ISA UK 600 revised (Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors)) was published in September 2022 and is effective for accounting periods commencing on or after 15 December 2023.

Although the revised ISA will be particularly impactful for group audits with components not audited by the parent entity auditor, it will be relevant for all group audits, including those where the group auditor also audits all the components. With that in mind, as thoughts turn to the planning of 31 December 2024 year end group audits, careful consideration needs to be given now to the key changes.

We’ve given this topic lots of coverage on out audit updates over the last year or so. Firms are now very keen to know what practical steps they should be taking. Here are our thoughts: 

1. Understand the group structure and subsidiary audit requirement

It’s always been important to understand the group structure but with the distinction between significant and non-significant components removed, the group structure and the misstatement risks relevant to the group accounts will need to be thought about differently. Some feel that the new philosophy will open the door to more regular use of the S479A guarantee in CA06.

2. Think about file layout – even for wholly UK groups

Depending on complexity, materiality and variability of misstatement risks in individual components, it may make sense to have separate audit files for individual components and a separate file for the group. For firms that use proprietary audit systems there will almost certainly be more group level documentation on file in the planning section.

3. Start early – you can’t roll forward!

Many feel that the overall approach and outcome of the group audit will change little for groups that consist solely of UK components, each audited by the same firm and each subject to its own statutory audit. This might be the case but, because ISA (UK) 600 has been completely rewritten, it will not be possible to just roll files forward from the previous year.

4. Give careful thought to acceptance & continuance

An important consideration here will be whether a firm should actually be taking on a group audit when other firms (perhaps based overseas) are auditing a large chunk of the group trade. It is also important to remember that the group auditor review of component audit work needs to be robust – and so group auditors need to be able to review and retain relevant component auditor working papers. If this simply will not be possible, the group auditor may need to walk away.

5. Properly check out and engage early with component auditors

Important considerations here are:

• The UK version of the ISA requires the group auditor to get confirmation from the component auditor that they will comply with the FRC Ethical Code for Auditors. In the absence of a readily available comparison of the FRC Code and (e.g.) the IESBA Code for auditors, open conversations are likely needed between group and component auditors about likely ethical threats and how these are mitigated.
• Regulators will expect firms to properly appraise and understand the ability of component auditors to perform required procedures. There has perhaps historically been an overreliance on questionnaires here. Can the group auditor perform ‘open source’ checks for adverse regulator comments or other feedback? Open conversations with component auditors are also likely to be more revealing than responses to a questionnaire.
• Component auditors are ‘service providers’ and will need to evidence compliance with ISQM 1 to the group auditor. This might be challenging given that the UK version of ISQM 1 is ‘gold plated.’
• Getting a clear commitment to the transfer of relevant audit documentation (see above) will also be crucial when engaging with component auditors.

6. Dedicate sufficient time to group planning and risk assessment

Based on the revised ISA requirements, it will be crucial to identify and appraise misstatement risks at the group level. This can lead to greater efficiency of effort as well as ISA compliance. The group and component auditors must both input here in order for the process to be a success.

In performing this risk assessment (and briefing the team), group auditors will need to properly engage with component auditors – but also, potentially, with group management and component management too. 

7. Think about revised group materiality requirements

As mentioned above, the terminology and approach in respect of materiality changes with introduction of the revised ISA.

Application paragraph guidance (A116-A120) is helpful in guiding firms in determining component performance materiality (CPM). It’s no different in concept to performance materiality in general; it’s simply acknowledging that when various components get aggregated, the cumulative effect of component errors can mount up.

So, if a group is evenly split between, say, 8 components and the group performance materiality (PM) was set at (say) 85% of group materiality, CPM would be set at a lower percentage of this (e.g. 60% of group PM). Whereas if most of the group results came from one or two (broadly similar) components only, CPM might be 90% of group PM. And if the components weren’t as neatly similar, the group auditor might use different CPMs for each one.

8. Be creative about use of component auditors

Firms might consider being more creative about the way that they use component auditors. It might not always simply be a question of asking a component auditor to do a full audit of financial information based on component performance materiality.

9. Plan review of component auditor work – and ensure relevant access

As well as needing to ensure access to audit working papers (see above), consideration needs to be given to what the group auditor review will look like. It is less likely to be acceptable now for group auditors to simply rely on summaries produced by component auditors without challenge.

Another factor concerns who will perform the review. As mentioned above, component auditors are part of the engagement team. So, work that the engagement partner would be reviewing themself if performed by a member of their immediate team will still need to be reviewed by them if performed by a component auditor in a different jurisdiction. This is likely to apply to be relevant to the Engagement Quality Review (EQR) also.

10. Look out for further guidance

We are expecting further practical guidance from professional bodies during the Autumn of 2024. ICAEW’s definitive guidance for group auditors (the ‘Russian dolls guidance’) is being rewritten and is expected to be published during September or October.