Exposure Draft

January 2023
Comments due: May 2, 2023

International Standard on Auditing

Proposed Part 10, Audits of

Group Financial Statements of
the Proposed International
Standard on Auditing for Audits
of Financial Statements of Less
Complex Entities (ISA for LCE)
and

Proposed Conforming
Amendments
About the IAASB
This Exposure Draft was developed and approved by the International Auditing and Assurance Standards
Board (IAASB).

The objective of the IAASB is to serve the public interest by setting high-quality auditing, assurance, and
other related standards and by facilitating the convergence of international and national auditing and
assurance standards, thereby enhancing the quality and consistency of practice throughout the world and
strengthening public confidence in the global auditing and assurance profession.
The IAASB develops auditing and assurance standards and guidance for use by all professional
accountants under a shared standard-setting process involving the Public Interest Oversight Board, which
oversees the activities of the IAASB, and the IAASB Consultative Advisory Group, which provides public
interest input into the development of the standards and guidance.

For copyright, trademark, and permissions information, please see page 23.

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 REQUEST FOR COMMENTS
This Exposure Draft of proposed Part 10, Audits of Group Financial Statements of the proposed
International Standard on Auditing for Audits of Financial Statements of Less Complex Entities (ISA for LCE)
was developed and approved by the IAASB.

The proposals in this Exposure Draft may be modified in light of comments received before being issued in
final form. Comments are requested by May 2, 2023.

Respondents are asked to submit their comments electronically through the IAASB website, using the
“Submit Comment” link. Please submit comments in both a PDF and Word file. First-time users must
register to use this feature. All comments will be considered a matter of public record and will ultimately be
posted on the website.

This publication may be downloaded from the IAASB website: www.iaasb.org. The approved text is
published in the English language.

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 EXPLANATORY MEMORANDUM
CONTENTS

Page

Introduction ................................................................................................................................................. 5

Background ............................................................................................................................................... 5

Section 1 Guide for Respondents ............................................................................................................ 6

Section 2 Significant Matters .................................................................................................................... 6

Section 2-A ‒ Proposed Additions to the Authority ................................................................................... 6

Section 2-B ‒ Proposed Part 10, Audits of Group Financial Statements .................................................. 8

Section 2-C – Proposed Conforming Amendments Arising from Proposed Part 10 ................................. 9
Section 3 Request for Comments .......................................................................................................... 10

Appendix – Revisions to the Authority Since the ED-ISA for LCE ..................................................... 11

Exposure Draft

Proposed Additions to the Authority for Group Audits ............................................................................. 13

Proposed Part 10 – Audits of Group Financial Statements ..................................................................... 15

Proposed Conforming Amendments Arising from Proposed Part 10 ...................................................... 20

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 EXPLANATORY MEMORANDUM – PROPOSED PART 10, AUDITS OF GROUP FINANCIAL STATEMENTS

Introduction
1. This memorandum provides background to, and an explanation of, the Exposure Draft of proposed
Part 10 of the proposed ISA for LCE which was approved for exposure by the IAASB in December
2022.

Background

2. In December 2020, the Project Proposal for the workstream to develop a separate standard for Less
Complex Entities (LCE) was approved by the IAASB, and in July 2021 the Exposure Draft of
Proposed International Standard on Auditing for Audits of Financial Statements of Less Complex
Entities (ED-ISA for LCE) was published for public comment.

3. In the ED-ISA for LCE, audits of group financial statements (group audits) were excluded from the scope
of the proposed standard. This was done because the IAASB, on balance, had the view that group audits
inherently exhibited characteristics of complexity within an entity and, consistent with other areas of
complexity, had not been contemplated in the design of the proposed standard. The IAASB was open to
reconsider the decision to exclude group audits based on stakeholder feedback and included a specific
question regarding whether group audits should be excluded from (or included in) the scope of the
proposed standard.

4. Respondents to the ED-ISA for LCE along with participants of outreach activities showed strong support
for the inclusion of group audits. Therefore, the IAASB reconsidered its decision to exclude group audits
from the scope of the ED-ISA for LCE. The IAASB concluded that, taking into account the examples of
less complex groups provided by respondents to ED-ISA for LCE and the revised definitions in ISA 600
(Revised), 1 2 not all group audits inherently exhibit characteristics of complexity and supported the
inclusion of certain group audits in the scope of proposed ISA for LCE.
5. As the ED-ISA for LCE included a specific prohibition that excluded all group audits, it did not include
any requirements or Essential Explanatory Material (EEM) related to group audits. Given the IAASB’s
June 2022 decision to include certain group audits in the scope of the proposed ISA for LCE, the
IAASB subsequently developed requirements in this area which had not previously been exposed for
public comment.

