ISA 580 Page 120

necessary to obtain audit evidence.

 All transactions have been recorded in the accounting records and are reflected in the
financial statements.
 We have disclosed to you the results of our assessment of the risk that the financial
statements may be materially misstated as a result of fraud. (ISA 240)
 We have disclosed to you all information in relation to fraud or suspected fraud that we are
aware of and that affects the entity and involves:
 Management;
 Employees who have significant roles in internal control; or
 Others where the fraud could have a material effect on financial statements. (ISA 240)
 We have disclosed to you all information in relation to allegations of fraud, or suspected
fraud, affecting the entity’s financial statements communicated by employees, former
employees, analysts, regulators or others. (ISA 240)
 We have disclosed to you all known instances of non- compliance or suspected non-
compliance with laws and regulations whose effects should be considered when preparing
financial statements. (ISA 250)
 We have disclosed to you the identity of the entity’s related parties and all the related party
relationships and transactions of which we are aware. (ISA 550)

[Any other matters that the auditor may consider necessary (see paragraph A11 of this ISA).]

Management Management

Important Paragraphs 10, 11, 16, 19, 20, A8, A10, A12, A27
ISA 600 Page 121

ISA 600

 Group engagement partner is responsible for the direction, supervision and performance of
the group audit engagement in compliance with professional standards and applicable
legal and regulatory requirements, and issuance of an appropriate auditor report.
 Auditor’s report on group F/S shall not refer to a component auditor
- Unless required by law or regulation to include such reference.
- If required by law, auditor’s report shall indicate that the reference does not diminish
the group engagement partner’s / firm’s responsibility for the group audit opinion

Acceptance and Continuance

Group engagement team shall obtain an understanding of group, its components, and their
environments
 Group structure, including legal & organizational structure.
 Components' business activities significant to the group
 Use of service organizations, including shared service centers.
 A description of group-wide controls.
 Complexity of the consolidation process.
 Component auditors
 Whether the group engagement team:
- Will have unrestricted access to TCWG and management of group & components
- Will be able to perform necessary work on components.

For continuing engagement, group engagement team's ability to obtain sufficient appropriate
audit evidence may be affected by:
 Changes in group structure.
 Changes in components' business activities significant to group.
 Changes in composition of TCWG of group, group management, or key management of
significant components.
 Concerns with regard to integrity and competence of group or component management.
 Changes in group-wide controls.
 Changes in the AFRF.

If the group engagement partner concludes that:

a) It will not be possible to obtain sufficient appropriate audit evidence due to restrictions
imposed by group management (to obtain information of component or work on it); and
b) Possible effect of inability will result in a disclaimer of opinion on group F/S, the group
engagement partner shall:
o For new engagement; Not accept the engagement
o For continuing engagement; Withdraw from engagement,
o Disclaim opinion (if withdrawal is not possible/practicable)
ISA 600 Page 122

Appendix 3: Examples of Conditions or Events that May Indicate Risks of Material

Misstatement of Group F/S

 A complex group structure.

 Poor corporate governance structures.
 Non-existent or ineffective group-wide controls.
 Components operating in foreign jurisdictions
 Business activities of components that involve high risk
 Uncertainties regarding which components' financial information.
 Unusual related party relationships and transactions.
 Prior occurrences of non matching intra-group account balances
 Complex transactions accounted for in more than 1 component.
 Components' application of accounting policies that differ from those applied to group F/S.
 Components with different financial year-ends
 Prior occurrences of unauthorized or incomplete adjustments.
 Aggressive tax planning within the group.
 Frequent changes of auditors

Group engagement partner shall agree on the terms of the group audit engagement in
accordance with ISA 210

Additional matters may be included in terms of a group audit engagement, such that:
 The communication between the group engagement team and the component auditors
should be unrestricted to the extent possible under law or regulation;
 Important communications between the component auditors, TCWG of the component,
and component management, including communications on significant deficiencies in
internal control, should be communicated as well to the group engagement team;
 Important communications between regulatory authorities and components related to
financial reporting matters should be communicated to the group engagement team; and
 To the extent the group engagement team considers necessary, it should be permitted:
- Access to component information, TCWG of components, component management, and
the component auditors (including relevant audit documentation sought by the group
engagement team); and
- To perform work or request a component auditor to perform work on the financial
information of the components.

