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Change on the horizon for group audits

14 October 2020: As IAASB’s consultation on revisions to ISA 600, the standard covering group audits, concludes, we can expect a revised standard which will require auditors to take a more top-down, risk-based approach to the audit of groups. Louise Sharp​, Technical Manager at ICAEW’s Audit and Assurance Faculty, reports.

The audit of groups is an area ripe for improvement. Regulatory inspection reports have been consistently noting quality issues on group audits, and firms and regulators alike highlight inconsistencies and challenges in practice. 

As the International Auditing and Assurance Standards Board’s (IAASB) consultation on proposed ISA 600 (Revised) (ED-600) concludes, we can expect to see a revised standard in 2021 which will require auditors to take a more top-down risk-based approach to the audit of groups.

In principle, this approach is difficult to argue with. It focuses on the group engagement team’s responsibility for identifying and assessing risks of material misstatement in the group financial statements and for determining the work effort to respond to these risks. This, therefore, ensures the group engagement team is accountable for the audit performed and opinion provided. However, in practice, such an approach is not without risks to audit quality. 

The changes in ED-600 will likely require more work from auditors – more audit procedures, particularly in relation to risk assessment and this will inevitably have cost implications. 

There will be implementation challenges and a need for more guidance to help support auditors in applying the requirements, particularly in relation to the linkages to the requirements of ISA 220 (dealing with quality management at the engagement level), understanding what is and is not within the scope of the standard, and the change in definition of a component. 

There are particular concerns that the approach in ED-600, coupled with the requirements in ISA 220 (Revised) (which awaits PIOB approval) might discourage the involvement of, or change the nature of the relationship between the group engagement team and component auditors, to the extent that risks of material misstatement relevant to the group financial statements may be missed. This has potentially wider implications, not just for audit quality, but also for the audit market. 

To find out more, please take a look at ICAEW’s representation on this issue.