The group auditor as the repository of information

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
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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.