Overall Audit Strategy and Audit Plan

 Group engagement team shall establish an overall group audit strategy and shall develop a
group audit plan in accordance with ISA 300
 Group engagement partner shall review the overall group audit strategy and group audit
plan.
ISA 600 Page 123

Understanding the Group, Its Components, and Their Environments

Auditor is required to identify and assess the risks of material misstatement through obtaining
an understanding of the entity and its environment. The group engagement team shall:
 Enhance its understanding of the group, its components, and their environments,
including group-wide controls, obtained during the acceptance or continuance stage; and
 Obtain an understanding of the consolidation process, including the instructions issued by
group management to components ordinarily including:.
- The accounting policies to be applied;
- Statutory and other disclosure requirements applicable to the group F/S

Group engagement team’s understanding of the instructions may include following:

 The clarity and practicality of the instructions for completing the reporting package.
 Whether the instructions:
- Adequately describe the characteristics of the AFRF;
- Provide for disclosures that are sufficient to comply with requirements of the AFRF
- Provide for the identification of consolidation adjustments, for example, intra-group
transactions and unrealized profits, and intra-group account balances; and
- Provide for the approval of the financial information by component management.

Discussion among Group Engagement Team Members & Component Auditors regarding risks
of Material Misstatement of Group F/S, Including Risks of Fraud provide an opportunity to:
 Share knowledge of components and their environments, including group-wide controls.
 Exchange information about the business risks of the components or the group.
 Exchange ideas about where group F/S may be susceptible to material misstatement due
to fraud or error, how group management and component management could perpetrate
and conceal fraudulent reporting, and how component’s assets could be misappropriated
 Identify practices followed by group or component management that may be biased or
designed to manage earnings that could lead to fraudulent financial reporting, for
example, revenue recognition practices that do not comply with the AFRF.
 Consider known external and internal factors affecting group that may create an incentive
or pressure for group management, component management, or others to commit fraud,
provide the opportunity for fraud to be perpetrated, or indicate environment that enables
group management, component management, or others to rationalize committing fraud.
 Consider the risk that group or component management may override controls.
 Discuss fraud that has been identified in components, or information that indicates
existence of a fraud in a component.

The group engagement team shall obtain an understanding that is sufficient to:
 Confirm or revise its initial identification of components that are likely to be significant;
 Assess risks of material misstatement of group F/S, whether due to fraud or error through:
- Information obtained from understanding of group, components, and environments,
and of consolidation process, including group-wide controls.
- Information obtained from the component auditors.
ISA 600 Page 124

Understanding the Component Auditor

If the group engagement team plans to request a component auditor to perform work on the
financial information of a component, group engagement team shall obtain understanding of:
 Whether the component auditor understands and will comply with the ethical
requirements that are relevant to the group audit and, in particular, is independent. (Ref:
Para. A37)
 The component auditor’s professional competence; whether he:
- Possesses an understanding of auditing and other standards applicable to group audit
that is sufficient to fulfill the component auditor’s responsibilities in the group audit;
- Possesses the special skills (for example, industry specific knowledge) necessary to
perform the work on the financial information of the particular component; and
- Where relevant, possesses an understanding of the AFRF that is sufficient to fulfill the
component auditor’s responsibilities in the group audit
 Whether group engagement team will be able to be involved in the work of the component
auditor to the extent necessary to obtain sufficient appropriate audit evidence.
 Whether he operates in a regulatory environment that actively oversees auditors.

Such understanding may be obtained in a number of ways:

In the first year of involving a component auditor, group engagement team may, for
example:
 Evaluate the results of quality control monitoring system where the group engagement
team and component auditor are from a firm or network that operates under and
complies with common monitoring policies and procedures;
 Visit the component auditor to discuss the above matters
 Request component auditor to confirm the above matters (Appendix 4)
 Request the component auditor to complete questionnaires about the above matters;
 Discuss the component auditor with colleagues in the group engagement partner’s firm, or
with a reputable third party that has knowledge of the component auditor; or
 Obtain confirmations from professional body or bodies to which the component auditor
belongs, the authorities by which the component auditor is licensed, or other third parties.