6. Contents of the proposed ISA for LCE not related to group audits are currently being considered for
revision through analysis and discussions of the comments received from ED-ISA for LCE. Therefore,
further feedback on such content (i.e., the Authority of the ISA for LCE (excluding the Authority related
to group audits), Parts 1-9, Preface) is not invited at this time and will not be considered.
7. The 90-day comment period of this Exposure Draft will allow, subject to the nature and extent of
comments received, the IAASB to approve Part 10 at the same time as the remaining parts of the
proposed ISA for LCE. The IAASB plans to approve the ISA for LCE in its December 2023 meeting.

1
ISA 600 (Revised), Special Considerations–Audits of Group Financial Statements (Including the Work of Component Auditors)
2
ISA 600 (Revised) will be effective for audits of group financial statements for periods beginning on or after December 15, 2023
and includes a revised definition of group financial statements. Because of the revised definition, more LCEs are deemed to be
a group than under extant ISA 600, Special Considerations–Audits of Group Financial Statements (Including the Work of
Component Auditors).

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 EXPLANATORY MEMORANDUM – PROPOSED PART 10, AUDITS OF GROUP FINANCIAL STATEMENTS

Section 1 Guide for Respondents

The IAASB welcomes comments on all matters addressed in this exposure draft, but especially those
identified in the Request for Comments section. Comments are most helpful when they refer to specific
paragraphs, include the reasons for the comments, and make specific suggestions for any proposed
changes to wording. Respondents are also free to address only questions relevant to them. When a
respondent agrees with proposals in this exposure draft, it will be helpful for the IAASB to be made aware
of this view as support for the IAASB’s proposals cannot always be inferred when not stated.

Section 2 Significant Matters

8. Given the IAASB’s decision to include certain group audits in the scope of the proposed ISA for LCE,
the IAASB has proposed:

• Additions to Part A, Authority of the ISA for Audits of Financial Statements of Less Complex
Entities (the Authority) (see Section 2-A);

• A new part on group audits, proposed Part 10, Audits of Group Financial Statements (see
Section 2-B); and
• Conforming amendments to other parts of the proposed ISA for LCE (see Section 2-C).

Section 2-A ‒ Proposed Additions to the Authority

A summary of changes that the IAASB has made thus far to the Authority (i.e., not related to group audits)
since the ED-ISA for LCE is presented in the Appendix.

9. The Authority of the proposed ISA for LCE describes when the proposed standard is appropriate for
use in undertaking an audit engagement. In addition to removing the prohibition on the use of the
standard when the audit is a group audit, the IAASB discussed:

• A prohibition on the use of component auditors; and

• Qualitative characteristics related to group audits.

Prohibition on the Use of Component Auditors

10. The IAASB had mixed views about whether group audits where component auditors are involved
should be included in the scope of the proposed ISA for LCE.

11. On one hand, the IAASB noted that, generally, component auditors are more often used in more
complex groups (e.g., in groups where activities for financial reporting is decentralized across
individual entities or operations span across multiple jurisdictions such that the involvement of a
component auditor would be needed). Therefore, the IAASB was of the view that prohibiting the use
of component auditors was consistent with the nature and circumstances of a typical LCE that the
proposed standard is intended to be designed for. The IAASB also noted that the use of a “bright line”
prohibition would reduce the level of judgment by an auditor when determining if the ISA for LCE can
be used and, therefore, would be easier to apply.

12. On the other hand, the IAASB did acknowledge that the use of component auditors may sometimes
be due to a practical consideration rather than due to the complexity of the group itself. For example,
there may be situations where a physical presence is required for a specific audit procedure in an

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 EXPLANATORY MEMORANDUM – PROPOSED PART 10, AUDITS OF GROUP FINANCIAL STATEMENTS

otherwise less complex group (e.g., an inventory count or the verification of a physical asset
performed at a component). Not including a specific prohibition for audits where component auditors
are involved would also be consistent with the overall approach to the Authority of the proposed ISA
for LCE as the use of the standard should be driven by the complexity of the entity and not that of the
audit.
13. On balance, the IAASB was of the view that the use of component auditors should be excluded from
the scope of the proposed ISA for LCE, recognizing the overall pervasive theme heard from
respondents to ED-ISA for LCE that the scope of the proposed standard should better reflect the
typical LCE for which the proposed ISA for LCE is intended to be designed for.

14. The IAASB did consider the examples provided through outreach and from respondents to ED-ISA
for LCE of situations where component auditors may be involved in a less complex group audit. To
address these circumstances the IAASB has proposed that the Authority prohibits the use of the ISA
for LCE when component auditors are involved “except when the component auditor’s involvement
is limited to circumstances in which a physical presence is needed for a specific audit procedure for
the group audit (e.g., attending a physical inventory count or inspecting physical assets)” (see
paragraph A.1 (d)(ii) of the Proposed Additions to the Authority for Group Audits).

