Statute, Regulation or Other Reason (A1)

Factors affecting the decision whether to use a statutory audit for group audit evidence:

Differences in financial reporting frameworks

Differences in auditing and other standards

Whether the component audit will be completed in time to meet the group reporting timetable

Component Definition (A2-A4)

Group structure affects how components are identified

Components may be identified by legal structure (subsidiaries, joint ventures, associates) or by function, process, product/service, or geographic location

Various levels of components may exist; aggregation may be appropriate

Subgroups may exist within larger groups

Significant Component (A5-A6)

As individual financial significance increases, risks of material misstatement ordinarily increase

A percentage may be applied to a chosen benchmark (e.g., 15% of group assets, liabilities, cash flows, profit or turnover)

A component may be significant due to specific nature or circumstances (e.g., foreign exchange trading) even if not individually financially significant

Component Auditor (A7)

A member of the group engagement team who performs work on a component's financial information at the request of the group engagement team is also a component auditor.

Responsibility (A8-A9)

The group engagement partner/firm is responsible for the group audit opinion

When the group audit opinion is modified due to inability to obtain sufficient appropriate audit evidence, the Basis for Modification paragraph describes the reasons without referring to the component auditor, unless such reference is necessary for an adequate explanation

Acceptance and Continuance (A10-A21)

Obtaining Understanding at Acceptance/Continuance Stage (A10-A12):

Information from group management

Communication with group management

Communication with previous group engagement team, component management, or component auditors

Matters include: group structure, significant business activities, service organizations, group-wide controls, complexity of consolidation process, use of component auditors not from the same firm/network, access restrictions

Expectation to Obtain Sufficient Appropriate Audit Evidence (A13):

A group may consist only of components not considered significant

The group engagement partner can reasonably expect to obtain sufficient appropriate audit evidence if the team can perform work on some components and be involved in work performed by component auditors on others

Access to Information (A14-A19):

Restrictions may be due to circumstances (confidentiality laws, data privacy, denial by component auditor) or group management

If access is restricted by circumstances, the group engagement team may still be able to obtain sufficient appropriate audit evidence, but this is less likely as the significance of the component increases

If group management restricts access to a significant component, the group engagement team will not be able to obtain sufficient appropriate audit evidence

Law or regulation may prohibit declining or withdrawing from an engagement

Understanding the Group, Its Components, and Their Environments (A23-A31)

Instructions Issued by Group Management to Components (A24-A26):

Specify requirements for financial information to be included in group financial statements

Often include financial reporting procedures manuals and reporting packages

Cover: accounting policies, statutory and other disclosure requirements, reporting timetable

Fraud (A27):

Information used to identify risks of material misstatement due to fraud may include:

Group management's assessment of fraud risks

Group management's process for identifying and responding to fraud risks

Whether particular components have fraud risks

How those charged with governance monitor fraud risk processes

Responses to inquiries about actual, suspected, or alleged fraud

Discussion Among Team Members (A28-A29):

Key members of the engagement team are required to discuss susceptibility to material misstatement due to fraud or error

In a group audit, these discussions may also include component auditors

Provides opportunity to share knowledge, exchange information, identify practices that may be biased

Understanding the Component Auditor (A32-A41)

Procedures to Obtain Understanding (A33-A35):

Evaluate results of quality management monitoring activities

Visit the component auditor

Request written confirmations

Request questionnaires

Discuss with colleagues or reputable third parties

Obtain confirmations from professional bodies

Ethical Requirements (A37):

The component auditor is subject to ethical requirements relevant to the group audit

These may be different from or in addition to those applying to the component auditor's statutory audit

Professional Competence (A38):

Understanding of auditing and other standards applicable to the group audit

Special skills (e.g., industry specific knowledge)

Understanding of the applicable financial reporting framework

Application of Understanding (A39-A41):

The group engagement team cannot overcome a component auditor's lack of independence by being involved in the work or performing additional procedures

Less than serious concerns about professional competency may be overcome by involvement or additional procedures

Where law or regulation prohibits access to relevant parts of audit documentation, the group engagement team may request a memorandum covering relevant information