In subsequent years, the understanding of the component auditor may be based on

the group engagement team’s previous experience with the component auditor. The
group engagement team may request the component auditor to confirm whether
anything in relation to above understanding has changed since the previous year.
If a component auditor does not meet such independence requirements, or group engagement
team has serious concerns about his competence and independence etc, they shall obtain
sufficient appropriate audit evidence relating to financial information of component without
requesting that component auditor to perform work on financial information of that component.
ISA 600 Page 125

Materiality

 The group engagement team shall determine the following:

- Materiality for the F/S as a whole;
- Materiality of particular class of transaction, account balances or disclosure (if any);
- Component materiality for those components where component auditors will perform
an audit or a review for purposes of the group audit.
- Threshold above which misstatements cannot be regarded as trivial to group F/S.
 Group engagement team shall evaluate the appropriateness of performance materiality
determined at the component level.
 If a component is subject to audit by statute, regulation or other reason, and the group
engagement team decides to use that audit to provide audit evidence for the group audit,
the group engagement team shall determine whether:
- Materiality for the component F/S as a whole; and
- Performance materiality at the component level meet the requirements of this ISA.

Responding to Assessed Risks

 Auditor is required to design and implement appropriate responses to address assessed

risks of material misstatement of the F/S.
 Group engagement team shall determine the type of work to be performed by the group
engagement team, or the component auditors on its behalf, on the financial information of
the components (see flow chart below).
 Group engagement team shall also determine nature, timing and extent of its involvement
in the work of the component auditors
 Such determination of the type of work and its involvement in the work is affected by:
- The significance of the component;
- The identified significant risks of material misstatement of the group F/S;
- The group engagement team’s evaluation of the design of group-wide controls and
determination whether they have been implemented; and
- The group engagement team’s understanding of the component auditor.

Component - An entity or business activity for which group or component management

prepares financial information that should be included in the group F/S

Significant Component - A component identified by the group engagement team

 That is of individual financial significance to the group, or
 That, due to its specific nature or circumstances, is likely to include significant risks
of material misstatement of the group F/S.

Diagram (on next page) explaining all the decision map about above procedures
ISA 600 Page 126

If group engagement team does not consider that sufficient appropriate audit evidence
will be obtained from work performed on financial information of significant components,
and related procedures performed at group level; they shall select components that are not
significant components and perform, or request a component auditor to perform, one
or more of the following on financial information of individual components selected:
 Audit of financial information of component using components materiality
 Audit of one or more of the class of transactions, account balances or disclosures
 Review of financial information of component using components materiality
 Specified procedures
ISA 600 Page 127

Above decision of selecting non significant components depends on

 Extent of audit evidence expected to be obtained from them
 Whether the component has been newly formed or acquired.
 Whether significant changes have taken place in the component.
 Whether an adequate internal audit function has performed work at the component
 Whether the components apply common systems and processes.
 The operating effectiveness of group-wide controls.
 Abnormal fluctuations identified by analytical procedures performed at group level.
 Individual financial significance or the risk of the component in comparison with other
components within this category.
 Whether component is subject to audit required by statute, regulation etc

Significant Components—Risk Assessment

Group engagement team shall be involved in component auditor’s risk assessment to identify
significant risks of material misstatement of the group F/S. Nature, timing and extent of this
involvement are affected by understanding of the component auditor, including at a minimum:
 Discussing with component auditor or component management those of the component’s
business activities that are significant to the group;
 Discussing with component auditor susceptibility of component to material misstatement
of the financial information due to fraud or error; and
 Reviewing component auditor’s documentation of identified significant risks of material
misstatement of group F/S.

Consolidation Process

Group engagement team shall

 Design and perform further audit procedures on the consolidation process
 Evaluate whether all components have been included in the group F/S.
 Evaluate the appropriateness, completeness and accuracy of consolidation adjustments etc
 Evaluate fraud risk factors or indicators of possible management bias including
- Evaluating whether significant adjustments appropriately reflect the underlying events
and transactions;
- Determining whether significant adjustments have been calculated, processed and
authorized by group management and, where applicable, by component management;
- Determining whether significant adjustments are properly supported and documented
- Checking the reconciliation and elimination of intra-group transactions and unrealized
profits, and intra-group account balances.
 If financial information of a component has not been prepared as per same accounting
policies applied to the group F/S, group engagement team shall evaluate whether financial
information of that component has been appropriately adjusted for group F/S.
 Group engagement team shall determine whether financial information identified in the
component auditor’s communication is incorporated in the group F/S.
 For a component with different period-end from group, group engagement team shall
evaluate whether appropriate adjustments have been made to those F/S as per AFRF.
ISA 600 Page 128

Subsequent Events
 If group engagement team or component auditors perform audits on components, they
shall perform procedures to identify and apply procedures on subsequent events.
 If component auditors perform work other than audits of components, group engagement
team shall request him to notify group engagement team if they become aware of
subsequent events that may require an adjustment to or disclosure in the group F/S.