15. The IAASB has also proposed EEM to provide guidance around determining whether the audit is a
group audit and evaluating whether an auditor is a component auditor.

Qualitative Characteristics Related to Group Audits

16. The IAASB discussed if, and if so how, the qualitative characteristics of a less complex group differ
from the qualitative characteristics of an LCE that is not a group and is of the view that the qualitative
characteristics are broadly the same (i.e., a group as a whole and each of its individual entities and
business units should meet the qualitative characteristics of an LCE that is not a group). At the same
time, the IAASB noted that there are additional qualitative characteristics for group audits that should
be considered (see paragraph 17 below).

17. The IAASB considered indicators of complexity that more specifically relate to group audits, including
those described in paragraph 158 of the Explanatory Memorandum accompanying ED-ISA for LCE
and those suggested by respondents to ED-ISA for LCE. The IAASB noted that most areas of
complexity for a group were already addressed by the qualitative characteristics for an entity that is
not a group, except the following group specific circumstances:

(a) Group Structure and Activities – a group may be more complex when the number of entities or
business units increase or are in a number of jurisdictions.

(b) Access to Information or People – a group may comprise of multiple entities or business units
and therefore it may be more complex for group management to provide access to information
or people.

(c) Consolidation Process – a group may be more complex because of the consolidation process.

Based on the above, proposed additional “group-specific” characteristics are presented at paragraph
A.3. of the Proposed Additions to the Authority for Group Audits.

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 EXPLANATORY MEMORANDUM – PROPOSED PART 10, AUDITS OF GROUP FINANCIAL STATEMENTS

Section 2-B ‒ Proposed Part 10, Audits of Group Financial Statements

Background

18. Respondents to ED-ISA for LCE supported including the group audit requirements in a separate part
rather than including requirements within the relevant parts of the proposed ISA for LCE because this
would:

• Keep the body of the proposed standard more streamlined and easier to use, especially for
audits that are not group audits;

• Make it easier for auditors of groups to see all relevant additional requirements in one place;
and

• Make it easier to exclude proposed Part 10 if a jurisdiction decided to not allow the proposed
standard to be used for group audits.

The IAASB agreed that this would be an appropriate presentation.

Development of Proposed Part 10

19. Similar to the other parts, proposed Part 10 is based on the core requirements of the relevant ISA –
for proposed Part 10 this is ISA 600 (Revised). The IAASB did not include requirements in ISA 600
(Revised) that:
• Relate to the involvement of component auditors (to reflect the decision to exclude the use of
component auditors from the scope of the proposed ISA for LCE other than in limited
circumstances). The IAASB is of the view that these limited circumstances would be
appropriately addressed by requirements in other parts of the proposed ISA for LCE. This is
consistent with how such circumstances are addressed in the ISAs. These include the
requirements in Part 3 in relation to engagement quality, relevant ethical requirements, and the
direction and supervision of the members of the engagement team and the review of their work.

• Are deemed to indicate complexity that would not be typical for an LCE. For example,
requirements related to the evaluation of consolidation adjustments for entities or business
units with different accounting policies or reporting periods are not included, as these matters
are deemed to be indicators of complexity in the Authority (as described in the proposed
qualitative characteristic relating to a group’s consolidation process).

20. Taking into account the typical nature and circumstances of a less complex group, a number of
requirements in ISA 600 (Revised) were not included in Part 10 as they were deemed to be
sufficiently addressed by requirements in other parts of the proposed ISA for LCE. For example,
paragraph 19 of ISA 600 (Revised) requires the group auditor to obtain agreement of group
management regarding its responsibilities to provide the engagement team with access to people
and information, and paragraph 4.3.1. of ED-ISA for LCE requires the auditor to obtain agreement of
management regarding the same specific matters. In this instance, the IAASB was of the view that it
was not necessary to include a specific additional requirement in proposed Part 10, to address
paragraph 19 of ISA 600 (Revised) as it was sufficiently addressed by paragraph 4.3.1.
21. Consistent with ISA 600 (Revised), the introductory box to proposed Part 10 explains that the
requirements and guidance in proposed Part 10 refer to, or expand on, the application of other parts
of the proposed ISA for LCE to a group audit.

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 EXPLANATORY MEMORANDUM – PROPOSED PART 10, AUDITS OF GROUP FINANCIAL STATEMENTS

22. The IAASB included EEM based on the application material included in ISA 600 (Revised) when it was
deemed to be appropriate and proportionate for a typical LCE and consistent with the general approach
to EEM taken in the proposed ISA for LCE. As described in paragraph 88 of the Explanatory Memorandum
accompanying ED-ISA for LCE, EEM serves a similar purpose to application and other explanatory
material in the ISAs but is more limited and is targeted at a higher level.

