The Auditing Standards Board recently issued a proposed Statement on Auditing Standards (SAS), Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors and Audits of Referred-to Auditors). If finalized, this proposed SAS would supersede AU-C section 600 in its entirety, and it would amend several standards.
The proposed SAS introduces a principles-based approach that is adaptable to a wide variety of circumstances and scalable for audits of groups of different complexity, for example by (a) focusing on identifying, assessing and responding to the risks of material misstatement and (b) including separate sections throughout the proposed SAS to highlight the requirements and application material for circumstances when component auditors are involved or when reference is made to the audit of a referred-to auditor in the auditor’s report on the group financial statements.
Among other notable changes, this proposed standard:
- Introduces the term referred-to auditor and including all guidance related to making reference to the audit of a referred-to auditor in one section within the proposed SAS. A referred-to auditor is defined as an auditor who performs an audit of the financial statements of a component to which the group engagement partner determines to make reference in the auditor’s report on the group financial statements. A referred-to auditor is not a component auditor, and accordingly, is not a part of the engagement team for a group audit.
- Revises the term component auditor to indicate that a component auditor is part of the engagement team, and clarifies that the group engagement partner has overall responsibility for the group audit engagement.
- Revises the definition of group financial statements as financial statements that include the financial information of more than one entity or business unit through a consolidation process. The proposed SAS clarifies that the consolidation process includes consolidation, proportionate consolidation, inclusion, or an equity method of accounting; the presentation in combined financial statements of the financial information of entities or business units that are under common control or common management; and the aggregation of the financial information of entities or business units such as branches or divisions.
- Establishes a framework for planning and performing a group audit engagement, which, among other aspects, highlights the importance of involving component auditors throughout all phases of a group audit.
- Reinforces that all applicable AU-C sections need to be applied in a group audit engagement. The proposal establishes stronger linkages to other AU-C sections, including those related to engagement quality management, understanding the entity, assessing the risks of material misstatement, performing audit procedures in response to assessed risks, and evaluating the audit evidence obtained.
- Strengthens communications between the group auditor and component auditors, emphasizing the importance of two-way communications.
- Emphasizes the importance of professional skepticism.
- Enhances the documentation requirements to clarify what the group auditor may need to document in different situations, including when there are restrictions on access to component auditor audit documentation.
If finalized, the proposed SAS would be effective for audits of group financial statements for periods ending on or after December 15, 2026. The proposed SAS is available for comment until June 21, 2022.