Communication with the Component Auditor

 Group engagement team shall communicate its requirements to component auditor on a
timely basis.
 This communication shall set out work to be performed, use to be made of that work, and
form and content of component auditor's communication with group engagement team.
- Request that component auditor confirms that he will cooperate with them
- Ethical and independence requirements relevant to audit
- Component materiality
- Request him to communicate any identified significant risks of material misstatement
of group F/S.
- A list of related parties
 Group engagement team shall request component auditor to communicate matters
relevant to group engagement team's conclusion with regard to the group audit.
- Whether he has complied with relevant ethical and independence requirements
- Whether he has complied with our requirements;
- Identification of financial information of the component
- Information on instances of non-compliance with laws
- List of uncorrected misstatements
- Indicators of possible management bias;
- Description of significant deficiencies in internal control;
- Other significant matters (e.g. fraud or suspected fraud)
- Any other matters
- Component auditor's findings, conclusions or opinion.

Evaluating the Sufficiency and Appropriateness of Audit Evidence Obtained

 Group engagement team shall:

- Discuss significant matters arising from that evaluation with the component auditor,
component management or group management, as appropriate; and
- Determine whether it is necessary to review other relevant parts of the component
auditor’s audit documentation.
 If group engagement team concludes that the work of the component auditor is insufficient,
the group engagement team shall determine additional procedures to be performed
 Group engagement partner shall evaluate the effect on group audit opinion of any
uncorrected misstatements and any instances where there has been an inability to obtain
sufficient appropriate audit evidence.
ISA 600 Page 129

Communication with Group Management and TCWG of the Group

 Group engagement team shall determine which identified deficiencies in internal control to
communicate to TCWG and group management in accordance with ISA 265 regarding:
- Group-wide internal control that the group engagement team has identified;
- Internal control that group engagement team or component auditor has identified
 If fraud has been identified by group engagement team or component auditor or
information indicates that a fraud may exist, group engagement team shall communicate
this on a timely basis to the appropriate level of group management
 In addition, group engagement team shall communicate these matters with TCWG of group:
- An overview of type of work to be performed on the components.
- An overview of nature of the group engagement team’s planned involvement in work
to be performed by component auditors on significant components.
- Instances where the group engagement team’s evaluation of the work of a component
auditor gave rise to a concern about the quality of that auditor’s work.
- Any limitations on the group audit (e.g restriction on group engagement team’s access)

Documentation (Ref: 49)

Group engagement team shall include in the audit documentation the following matters
 An analysis of components, indicating those that are significant, and the type of work
performed on the financial information of the components.
 Nature, timing and extent of the group engagement team’s involvement in work performed
by component auditors on significant components including, group engagement team’s
review of relevant parts of component audit documentation and conclusions thereon.
 Written communications between group engagement team and the component auditors

Components Subject to Audit by Statute, Regulation or Other Reason (Ref: 3, A1)

 A component auditor may be required by statute, regulation or for another reason, to
express an audit opinion on the F/S of a component.
 Group engagement team may decide to use the audit evidence on which the audit opinion
on the F/S of the component is based to provide audit evidence for the group audit, but the
requirements of this ISA nevertheless apply
 Factors that may affect the decision of whether to use an audit required by statute,
regulation or for another reason to provide audit evidence for group audit include:
- Differences in the AFRF applied in preparing the F/S of the component and that
applied in preparing the group F/S.
- Differences in the auditing and other standards applied by the component auditor and
those applied in the audit of the group F/S.
- Whether the audit of the F/S of the component will be completed in time to meet the
group reporting timetable.
Important Paragraphs 12, 13, 17, 19, 21, 26-29, 40,41, 46,49,50, A11, A12, A20, A26,
A27, A29, A33, A35, A51, A55
ISA 600 Page 130

Appendix 1
(Ref: Para. A19)

“Independent Auditor’s Report Where the Group Engagement Team Is Not Able to Obtain
SufficientAppropriate Audit Evidence on Which to Base the Group Audit Opinion”