Section 2-C – Proposed Conforming Amendments Arising from Proposed Part 10

23. The IAASB reviewed the other parts of the proposed ISA for LCE to identify areas where conforming
amendments should be made due to the incorporation of group audits and identified conforming
amendments to the Preface, Part 9, 3 and the Glossary.

24. In Part 9, proposed revisions explain additional content of the Auditor’s Report in a group audit. It is
anticipated that the Non-Authoritative Supplemental Guide on Reporting will be updated for matters
relevant for group audits (including illustrative reports) after finalization of the proposed ISA for LCE.

25. In the Glossary, the IAASB added definitions for terms used in proposed Part 10. These definitions
are similar to the definitions in ISA 600 (Revised). The IAASB decided not to include the following
definitions from ISA 600 (Revised):

• Group auditor. ISA 600 (Revised) describes requirements of both the group auditor and
component auditor. As component auditors are not in the scope of the proposed ISA for LCE
other than in limited circumstances, auditors using the proposed Part 10 can only be a group
auditor (ISA 600 (Revised) only refers to the group auditor or a component auditor). Therefore,
the IAASB concluded that it is not necessary to use the term “group” when referring to the
auditor. This also aids in the consistency of proposed Part 10 with the other parts.

• Group audit opinion. As there are no references to the group audit opinion in proposed Part 10,
the IAASB did not include this definition

• Group engagement partner. As there are no references to the group engagement partner in
proposed Part 10, the IAASB did not include this definition.

3
Part 9, Forming an Opinion and Reporting

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 EXPLANATORY MEMORANDUM – PROPOSED PART 10, AUDITS OF GROUP FINANCIAL STATEMENTS

Section 3 Request for Comments

Respondents are asked to comment on the clarity, understandability and practicality of application of
proposed Part 10 and related conforming amendments. In this regard, comments will be most helpful if they
are identified with specific aspects and include the reasons for any concern about clarity, understandability
and practicality of application, along with suggestions for improvement. When a respondent agrees with the
proposals, it will be helpful for the IAASB to be made aware of this view.

Specific Questions

Please respond directly to the questions and provide the rationale for your answers, as well as specific
suggestions, where appropriate. We appreciate all your feedback, and respondents may respond to all
questions or only those questions where they have specific comments.

1. In the Authority, do you agree with the proposed prohibition on the use of the proposed ISA for LCE
for group audits where component auditors are involved, other than in limited circumstances where
physical presence is required?

2. In the Authority, do you agree with the proposed group-specific qualitative characteristics to describe
the scope of group audits for which the proposed ISA for LCE is designed to be used?

3. Do you agree with the content of proposed Part 10 and related conforming amendments?

Respondents are reminded that the IAASB is not asking for further feedback on content of the
proposed ISA for LCE that does not relate to group audits.

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 EXPLANATORY MEMORANDUM – PROPOSED PART 10, AUDITS OF GROUP FINANCIAL STATEMENTS

Appendix

Revisions to the Authority Since the ED-ISA for LCE

This content below is included for information purposes only. It is not part of the proposed
additions to the Authority for group audits and, therefore, the IAASB is not inviting comment
on this content.

Background

This Appendix includes a description of directional changes to the Authority that have been discussed by
the IAASB since the ED-ISA for LCE. For more information on respondents’ views on the Authority and the
IAASB’s proposals, please refer to the issues papers for the IAASB’s June and September 2022 meetings.

Feedback on the Authority

Respondents to ED-ISA for LCE expressed concerns that the Authority was unclear as to the intended
scope of the proposed ISA for LCE. It was noted that the Authority:

• Was too open (i.e., it was not clear enough about which entities on the “complexity spectrum” the
standard was designed for); and

• Involved too much judgment;

and may therefore lead to inconsistent use of the proposed standard, or use of the proposed standard for
complex entities.

Respondents to ED-ISA for LCE also noted that the Authority should be clearer about the qualitative
characteristics that a typical LCE exhibit and suggested to focus on describing what is “less complex” (rather
than describing complex circumstances). This would drive a conscious determination about whether the
entity is truly “less complex.” To be more specific, respondents also suggested using illustrative numerical
indicators (where appropriate).

The IAASB discussed proposed revisions to individual qualitative characteristics that describe a typical LCE
for the purpose of determining the appropriate use of the proposed ISA for LCE. The proposed revisions
include:

• Business Activities, Business Model and Industry – removing reference to new or emerging markets,
or entities in the development stage and instead focusing on whether matters give rise to significant
business risks, if there are specific laws or regulations that add complexity, and if transactions result
from few business activities or revenue streams.
• Organizational Structure and Size – removing reference to unusual entities or arrangements and
better describing what makes an entity’s structure straightforward, including having few reporting
lines or levels and a small key management team.
• Ownership Structure – focusing on the presence of clear transparency of ownership and control, such
that all individual owners and beneficial owners are known.

