SOCPA's Auditing Standards Board Approves IAASB's Amendments to ISA No. 600
The Saudi Organization for Chartered and Professional Accountants (SOCPA), represented by its Auditing Standards Board has approved the amendments made by the International Auditing and Assurance Standards Board (IAASB) to ISA 600, Special Considerations— Audits of Group Financial Statements (Including The Work of Component Auditors). The Board approved the amendments after completing the procedures for adopting the standard under the Auditing Standards Board Regulation approved by SOCPA's Board of Directors. The Board found that the standard does not include anything that contradicts the local environment, which paved the way for the standard to be approved for adoption and application in the kingdom of Saudi Arabia as issued by IAASB for audits of financial statements for periods beginning on or after December 15, 2023
Most prominent amendments of ISA 600 "Special Considerations— Audits of Group Financial Statements (Including The Work of Component Auditors)":
Introduction and Scope of the Standard (1-11) (A1-A18)
• Rewording of the introduction (paragraphs 1, 2, 3 and related Application Materials) to indicate that it deals with considerations related to Group financial statements audit and thus covers how to apply all the requirements and Application Materials related to this type of engagement, of which other auditing standards cover a significant part.
• Further clarification of the scope of the standard; so that it shows the areas of application (what is meant by the group and the coverage of the standard for the audit of group financial statements with the Involvement of component auditors and the possibility of benefiting from the requirements of the standard and its Application Materials for some instances other than the audit of group financial statements, such as performing audit with other auditors from other audit firms) and the correlation of the requirements of the standard with other relevant international auditing standards. The standard additionally explained what is meant by the audit of group financial statements, which is "Auditing of the financial statements of more than one business unit/ entity" and that it includes various forms, including branches and divisions that are included in the aggregation process of the group's financial statements, also the application materials (A4 and 5) have been added to clarify this point further.
• The addition of paragraph 9, entitled "Professional Skepticism" and its related application materials, to emphasizes the importance of exercising professional skepticism as part of the group audits through the existence of direction, supervision, and review of the work of the group audit team. This includes the component auditors, verifying the appropriate practice of professional skepticism and assessing the sufficiency of the obtained audit evidence to build an opinion on the group financial statements. Other application materials (such as A14-A18, A78) have been developed to explain the importance of practicing professional skepticism and strengthening it through communication between the group auditor and the component auditors and documenting such communication during the performance of the group audit. The added materials also talk about a set of instances and circumstances that can weaken the exercise of professional skepticism.
• The addition of paragraph 10 to clarify the cases of applying the standard to less complex groups in which the group auditor may feel that there is no need to rely on component auditors, so he performs the audit centrally. Therefore, the standard requirements related to the participation of component auditors are not applicable.
• The addition of application materials (A10 and 11) to clarify the cases in which the component auditor has carried out the audit for a purpose other than auditing the group's financial statements. The application materials explain the prospect of the group auditor's dependency on the work performed by the component auditor and how the group auditor exercises responsibility for directing, supervising, and examining the component auditor's work.
Definitions (14-15) (A19-A28)
• Setting a definition of the term "component" so that it is more representative of the group auditor's point of view for the purposes of planning and performing audit procedures in a group audit.
• Clarification of the term "consolidation process." in paragraph 14(K) with the addition of application material A27 to clarify that this term used in this standard is different from the uses of the term "consolidation" in the financial reporting framework, as the term used in this standard generally refers to the mechanism of preparing group financial statements.
• Modification of the term "group engagement team "to become "group auditor." Thus, the term "engagement team" more clearly includes the term "group auditor" and "component auditors," and application material A21 has explained this.
• Clarifying how to apply the concepts of materiality and overall audit risk, which includes auditing group components risks that affect the group audit process. These new amendments were linked to ISA 320, which relates to Materiality in planning and performing an audit, where new definitions were added, namely "Aggregation Risk" and "Component Performance Materiality." There was a particular emphasis in the standard to use the term "Component Performance Materiality" instead of "Component Materiality."
• New definitions of some terms mentioned in the standard or further clarification to previous definitions:
o Aggregation risk – The probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.
o Group auditor – The group engagement partner and members of the engagement team other than component auditors. The group auditor is responsible for:
• Establishing the overall group audit strategy and group audit plan;
• Directing and supervising component auditors and reviewing their work;
• Evaluating the conclusions drawn from the obtained audit evidence as the basis for forming an opinion on the group financial statements.
o Consolidation- proportionate consolidation, or an equity method of accounting;
o Group performance materiality – Performance materiality in relation to the group financial statements as a whole, as determined by the group auditor.