INDEPENDENT AUDITOR’S REPORT

To the Shareholders of ABC Company [or other Appropriate Addressee]

Report on the Audit of the Consolidated F/S

Qualified Opinion

We have audited the consolidated F/S of ABC Company and its subsidiaries (the Group), which
comprise the consolidated statement of financial position as at December 31, 20X1, and the
consolidated statement of comprehensive income, consolidated statement of changes in equity
and consolidated statement of cash flows for the year then ended, and notes to the
consolidated F/S, including a summary of significant accounting policies.
In our opinion, except for the possible effects of the matter described in the Basis for Qualified
Opinion section of our report, the accompanying consolidated F/S present fairly, in all material
respects (or give a true and fair view of), the consolidated financial position of the Group as
at December 31, 20X1, and (of) their consolidated financial performance and consolidated
cash flows for the year then
ended in accordance with International Financial Reporting Standards (IFRSs).

Basis for Qualified Opinion

ABC Company’s investment in XYZ Company, a foreign associate acquired during the year and
accounted for by the equity method, is carried at $15 million on the consolidated statement of
financial position as at December 31, 20X1, and ABC’s share of XYZ’s net income of $1 million is
included in the consolidated statement of comprehensive income for the year then ended. We
were unable to obtain sufficient appropriate audit evidence about the carrying amount of
ABC’s investment in XYZ as at December 31, 20X1 and ABC’s share of XYZ’s net income for the
year because we were denied access to the financial information, management, and the
auditors of XYZ. Consequently, we were unable to determine whether any adjustments to
these amounts were necessary.

We conducted our audit in accordance with International Standards on Auditing (ISAs). our
responsibilities under those standards are further described in the Auditor’s Responsibilities for the
Audit of the Consolidated F/S section of our report. We are independent of the Group in accordance
with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional
Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance
ISA 600 Page 131

with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our qualified audit opinion.

Other Information [or another title if appropriate such as “Information Other than the
F/S and Auditor’s Report Thereon”]

[Reporting in accordance with the reporting requirements in ISA 720 (Revised)

Responsibilities of Management and TCWG for the Consolidated F/S

[Reporting in accordance with ISA 700 (Revised)

Auditor’s Responsibilities for the Audit of the Consolidated F/S

[Reporting in accordance with ISA 700 (Revised)

Report on Other Legal and Regulatory Requirements

[Reporting in accordance with ISA 700 (Revised)

[Signature in the name of the audit firm, the personal name of the auditor, or both, as
appropriate for the particular jurisdiction]

[Auditor Address]

[Date]

If, in the group engagement partner’s judgment, the effect on the group F/S of the inability to
obtain sufficient appropriate audit evidence is material and pervasive, the group engagement
partner would disclaim an opinion in accordance with ISA 705 (Revised).
ISA 600 Page 132

Appendix 2 (Ref: Para. A23)

“Examples of Matters about Which the Group Engagement Team Obtains Understanding”
Group-Wide Controls
 Regular meetings between group and component management
 Monitoring of components' operations and financial results.
 Group management's risk assessment process
 Monitoring, controlling, reconciling, and eliminating intra-group transactions and
unrealized profits etc.
 Process for monitoring the timeliness and assessing the accuracy and completeness of
financial information from components.
 A central IT system and the control activities within an IT system
 Monitoring of controls
 Consistent policies and procedures, including group financial reporting procedures manual.
 Group-wide programs, such as codes of conduct and fraud prevention programs.
 Arrangements for assigning authority and responsibility to component management.
 Understanding about internal Audit Function (if it is centralized)
Understanding of the AFRF and the Consolidation Process
 The extent to which component management has an understanding of the AFRF.
 The process for identifying and accounting for components.
 Process for identifying reportable segments for segment reporting.
 Process for identifying related party relationships & transactions for reporting
 Accounting policies applied to group F/S, changes from last financial year, and changes
resulting from new or revised standards under the AFRF.
 Procedures for dealing with components with different financial year-ends
 Group management’s process for obtaining an understanding of the accounting policies
used by components, and, where applicable, ensuring that uniform accounting policies are
used to prepare the financial information of the components for the group F/S
 Group management’s process for ensuring complete, accurate and timely financial
reporting by the components for the consolidation.
 Process for translating financial information of foreign components into currency of group.
 How IT is organized for consolidation, including manual and automated stages of process,
and manual and programmed controls in place at various stages of consolidation process.
 Group management’s process for obtaining information on subsequent events.
 Matters relating to consolidation adjustments:
 Process for recording consolidation adjustments, including preparation, authorization and
processing of related journal entries, & experience of personnel responsible for that
 The consolidation adjustments required by the applicable AFRF.
 Business rationale for events and transactions that gave rise to consolidation adjustments.
 Frequency, nature and size of transactions between components.
 Procedures for monitoring, controlling, reconciling and eliminating intra-group
transactions and unrealized profits, and intra-group account balances.
 Steps taken to arrive at the fair value of acquired assets and liabilities, procedures for
amortizing goodwill (where applicable), and impairment testing of goodwill.
ISA 600 Page 133