• Nature of Finance Function – new characteristic describing centralized financial reporting with few
employees involved in financial reporting roles.

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 EXPLANATORY MEMORANDUM – PROPOSED PART 10, AUDITS OF GROUP FINANCIAL STATEMENTS

• Information Technology – updating to be more consistent with the characteristics used to describe
complexity in ISA 315 (Revised 2019) 4 Appendix 5 (e.g., commercial software, limited access to make
configurations, few formalized general IT controls needed).

• Application of the Financial Reporting Framework and Accounting Estimates – removing reference
to estimation uncertainty and describing the presence of few accounts or disclosures that necessitate
the use of significant management judgment and where financial statements typically do not include
accounting estimates that involve the use of complex methods or models, assumptions or data.

4
ISA 315 (Revised 2019), Identifying and Assessing the Risks of Material Misstatement

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 EXPOSURE DRAFT - PROPOSED ADDITIONS TO THE AUTHORITY FOR GROUP AUDITS

PROPOSED ADDITIONS TO THE AUTHORITY FOR GROUP AUDITS

Marked from Exposure Draft of the proposed ISA for LCE 1

A. Authority of the ISA for Audits of Financial Statements of Less Complex

Entities

Limitations for Using the ISA for LCE

…
Specific Prohibitions

…
A.71. The ISA for LCE shall not be used if:

…
(d) The audit is an audit of group financial statements (group audit) and:
(i) Any of the group’s individual entities or business units meet the criteria as described in
paragraph A.1.(b) or A.1.(c); 2 or

(ii) Component auditors are involved, except when the component auditor’s involvement is
limited to circumstances in which a physical presence is needed for a specific audit
procedure for the group audit (e.g., attending a physical inventory count or inspecting
physical assets).
A single legal entity may be organized with more than one business unit, for example, a company
with operations in multiple locations, such as a store with multiple branches. When those business
units have characteristics such as separate locations, separate management, separate general
ledger and the financial information is aggregated in preparing the single legal entity’s financial
statements, such financial statements meet the definition of group financial statements because they
include the financial information of more than one entity or business unit through a consolidation
process.

In some cases, a single legal entity may configure its information system to capture financial
information for more than one product or service line for legal or regulatory reporting or other
management purposes. In these circumstances, the entity’s financial statements are not group
financial statements because there is no aggregation of the financial information of more than one
entity or business unit through a consolidation process. Further, capturing separate information (e.g.,
in a sub-ledger) for legal or regulatory reporting or other management purposes does not create
separate entities or business units (e.g., divisions) for purposes of this ISA for LCE.

1
As described in Section 2-A, only additions to the Authority that are specific to group audits have been presented for comment.
2
In ED-ISA for LCE the equivalent paragraphs to paragraphs A.1.(b) and A.1.(c) are paragraphs A.7.(b) and A.7.(c) relating to
prohibitions for listed entities and certain classes of entities exhibiting public interest characteristics. As described in Section 2-
A, revisions to these paragraphs are currently being discussed based on feedback from ED-ISA for LCE.

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 EXPOSURE DRAFT - PROPOSED ADDITIONS TO THE AUTHORITY FOR GROUP AUDITS

Component Auditors

A component auditor is an auditor who performs audit work related to a component 3 for purposes of
the group audit. A component auditor is a part of the engagement team for a group audit.

Part 3 contains requirements in relation to engagement quality, including relevant ethical

requirements, and the direction and supervision of the members of the engagement team, and the
review of their work.

When the auditor responsible for the group audit performs audit procedures related to a component,
the auditor is not considered a component auditor.

…
Qualitative Characteristics

…
A.93.

…
For the purpose of group audits, these considerations shall apply to both the group and each of its
individual entities and business units.

Additional Characteristics Relevant for Group Audits

For group audits, the following qualitative characteristics are to be considered in addition to those
above:

Group Structure The group has few entities or business units (e.g., 5 or less).
and Activities
Group entities or business units are limited to few jurisdictions (e.g., 3 or less).

Access to Group management will be able to provide the engagement team with access
Information or to information and unrestricted access to persons within the group as
People determined necessary by the auditor.

Consolidation The group has a simple consolidation process. For example:

Process
• Financial information of all entities or business units has been prepared
in accordance with the same accounting policies applied to the group
financial statements;

• All entities or business units have the same financial reporting period-
end as that used for group financial reporting;
• There are no sub-consolidations; and

• Intercompany, or other consolidation adjustments are not complex.

…
3
A component is an entity, business unit, function or business activity, or some combination thereof, determined by the auditor
responsible for the group audit for the purposes of planning and performing audit procedures in a group audit.

