For many accountants, dealing with group accounts can be a daunting experience – straining to remember all those adjustment workings from exam training and hoping there are no flaws in the consolidation spreadsheet. There are numerous challenges, including the application of company law requirements, differences between UK GAAP and IFRS, and areas where the use of judgement can be critical to showing a true and fair view of the combined entity as one.
For auditors, dealing with group accounts can be even more of a challenge. ISA (UK) 600 was ‘clarified’ in 2009 and was among the most reinforced Standards during the Clarity Project. Now, more than a decade later, the FRC has just issued an Exposure Draft to a revised ISA (UK) 600, reflecting changes made by the IAASB to further strengthen the requirements for auditors of groups, and building on an interim update to the UK Standard in 2019.
In this blog article, we’ll summarise some of the main changes and reflect on the likely impact on UK group auditors.
The main changes
Scope of ISA 600
The scope has been clarified for audits of non-traditional groups, such as divisional or branch-based entities or the use of shared service centres.
A more risk-based focus
The UK Exposure Draft brings a more principle-based approach. For example, group audits that don’t involve component auditors will be typically much more straightforward to address, and the revision helps to contain requirements for component auditors into discrete sections.
A key outcome of this shift in approach concerns how components within the group are categorised. The current ISA contains a flowchart which categorises components into:
- Financially significant components (which require audit);
- Components likely to include significant risks at group level (which require either full audit or work to address the significant risks); and
- Insignificant components (which need only analytical procedures at group level).
The new principle-based approach means that components are no longer categorised in this way. Instead, the Exposure Draft uses the term ‘components at which to perform audit work’. This implies that, as currently, some components will not be subject to direct audit testing.
Quality control for group audits
A key reinforcement in the revised ISA is that all other ISAs need to be applied to group audits. In particular, the recently revised risk ISA (315) and engagement quality ISA (220) are more strongly linked to the draft Standard.
This has raised some concerns about how the term ‘engagement team’ applies in a group audit context. The international Exposure Draft defined the term ‘group engagement team’ as excluding component auditors; however, ISA 220’s definition of engagement team includes them. The FRC’s response has been to include a very basic diagram in the Exposure Draft to illustrate that the ‘engagement team’ includes both the ‘group auditor’ and ‘component auditors’. The difficulty is that ISA 220 imposes rigorous requirements to the entire engagement team, including how the engagement partner assesses component auditors’ competence and how they supervise the work of the team. These concerns were highlighted by ICAEW in its response to the IAASB on the international Exposure Draft.
In response, the UK Exposure Draft includes the following paragraph 16-1:
In the UK, the group engagement partner shall bear overall responsibility for compliance with the requirements of this, and all other ISAs (UK) relevant to the audit, including those requirements related to engagement performance and for ensuring that the auditor’s report issued is appropriate in the circumstances. The group engagement partner’s firm shall bear overall responsibility for the design, implementation, and operation of a system of quality management that supports the group engagement partner in fulfilling their responsibilities.
The Exposure Draft also includes consequential amendments to ISA (UK) 220; however these are not extensive, and as a result it’s not clear that the concerns have been fully addressed. This could prove challenging especially when the component auditor is not connected with the group auditor (e.g. not part of the same network).
Ethical compliance
A related responsibility for the group engagement partner is to ensure that component auditors adhere to ethical requirements. While the existing UK Standard has required that this means compliance with the FRC Ethical Standard, this has been reinforced in the Exposure Draft including a specific requirement for obtaining confirmation from the component auditors that they have complied in this way.
Effective date
The proposed effective date of the new Standard is for periods beginning on or after 15 December 2023 (i.e. broadly for December 2024 year-ends). This is one year later than originally planned and, given the impact of other significant ISAs in the two years leading up to this date, this delay is welcome.
Likely impact
The proposed revision doesn’t fundamentally change the nature of group audits and is not likely to be as radical as other recent changes (especially to the quality management standards). It’s also a specialised standard that may not affect many of a typical audit firm’s engagements. And in the case of a UK non-small group in which every company is individually audited by the same firm, the changes are likely to have only limited impact.
For bigger and more complex groups which involve component auditors, the changes will be harder to adopt. The decision to use component auditors at all (rather than sending members of the group audit team to gather evidence directly from components) is often solely a logistical choice which depends on the work effort involved. The increased requirements for the use of component auditors (in particular, the emphasis on two-way communication and more documentation) may push firms towards using their own teams instead in more instances.
It’s not clear whether the move away from ‘significant’ and ‘insignificant components’ towards a top-down, risk-driven strategy will make much difference to group auditors’ approach although it might allow a little more flexibility, particularly when considering whether to aggregate ‘sub-groups’ for audit purposes.
As is usually the case, the proposed revision makes for a longer standard, which further adds to calls for a more suitable alternative for less complex entities (LCEs). Whether the draft LCE Standard will be amended to allow its use for group audits remains to be seen.
Join Jeremy Williams for discussion of the common issues faced by accountants when producing and auditing group accounts on his upcoming courses Accounting for Groups and Auditing Groups.
Jeremy Williams, April 2022