Materiality (A42-A46)

Materiality is established for both the group financial statements as a whole and for the financial information of the components

Component materiality is set lower than materiality for the group financial statements as a whole

Different component materiality may be established for different components

Component materiality need not be an arithmetical portion of group materiality

The aggregate of component materiality for different components may exceed group materiality

A threshold for misstatements is determined in addition to component materiality

Performance materiality at the component level is determined by the component auditor (or group engagement team)

Responding to Assessed Risks (A47-A55)

Determining Type of Work (A47):

Factors affecting determination:

Significance of the component

Identified significant risks of material misstatement

Evaluation of design of group-wide controls

Understanding of the component auditor

Significant Components (A48-A49):

For components significant due to specific nature or circumstances, the group engagement team may identify account balances, classes of transactions or disclosures affected by the likely significant risks

The group engagement team may design audit procedures that respond to a likely significant risk

Components that Are Not Significant Components (A50-A53):

Analytical procedures at group level corroborate conclusions that there are no significant risks

Factors affecting selection of components: extent of audit evidence expected, whether newly formed or acquired, significant changes, internal audit function work, common systems and processes, operating effectiveness of group-wide controls, abnormal fluctuations, individual financial significance, whether subject to statutory audit

Including an element of unpredictability in selecting components may increase likelihood of identifying material misstatement

A group may consist only of components that are not significant components

Involvement in Work Performed by Component Auditors (A54-A55):

Factors affecting involvement:

Significance of the component

Identified significant risks

Understanding of the component auditor

Forms of involvement may include:

Meeting with component management or component auditors

Reviewing component auditors' overall audit strategy and audit plan

Performing risk assessment procedures

Designing and performing further audit procedures

Participating in closing and other key meetings

Reviewing other relevant parts of audit documentation

Consolidation Process (A56)

Evaluation of consolidation adjustments may include:

Whether significant adjustments appropriately reflect events and transactions

Whether significant adjustments have been correctly calculated, processed and authorized

Whether significant adjustments are properly supported and sufficiently documented

Checking reconciliation and elimination of intra-group transactions and unrealized profits, and intra-group account balances

Communication with the Component Auditor (A57-A60)

If effective two-way communication does not exist, there is a risk that the group engagement team may not obtain sufficient appropriate audit evidence

Requirements are often communicated in a letter of instruction

Communication may not necessarily be in writing (e.g., visits to discuss identified significant risks)

Where a member of the group engagement team is also a component auditor, the objective can often be achieved by means other than specific written communication

Evaluating the Sufficiency and Appropriateness of Audit Evidence (A61-A63)

Focus is often on audit documentation relevant to significant risks

If sufficient appropriate audit evidence has not been obtained, the group engagement team may request the component auditor to perform additional procedures, or perform its own procedures

The group engagement partner's evaluation of the aggregate effect of misstatements allows determination of whether the group financial statements as a whole are materially misstated

KEY TAKEAWAYS SUMMARY

Area	Key Requirement
Responsibility	Group engagement partner has overall responsibility; auditor's report shall not refer to component auditor
Acceptance	Determine whether sufficient appropriate audit evidence can be obtained; evaluate ability to be involved in component auditors' work
Understanding	Obtain understanding of group, components, environments, group-wide controls, and consolidation process
Component Auditor	Obtain understanding of component auditor's ethics, competence, and ability to be involved
Materiality	Determine group materiality, component materiality (lower than group), and threshold for clearly trivial misstatements
Significant Components	Audit of financial information using component materiality (for financial significance); audit or specified procedures (for specific nature/circumstances)
Non-Significant Components	Analytical procedures at group level; select additional components if needed
Involvement	Be involved in component auditor's risk assessment for significant components; evaluate further audit procedures
Consolidation	Evaluate completeness, appropriateness of adjustments, accounting policies, and period-end differences
Communication	Clear, timely two-way communication with component auditors; communicate with group management and those charged with governance
Documentation	Analysis of components, nature/timing/extent of involvement, written communications