Academic journal article Journal of Accountancy

Clarifying the Standard for Group Audits: Impact of New Standard on Individual Engagements Will Depend on the Manner in Which the Practitioner Has Performed Group Audits in the Past

Academic journal article Journal of Accountancy

Clarifying the Standard for Group Audits: Impact of New Standard on Individual Engagements Will Depend on the Manner in Which the Practitioner Has Performed Group Audits in the Past

Article excerpt

EXECUTIVE SUMMARY

* Clearer requirements and guidance for group auditors are contained in a new standard developed as part of the AICPA Auditing Standards Board's Clarity Project. The standard, AU-C 600, Special Considerations--Audits of Group Financial Statements (Including the Work of Component Auditors), particularly adds clarity for situations in which part of the work is performed by auditors other than the auditor who expresses the opinion on the financial statements of the group.

* AU-C 600 contains provisions that are consistent with the risk-based requirements of current U.S. standards. AU-C 600's guidance also is consistent with the international standard, ISA 600, Special Considerations--Audits of Group Financial Statements (Including the Work of Component Auditors), with the exception of a group auditor's ability to reference the work of a component auditor.

* CPAs who participate in group audits will want to become familiar with changes in terminology described in the new standard.

* The group auditor's responsibilities, including the extent of involvement in the work of component auditors, are more clearly articulated in the new standard.

* The impact of the new standard will depend on the approach the practitioner has taken in performing past group audits. The requirements generally are consistent with current best practices, but some specific requirements could create unnecessary work if the auditor does not understand the new standard or apply sound judgment.

As a result of the AICPA Auditing Standards Board's (ASB) Clarity Project, a new standard has been developed that provides clearer requirements and guidance for audits of group financial statements, in particular those in which part of the work is performed by auditors other than the auditor who expresses the opinion on the financial statements of the group.

The provisions of the new standard, AU-C 600, Special Considerations--Audits of Group Financial Statements (Including the Work of Component Auditors), are consistent with the risk-based requirements of current U.S. standards. AU-C 600's provisions also are consistent, with the exception of a group auditor's ability to reference the work of a component auditor, with the international standard (ISA 600, Special Considerations--Audits of Group Financial Statements (Including the Work of Component Auditors)). The new standard changes terminology (see the sidebar, "Group Audit Terminology") and more clearly articulates the group auditor's responsibilities, including the extent of involvement in the work of component auditors.

In this article, the term "group auditor" refers both to the "group audit team" and the "group engagement partner," even though the standard further differentiates responsibilities by referring to these parties separately It is important to note that the same personnel may, and often do, function as both members of the group engagement team and a component audit team.

SOURCES OF RISK OF MISSTATEMENTS IN GROUP FINANCIAL STATEMENTS

The risk that an individual component will contain misstatements that are material to the group financial statements is largely a function of the size of the component in relation to the group and the nature and other characteristics of the component. In addition to the considerations in assessing these risks for a specific component discussed in AU-C 315 and 320 of the clarified standards, there are additional risks that result from activities involved in managing a group that can be classified into the following categories:

* Risks related to managing complex, diverse, or decentralized business operations. These might result, for ex ample, from overseas operations in difficult environments, decentralized trading operations, or significant joint venture operations.

* Risks related to processes involved in obtaining and consolidating or combining financial and other required information into group financial statements. …

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