Appendix 4 (Ref: Para. A35)

Examples of a Component Auditor’s Confirmations
[Component Auditor Letterhead]
[Date]
[To Group Engagement Partner]
This letter is provided in connection with your audit of the group F/S of [name of parent] for the year
ended [date] for the purpose of expressing an opinion on whether the group F/S present fairly, in all
material respects (give a true and fair view of) the financial position of the group as at [date] and (of) its
financial performance and cash flows for the year then ended in accordance with [indicate AFRF].
We acknowledge receipt of your instructions dated [date], requesting us to perform the specified work
on the financial information of [name of component] for the year ended [date].
We confirm that:
 We will be able to comply with the instructions. / We advise you that we will not be able to comply
with the following instructions [specify instructions] for the following reasons [specify reasons].
 The instructions are clear and we understand them. / We would appreciate it if you could clarify the
following instructions [specify instructions].
 We will cooperate with you and provide you with access to relevant audit documentation.
We acknowledge that:
 The financial information of [name of component] will be included in the group F/S of [name of
parent].
 You may consider it necessary to be involved in the work you have requested us to perform on the
financial information of [name of component] for the year ended [date].
 You intend to evaluate and, if considered appropriate, use our work for the audit of the group F/S of
[name of parent].
In connection with the work that we will perform on the financial information of [name of component], a
[describe component, for example, wholly-owned subsidiary, subsidiary, joint venture, investee
accounted for by the equity or cost methods of accounting] of [name of parent], we confirm the following:
 We have an understanding of [indicate relevant ethical requirements] that is sufficient to fulfill our
responsibilities in the audit of the group F/S, and will comply therewith. In particular, and with
respect to [name of parent] and the other components in the group, we are independent within the
meaning of [indicate relevant ethical requirements] and comply with the applicable requirements of
[refer to rules] promulgated by [name of regulatory agency].
 We have an understanding of International Standards on Auditing and [indicate other national
standards applicable to the audit of the group F/S] that is sufficient to fulfill our responsibilities in the
audit of the group F/S and will conduct our work on the financial information of [name of
component] for the year ended [date] in accordance with those standards.
 We possess the special skills (for example, industry specific knowledge) necessary to perform the
work on the financial information of the particular component.
 We have an understanding of [indicate AFRF or group financial reporting procedures manual] that is
sufficient to fulfill our responsibilities in the audit of the group F/S.
We will inform you of any changes in the above representations during the course of
our work on the financial information of [name of component].
[Auditor’s signature] [Date]
[Auditor’s address]
ISA 600 Page 134

Appendix 5 (Ref: Para. A58)