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 EXPOSURE DRAFT - PROPOSED PART 10, AUDITS OF GROUP FINANCIAL STATEMENTS

PROPOSED PART 10 – AUDITS OF GROUP FINANCIAL STATEMENTS

10. Audits of Group Financial Statements

Content of this Part

Part 10 sets out the special considerations that apply to an audit of group financial statements.
Scope of this Part

All parts of the ISA for LCE apply to an audit of group financial statements (a group audit). The
requirements and guidance in this Part refer to, or expand on, the application of other parts of the ISA
for LCE to a group audit.

10.1. Objective

10.1.1. The objective of the auditor is to identify and assess the risks of material misstatement of the group
financial statements, whether due to fraud or error, and plan and perform further audit procedures to
appropriately respond to those assessed risks.

10.2. Planning Activities

10.2.1. In applying Part 5, the auditor shall establish, and update as necessary, the scope, timing and
direction of the group audit. In doing so, the auditor shall determine:
(a) The components at which audit work will be performed; and
(b) The resources needed to perform the group audit engagement.
Components

The determination of components at which to perform audit work is a matter of professional judgment.
Matters that may influence the auditor’s determination include, for example:

• The nature of events or conditions that may give rise to risks of material misstatement at the
assertion level of the group financial statements that are associated with a component, for
example, newly formed or acquired entities or business units or entities or business units in
which significant changes have taken place.

• The disaggregation of significant classes of transactions, account balances and disclosures in

the group financial statements across components, considering the size and nature of assets,
liabilities and transactions at the location or business unit relative to the group financial
statements.

• Whether sufficient appropriate audit evidence is expected to be obtained for all significant
classes of transactions, account balances and disclosures in the group financial statements
from audit work planned on the financial information of identified components.

• The nature and extent of misstatements or control deficiencies identified at a component in

prior period audits.

• The nature and extent of the commonality of controls across the group and whether, and if so,
how, the group centralizes activities relevant to financial reporting.

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 EXPOSURE DRAFT - PROPOSED PART 10, AUDITS OF GROUP FINANCIAL STATEMENTS

Based on the understanding of the group’s organizational structure and information system, the
auditor may determine that the financial information of certain entities or business units may be
considered together for purposes of planning and performing audit procedures. For example, a group
may have three legal entities with similar business characteristics, operating in the same
geographical location, under the same management, and using a common system of internal control,
including the information system. In these circumstances, the auditor may decide to treat these three
legal entities as one component.

Resources

Part 3 requires the engagement partner to determine that sufficient and appropriate resources to
perform the engagement are assigned or made available to the engagement team in a timely manner.
The auditor’s determination of the resources needed to perform the group audit are a matter of
professional judgment and may include the understanding of the group, the components within the
group at which audit work is to be performed and whether to perform work centrally, at components
or a combination thereof.

10.2.2. If, after the acceptance or continuance of the group audit engagement, the engagement partner
concludes that sufficient appropriate audit evidence cannot be obtained, the engagement partner
shall consider the possible effects on the group audit.

10.3. Materiality

10.3.1. In applying Part 5, when classes of transactions, account balances or disclosures in the group
financial statements are disaggregated across components, for purposes of planning and performing
audit procedures, the auditor shall determine component performance materiality. To address
aggregation risk, such amount shall be lower than group performance materiality.

The component performance materiality amount may be different for each component. Also, the
component performance materiality amount for an individual component need not be an arithmetical
portion of the group performance materiality and, consequently, the aggregate of component
performance materiality amounts may exceed group performance materiality.
The ISA for LCE does not require component performance materiality to be determined for each class
of transactions, account balance or disclosure for components at which audit procedures are
performed. However, if, in the specific circumstances of the group, there is one or more particular
classes of transactions, account balances or disclosures for which misstatements of lesser amounts
than materiality for the group financial statements as a whole could reasonably be expected to
influence the economic decisions of users taken on the basis of the group financial statements, Part
5 requires a determination of the materiality level or levels to be applied to those particular classes
of transactions, account balances or disclosures. In these circumstances, the auditor may need to
consider whether a component performance materiality lower than the amount may be appropriate
for those particular classes of transactions, account balances or disclosures.

The determination of component performance materiality is not a simple mechanical calculation and
involves the exercise of professional judgment. Factors the auditor may take into account in setting
component performance materiality include the following:

• The extent of disaggregation of the financial information across components (e.g., as the extent
of disaggregation across components increases, a lower component performance materiality
ordinarily would be appropriate to address aggregation risk). The relative significance of the
component to the group may affect the extent of disaggregation (e.g., if a single component
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 EXPOSURE DRAFT - PROPOSED PART 10, AUDITS OF GROUP FINANCIAL STATEMENTS

represents a large portion of the group, there likely may be less disaggregation across
components).