Requirements (16-59)
Leadership Responsibilities for Managing and Achieving Quality on a Group Audit (16) (A29-A31)
• Clarification of how ISA 220 (Revised) requirements apply to the quality management in group financial statements audit, including the adequacy and appropriateness of resources for performing the engagement, direction, supervision of the engagement team, and the review of the team's work (including coordination with components auditors and their compliance with ethical requirements, as well as the procedures necessary to secure sufficient and appropriate evidence in the absence of components auditors). Several requirements were added (such as paragraphs 16, 23, 25, 26, 27), as well as application materials related to the responsibilities of group audit leaders, compliance with ethical requirements, engagement resource management, engagement performance, and supervision.
• The addition of paragraph 16 (A) to indicate in the standard the overall responsibility of the group engagement partner to create an environment for the group audit engagement that emphasizes the expected behavior of engagement team members, including the exercise of appropriate professional skepticism.
Acceptance and Continuance (17-21) (A32-A46)
• The ideas were reorganized, and the wording was improved for this part and the associated application materials.
Overall Group Audit Strategy and Group Audit Plan (22-29) (A47-A87)
• Developing the "General Framework of Group Audit Strategy and Group Audit Plan" Part so that it covers issues related to the group audit strategy and plan, which includes, for example: assessing the possibility of component auditors participating in the group audit, managing and evaluating engagement resources, evaluating the role of the group auditor and the method of compliance with ethical requirements (including independence) in light of the participation of component auditors, determining a method of performing a group audit and a method of communication between the group auditor and the component auditors. This part covers several requirements and related application materials that demonstrate the possibility of a group auditor implementing a preliminary assessment regarding the involvement of component auditors. It also addresses instances in which a group engagement partner assesses after accepting/continuing with a client that it is impossible to obtain sufficient appropriate audit evidence.
• The development of a framework for planning and performing financial statements group audit, and linking this standard to ISA 300. The framework confirms certain considerations for developing the overall group audit strategy and the group audit plan. It demands that the group auditor determine the nature, timing, and extent to which component auditors are to be involved. Paragraph 22 and related application materials have been added to clarify this. The framework also emphasizes that group component auditors can and often do participate in all stages of a group audit.
• Developing paragraph 27 of the standard related to assessing compliance with ethical requirements at the group audit level, including compliance of component auditors, and assessing their capabilities to see whether they can be relied on (paragraphs 23-26). Several application materials were added, and they explain how to deal with instances of non-compliance with ethical requirements (including independence) by component auditors or instances of a material concern among the group's auditor about the impossibility of obtaining sufficient and appropriate audit evidence when there is a reliance on a component auditor or a material concern regarding the component auditor's competence.
• The exclusion of the concept of "important components" and stating that determining the components at the level at which the audit is performed is a procedure based on the professional judgment of the group auditor. Application material A51 has been added to clarify this, in addition to indicating a set of factors (such as the materiality of the parts of operations and balances of the accounts of the components that are aggregated in the group's financial statements, the size and nature of assets, liabilities, and transactions at the location or business unit relative to the group financial statements) that can be taken into account to make a professional judgment on determining the level of the component at which the audit is performed.
• Emphasizing and clarifying the importance of mutual communication "two-way communication" between the group auditors and the component auditors; this includes communicating about the expectations of the group auditors regarding the method and timing of communication between the two sides, ethical requirements related to the group audit, identifying the capabilities of the group auditors, and determining the appropriate nature, timing, and extent of the group auditor's involvement in the work of the group auditors. To affirm the importance of this, some requirements related to communication between the group auditors and the component auditors regarding the responsibilities of the component auditors and the expectations of the group auditors from them were transferred to the beginning of the standard in paragraph (29) under the section on the "Overall Group Audit Strategy and Group Audit Plan," in addition to the development of relevant application materials to be more precise about the nature, timing, and extent of communication.
• The addition of the application material A62 to further clarify the tasks of direction, supervision, and review carried out by the group audit partner on the work of the component auditors, including evaluating their competence and ability and whether they are part of the same network or not.
• The addition of application material A67 to clarify the issue of using an expert in the audit of group financial statements when the expert is used by the component auditors and to clarify the extent of the group auditor's responsibility for evaluating the work of that expert. Also, application material A142 was added, which concerned the use of an expert's work by component auditors and the discussion of group auditors on the possibility of benefiting from the work of that expert.
Understanding the Group and Its Environment, the Applicable Financial Reporting Framework and the Group’s System of Internal Control (30-32) (A88-A107)
• The standard has been updated to include the process of evaluating the group's system of internal control and its components, whether through the work of the group auditor or the component auditor, understanding the technical operation of the internal control system; reference to this is shown in paragraph 30 and application materials (e.g. A64, 93, 96, 97, 98).
