The group auditor as the repository of information The group engagement team’s role brings information flowing to them that is useful to disseminate around the group. This includes materiality (see below) and matters such as related party relationships, which may be unknown at the component level, because two subsidiaries may be unaware of each other’s existence. The group auditor asks each component auditor for known related party relationships and then communicates a collated list of all related party relationships to each component auditor. Materiality At the planning stage, the group engagement partner must determine several figures for materiality for each component part of the group (ISA 600:21). Group Parent Each component Financial statements materiality Group auditor Group auditor Component auditor Materiality for the consolidation package as a whole Group auditor Group auditor Group auditor Level of reduced materiality for sensitive figures Group auditor Group auditor Group auditor Performance materiality Group auditor Group auditor Group auditor Performance materiality is the figure below that any errors in the financial statements may be considered trivial. The component auditor will be required to communicate to the group auditor a summary of all unadjusted errors in the consolidation package. It is common in larger group audits for the financial statements to be prepared using a consolidation package of information that is sent to the parent company by each component company. This will omit many of the disclosures that will be in the eventual entity financial statements. The component auditor may, therefore, be required to issue a special audit opinion on the truth and fairness of the consolidation package. This 68
AAA Technical Articles opinion is likely to be addressed to the directors of the component company, or may be addressed to the group auditor directly. In order to minimise the risk of several accidental or deliberate errors in the financial statements together exceeding group materiality, component materiality figures will normally be significantly lower than the group materiality figure, even for the largest component companies. Example 1 Imagine that financial statements materiality is taken to be 10% of profit or loss for each entity within a group and performance materiality is set at 0.5% of profit. Imagine that a group has a parent company and two components, one of which is profit making and one of which is loss making: $'000s Parent Subsidiary 1 Subsidiary 2 Group Proft 2,000 12,000 -8,000 6,000 Component materiality @ 10% 200 1,200 800 600 Performance materiality @ 0.5% 10 60 40 30 If subsidiary 1 were audited by another firm using the same materiality calculation method as the parent, an unadjusted error of $10m would correctly result in issuance of an unmodified audit opinion on the financial statements of that individual company.
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- Fall '19