• Expectations about the nature, frequency, and magnitude of misstatements in the component
financial information, for example the nature and extent of misstatements identified at the
component in prior audits.

To address aggregation risk, paragraph 10.3.1. requires component performance materiality to be

lower than group performance materiality. In some circumstances, however, component performance
materiality may be set at an amount closer to group performance materiality because there is less
aggregation risk, such as when the financial information for one component represents a substantial
portion of the group financial statements.

10.4. Understanding the Group and Its Environment, the Applicable Financial Reporting
Framework and the Group’s System of Internal Control

10.4.1. In applying Part 6, the auditor shall obtain an understanding of:

(a) The group’s organizational structure and business model, including the locations in which the
group has its operations or activities and the extent to which they are similar across the group.

(b) The group’s system of internal control, including:

(i) The consolidation process used by the group and consolidation adjustments;

(ii) The nature and extent of commonality of controls; and

(iii) How the group centralizes activities relevant to financial reporting.

10.5. Identifying and Assessing the Risks of Material Misstatement

10.5.1. In applying Part 6, based on the understanding obtained in paragraph 10.4.1. the auditor shall
identify and assess the risks of material misstatement of the group financial statements, including
with respect to the consolidation process.
In applying Part 6, the auditor is required to identify and assess the risks of material misstatement of
the financial statements due to fraud, and to design and perform further audit procedures whose
nature, timing and extent are responsive to the assessed risks of material misstatement due to fraud
at the assertion level. Information used to identify the risks of material misstatement of the group
financial statements due to fraud may include the following:

• Whether there are particular components that are more susceptible to risks of material
misstatement due to fraud.

• Whether any fraud risk factors or indicators of management bias exist in the consolidation
process.

• How those charged with governance of the group monitor group management’s processes for
identifying and responding to the risks of fraud in the group, and the controls group
management has established to mitigate these risks.

• Responses of those charged with governance of the group, and group management to the
auditor’s inquiry about whether they have knowledge of any actual, suspected, or alleged fraud
affecting a component or the group.

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10.6. Responding to the Assessed Risks of Material Misstatement

10.6.1. In applying Part 7, the auditor shall determine the components at which to perform further audit
procedures and the nature, timing and extent of the work to be performed at those components.
In response to the assessed risks of material misstatement, the auditor may determine the following
scope of work to be appropriate at a component:

• Design and perform further audit procedures on the entire financial information of the
component;

• Design and perform further audit procedures on one or more classes of transactions, account
balances or disclosures; or

• Perform specific further audit procedures.

Further audit procedures may be designed and performed centrally if the audit evidence to be
obtained from performing further audit procedures on one or more significant classes of transactions,
account balances or disclosures in the aggregate will respond to the assessed risks of material
misstatement, for example, if the accounting records for the revenue transactions of the entire group
are maintained centrally.

The auditor may determine that the financial information of components can be considered as a
single population for the purpose of performing further audit procedures, for example, when
transactions are considered to be homogeneous because they share the same characteristics, the
related risks of material misstatement are the same, and controls are designed and operating in a
consistent way. In such cases, group performance materiality often will be used for purposes of
performing these procedures.

Consolidation Process

10.6.2. The auditor shall design and perform further audit procedures to respond to the assessed risks of
material misstatement of the group financial statements arising from the consolidation process. This
shall include:

(a) Evaluating whether all entities and business units have been included in the group financial
statements as required by the applicable financial reporting framework;

(b) Evaluating the appropriateness, completeness and accuracy of consolidation adjustments and
reclassifications;
(c) Evaluating whether management’s judgments made in the consolidation process give rise to
indicators of possible management bias; and

(d) Responding to assessed risks of material misstatement due to fraud arising from the consolidation
process.

The consolidation process may require adjustments and reclassifications to amounts reported in the
group financial statements that do not pass through the usual IT applications, and may not be subject
to the same controls to which other financial information is subject. The auditor’s evaluation of the
appropriateness, completeness and accuracy of the adjustments and reclassifications may include:

• Evaluating whether significant adjustments appropriately reflect the events and transactions
underlying them;

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 EXPOSURE DRAFT - PROPOSED PART 10, AUDITS OF GROUP FINANCIAL STATEMENTS

• Determining whether those entities or business units whose financial information has been
included in the group financial statements were appropriately included;

• Determining whether significant adjustments have been correctly calculated, processed and
authorized by group management and, when applicable, by component management;

• Determining whether significant adjustments are properly supported and sufficiently

documented; and

• Evaluating the reconciliation and elimination of intra-group transactions, unrealized profits, and
intra-group account balances.