Identifying and Assessing the Risks of Material Misstatement (33-34) (A108-A115)
• The updated standard draws the attention of the group auditor to the procedures for identifying and assessing the risks of material misstatement of the group financial statements and the response procedures. It also emphasizes the importance of designing and performing appropriate procedures to respond to risks identified and evaluated at various levels, specifically at the group financial statements level (paragraphs 33-34 and related application materials).
Materiality (35-36) (a116-A123)
• Rewording of the application material A118, which clarifies the factors that must be taken into account when determining the Component Performance Materiality to make it clearly emphasize that the process of determining the materiality of group component information at the group level is not a simple mechanical calculation and involves the exercise of professional judgment.
• The addition of application material A119 to provide guidance on the instances in which it may be appropriate to determine the Component Performance Materiality at a level close to the Group performance materiality and to determine the level of the materiality of performance in components in which the group does not have control percentage and are accounted for by the equity method.
• Improvement of wording related to instances when operations or balances of material accounts in the group financial statements are distributed over a wide range of components. The wording of the application materials (a128-A130) was improved. The use of the phrase "components that have independent financial significance" was removed, and instead, the phrase "Large Number of Components Whose Financial Information Is Individually Immaterial but Material in the Aggregate to the Group Financial Statements" was used.
Responding to the Assessed Risks of Material Misstatement (37-44) (a124-A143)
• The addition of several application materials that explain how to implement additional audit procedures in response to assessed risks at the group level, as well as the components according to their nature and differences in materiality, whether the group auditor decided the implementation of additional procedures at the level of the entire financial statements or a specific segment of accounts, operations or significant disclosures. Application materials (a124-A127) have also been developed to illustrate the importance for component auditors to consider when determining the implementation of additional procedures, even if they are carried out centrally by the group auditor.
• Improvements were made to the wording of some paragraphs, and some application materials were added to clarify the fluctuating nature of the audit process of group financial statements and that some of the initial judgments issued by the group auditor may change over the course of the audit process.
Evaluating the Component Auditor’s Communication and the Adequacy of Their Work (45-48) (a144-A149)
• The addition of paragraph 47 and several related application materials to clarify the importance of the group auditor's review of the component auditor's audit documentation and affirm the usefulness of this for the requirement of the group auditor's review of the group's component auditors to assess the reliability of their work and to direct and supervise them for the group audit. This requirement is also reinforced in paragraph 59, which focuses mainly on documenting the group audit work.
• Improving the wording of paragraphs (45-48) and related application materials to reinforce the importance of mutual communication between the group auditor, the group component auditors, and those charged with governance of the group, and clarifying the instances, cases, and content of the communication.
• Improving paragraph 45 concerning the requirement for the component auditor to inform the group auditor of a range of matters to include the requirement that the group component auditor communicates with the group auditor about corrected misstatements in the financial statements of the group component in addition to uncorrected ones discovered by the component auditor and considered higher than the level of materiality reported by the group auditor. Application materials related to the elements of Paragraph 45 have also been added to clarify those elements that the component auditor is required to inform the group auditor about.
Subsequent Events (49-50) (A150)
• Improving the wording of paragraph (49), making it shorter while linking it to the ISA 560, and developing the wording of the related application materials.
• The addition of Paragraph (50) and application material (A150) to indicate the importance of group auditors requesting component auditors to inform them if they become aware of subsequent events requiring amendments or disclosures in group financial statements.
Evaluating the Sufficiency and Appropriateness of Audit Evidence Obtained (51-52) (A151-a156)
• This part was shortened, and the paragraph's wording was improved as well as the application materials. This was after considering that part of the ideas related to evaluating the sufficiency and appropriateness of audit evidence have been covered in other paragraphs of the standard and in related application materials. The change also reinforces the link of this part to ISA (330).
Auditor’s Report (53) (a157-A158)
• The addition of paragraph (53) and related application material to discuss some issues affecting the audit report (such as instances of the group auditor's inability to obtain sufficient appropriate audit evidence and referencing component auditors in the audit report...Etc.) in a focused and straightforward manner while clarifying the responsibility of the group engagement partner for the group audit opinion.
Communication with Group Management and Those Charged with Governance of the Group (54-58) (a159-A165)
• Improving the wording of paragraphs (54-57) and related application materials to reinforce the importance of mutual communication between the group auditor, the group component auditors, and those charged with governance of the group, and clarifying the instances, cases, and content of the communication.