10.7. Specific Communication Requirements

Communication with Group Management and Those Charged with Governance of the Group

10.7.1. If fraud has been identified by the auditor, or information indicates that a fraud may exist, the auditor
shall communicate this on a timely basis to the appropriate level of group management in order to
inform those with primary responsibility for the prevention and detection of fraud of matters relevant
to their responsibilities.
10.7.2. The auditor shall communicate the following matters with those charged with governance:

(a) An overview of the work to be performed at the components of the group.

(b) Fraud or suspected fraud involving group management, component management, employees
who have significant roles in the group’s system of internal control or others when the fraud
resulted in a material misstatement of the group financial statements.

10.8. Specific Documentation Requirements

10.8.1. In addition to the general documentation requirements (Part 2.5.) for an audit engagement, the
auditor shall include in the audit documentation:

(a) The basis for the auditor’s determination of components for purposes of planning and
performing the group audit.

(b) The basis for the determination of component performance materiality.

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 EXPOSURE DRAFT - PROPOSED CONFORMING AMENDMENTS ARISING FROM PROPOSED PART 10

PROPOSED CONFORMING AMENDMENTS ARISING FROM

PROPOSED PART 10, AUDITS OF GROUP FINANCIAL STATEMENTS
Marked from Exposure Draft of the ISA for LCE

Preface ISA for LCE

…

Format of the [Draft] ISA for LCE

P.12. The [draft] ISA for LCE includes:

• The Authority (Part A), which sets out the circumstances for which the [draft] ISA for LCE is
prohibited or not appropriate to use.

• Part 1, which sets out the fundamental concepts and overarching principles to be applied
throughout the audit.

• Part 2, which sets out the general requirements for audit evidence and documentation, as well
as the overall objective of the audit.
• Part 3, which sets out the auditor’s and engagement partner’s obligations and responsibilities
for quality management in an audit of an LCE.

• Parts 4 to 9, which follow the flow of an audit engagement, and set out the detailed
requirements for the audit. Each of these Parts also includes specific communication and
documentation requirements as necessary.

 Part 10, which sets out special considerations that apply to an audit of group financial
statements (a group audit). When the ISA for LCE applies to a group audit, the requirements
and guidance in Part 10 refer to, or expand on the application of other relevant parts of the ISA
for LCE to a group audit.
• Appendices, which include the glossary of terms used in this [draft] standard, assertions, an
illustrative engagement letter and an illustrative representation letter, as well as other relevant
supporting materials for implementation of the requirements within this [draft] standard.

Part 9. Forming an Opinion and Reporting

…

9.4. Auditor´s Report

9.4.1. The auditor shall report in accordance with the specified format and content below unless:

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 EXPOSURE DRAFT - PROPOSED CONFORMING AMENDMENTS ARISING FROM PROPOSED PART 10

INDEPENDENT AUDITOR’S REPORT

…

Auditor’s Responsibilities for the Audit of the Financial Statements 1 2

Glossary of Terms
…

Aggregation risk—The probability that the aggregate of uncorrected and undetected misstatements
exceeds materiality for the financial statement as a whole.

…
Component—An entity, business unit, function or business activity, or some combination thereof,
determined by the auditor for purposes of planning and performing audit procedures in a group audit.

Component auditor— An auditor who performs audit work related to a component for purposes of the
group audit. A component auditor is a part of the engagement team for a group audit.

Component management—Management responsible for a component.

Component performance materiality—An amount set by the auditor to reduce aggregation risk to an
appropriately low level for purposes of planning and performing audit procedures in relation to a component.

Group—A reporting entity for which group financial statements are prepared.
Group audit— The audit of group financial statements.

Group financial statements—Financial statements that include the financial information of more than one
entity or business unit through a consolidation process. For purposes of the ISA for LCE, a consolidation
process includes:

(a) Consolidation, proportionate consolidation, or an equity method of accounting;

(b) The presentation in combined financial statements of the financial information of entities or business
units that have no parent but are under common control or common management; or

1
When the auditor disclaims an opinion on the financial statements, the description of the auditor’s responsibilities only includes
the matters required by paragraph 9.5.4.
2
When Part 10 applies, further describe the auditor’s responsibilities in a group audit engagement by stating that;
(i) The auditor’s responsibilities are to plan and perform the group audit to obtain sufficient appropriate audit evidence regarding
the financial information of the entities or business units within the group as a basis for forming an opinion on the group
financial statements;
(ii) The auditor is responsible for the direction, supervision and review of the audit work performed for purposes of the group
audit; and
(iii) The auditor remains solely responsible for the auditor’s opinion.

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 EXPOSURE DRAFT - PROPOSED CONFORMING AMENDMENTS ARISING FROM PROPOSED PART 10

(c) The aggregation of the financial information of entities or business units such as branches or
divisions.

Group management—Management responsible for the preparation of the group financial statements.

Group performance materiality— Performance materiality in relation to the group financial statements as
a whole, as determined by the auditor.

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