Documentation (59) (A166-A182)
• Improving the documentation requirements and adding application materials to reinforce the link between the standard and the documenting audit requirements contained in ISA (230) and other auditing standards, clarifying the possibility of using the policies and procedures specified in ISQM 1 in the process of documenting audit work, and defining what the auditor needs to document in various instances, such as the case of restrictions on access to audit documents for auditors of the financial statements of group components. To illustrate this link, the following phrase was used "the audit documentation ... needs to be sufficient to enable an experienced auditor, having no previous connection with the audit, to understand the nature, timing and extent of audit procedures performed" in ISA 230.
• Addition of paragraph 59 (E) to indicate the requirement to document the key elements of the group’s internal control system, including the process group aggregation, its subgroups, if any, and modifications resulting from the aggregation.
• Addition of paragraph 59 (d) to clarify the basis by which the group auditor can assess the extent of the auditors' competence and capabilities, including determining whether they have sufficient time to perform the assigned audit procedures at the components.
• Development of paragraph 59 to indicate the issues on which communication between the group's auditors and the component auditors is made, which include: matters related to fraud, and going concern risks, in addition to the issues associated with the group auditor's general opinion on the group financial statements and related discussions with the component auditors, the group management and the managements of group component departments.
• The addition of application material A167 to further clarify the link between documentation requirements and the responsibility of the group auditor to make a general evaluation of the adequacy and appropriateness of the audit evidence obtained, including those resulting from the work of the component group auditors, on which the group audit opinion will be based. The development of paragraphs 45-48, which focus on the importance of the group auditor assessment of component auditors' communication and the adequacy of their work for the purposes of the group auditor. The paragraphs now include the same idea that emphasizes the importance of assessing the adequacy and appropriateness of the audit evidence obtained by the component auditors during their review of the components for the group audit.
• Development of application material A168 to clarify that the documentation of the group financial statements audit includes the documentation of the group auditor's audit file and independent documentation in the audit files of the component auditors that are prepared for the group audit.
• The addition of application material A176 to clarify the general principle that there is no need to replicate the component auditor audit documentation in the group auditor's file, indicating that the group auditor may consider summarizing, replicating or retaining copies of certain component auditor documentation (wholly or partially) in the group auditor's audit file.
• The clarification of the different types of instances of restricting access to people, information, or work papers of the component auditors and how the group auditor can bypass those restrictions, which include restrictions on access to component information, the management, or those charged with governance of components, or the archive of work papers of the component auditors. Therefore, several application materials (A179-A182) have been developed and added that clarify the situation where there are access restrictions to information or people that are outside the control of the group management and cases of restrictions that are imposed by the group management, as well as those related to access to the papers of the components auditors. The requirements and application materials also explained how the group auditor would address/deal with these restrictions and that this largely depends on the auditor's professional judgment.
• The development of application material A181 to clarify that the Group auditor's documentation should be consistent with the requirements of ISAs, including those relating to the documentation of the nature, timing, and extent of the group auditor’s direction and supervision of component auditors and the review of their work. Even when there are restrictions on access to the work papers of the component auditors.
• The addition of application material A182 to clarify that If the group auditor is unable to overcome restrictions on access to the component auditor audit documentation, the group auditor may need to consider whether a scope limitation exists that may require a modification to the opinion on the group financial statements.
General Notes
• Reorganizing the standard in general, improving its wording, shortening several requirements and application material, and reinforcing the message about the importance of component auditors and their participation in the group audit by adding paragraphs related to this under the title "Considerations When Component Auditors Are Involved."
• Reinforcing the link between the requirements of the standard and its application materials with other auditing standards that should be taken into consideration when auditing group financial statements (such as ISAs (220) (revised), (230), (300), (315) (revised), and(330)).
• The addition of requirements, in accordance with the principles methodology, that are suitable for auditing the financial statements of various groups and for a wide range of circumstances that vary in their complexity. Emphasis was placed on identifying and evaluating the risks of material misstatements, responding to them, and adding paragraphs clarifying the requirements and application materials specifically for the instance in which the auditors of the financial statements share group components.
• In general, the standard has greatly expanded its application materials, with 182 paragraphs in the updated standard compared to 66 paragraphs in the previous standard, and gave multiple examples of the application of its requirements. The standard also expanded the requirements after developing the wording, reorganizing paragraphs, and breaking up some of them to constitute new independent paragraphs to increase clarity. The requirements in the updated standard are 59 paragraphs instead of 50 in the previous version.
• The updated standard included a reduction in the number of appendices, with only three appendices (compared to five in the previous version).
• The outputs of the updated standard included consequential updates on other standards associated with this standard to make them consistent with the context of the updated standard and the terminology contained therein, which are audit standards with numbers 260، 220، 300، 230، 240، 250، 315، 320، 402، 501، 510، 610، 570، 550، 700، 710، 706، 705، 701، 720، 805، and ISQMs (1) and (2), and Standard on Review Engagements 2400.
The revised standard can be accessed by clicking here