Required Additional Matters Included in Group Engagement Team’s Letter of Instruction
 A request for component auditor, knowing the context in which his work would be used, to confirm
that component auditor will cooperate with group engagement team.
 The timetable for completing the audit.
 Dates of planned visits by group management and the group engagement team, and dates of planned
meetings with component management and the component auditor.
 A list of key contacts.
 Work to be performed by the component auditor, the use to be made of that work, and arrangements
for coordinating efforts at the initial stage of and during the audit, including the group engagement
team’s planned involvement in the work of the component auditor.
 Ethical requirements relevant to the group audit and, in particular, independence requirements
 In case of an audit or review of the financial information of the component, component materiality,
and threshold above which misstatements cannot be regarded as clearly trivial to group F/S.
 A list of related parties prepared by group management, and any other related parties that the group
engagement team is aware of, and a request that the component auditor communicates on a timely
basis to the group engagement team related parties not previously identified
 Work to be performed on intra-group transactions and unrealized profits and intra-group balances.
 Guidance on other statutory reporting responsibilities, for example, reporting on group
management’s assertion on the effectiveness of internal control.
 Where time lag between completion of the work on components and the group engagement team’s
conclusion on the group F/S is likely, specific instructions for a subsequent events review.
 Matters that are relevant to the conduct of the work of the component auditor:
 The findings of the group engagement team’s tests of control activities of a processing system that is
common for all or some components, and tests of controls to be performed by the component auditor.
 Identified significant risks of material misstatement of the group F/S that are relevant to the work of
the component auditor, and a request that the component auditor communicates on a timely basis
any other significant risks of material misstatement of the group F/S, due to fraud or error, identified
in the component and the component auditor’s response to such risks.
 Findings of internal audit function, based on work performed on controls at components.
 A request for timely communication of audit evidence obtained from performing work on
components that contradicts the original audit evidence.
 A request for a written representation on component management’s compliance with the AFRF, or a
statement that differences between the accounting policies applied to the financial information of the
component and those applied to the group F/S have been disclosed.
 Matters to be documented by the component auditor. other information
 A request that the following be reported to the group engagement team on a timely basis:
- Significant accounting, financial reporting and auditing matters, including accounting estimates
and related judgments.
- Matters relating to the going concern status of the component.
- Matters relating to litigation and claims.
- Significant deficiencies in internal control that the component auditor has identified during the
performance of the work on the financial information of the component, and information that
indicates the existence of fraud.
 A request that group engagement team be notified of any significant or unusual events earliest
A request that the matters listed in Para 41 be communicated to the group engagement team when the
work on the financial information of the component is completed
ISA 610 Page 135

ISA 610 (REVISED)

External auditor may make use of internal audit function for audit purposes in following ways:
 To obtain information relevant to risk assessment (ISA 315); or
 May decide to use work of internal audit function in partial substitution for own work

Definition of Internal Audit Function

Function of an entity that performs assurance and consulting activities designed to evaluate
and improve effectiveness of entity's governance, risk management and internal control
processes.

Activities Relating to Governance

 Assess governance process in its accomplishment of objectives

Activities Relating to Risk Management

 Identifying and evaluating significant exposures to risk and contributing to improvement
of risk management and internal control - including effectiveness of financial reporting
process
 Assist the entity in detection of fraud.

Activities Relating to Internal Control

 Evaluation of internal control.
 Examination of financial and operating information.
 Review of operating activities.
 Review of compliance with laws and regulations.

In this ISA “internal audit function” also includes relevant activities of other functions similar
to internal audit or outsourced third-party service providers

Determining Whether, in Which Areas, and to What Extent the

Work of Internal Audit Function Can Be Used (Ref: 15-16, A5-A14)
Professional judgment is exercised in determining whether the work of internal audit
function can be used for audit, and the nature and extent of the work. External auditor
evaluates the following:

1) The extent to which the internal audit function's organizational status and relevant
policies and procedures support the objectivity of the internal auditors; and

Objectivity refers to the ability to perform those tasks without allowing bias, conflict of
interest or undue influence of others to override professional judgments.
ISA 610 Page 136

Factors that may affect external auditor evaluation include whether:

- Organizational status of internal audit function, including authority and accountability,
supports the ability to be free from bias, conflict of interest or undue influence of others to
override professional judgments. E.g. whether they reports to TCWG or management
(if reports to management, whether it has direct access to TCWG)
- They are free of any conflicting responsibilities
- TCWG oversee employment decisions of internal audit function.
- There are any restrictions placed by management or TCWG.
- Their internal policies or relevant membership of professional bodies require their
compliance with relevant professional standards relating to objectivity

2) The level of competence of the internal audit function; and

Competence: Attainment and maintenance of knowledge and skills at the level required to
enable assigned tasks to be performed diligently and accordance with professional standards.

Factors that may affect external auditor evaluation include whether:

- They are properly resourced relative to size of entity and nature of operations.
- Are there established policies for hiring, training & assigning them to their engagements.
- They have adequate technical training and proficiency in auditing
- They possess required knowledge and skills relating to the entity's financial reporting and
the AFRF
- They are members of relevant professional bodies that oblige them to comply with relevant
professional standards including continuing professional development.

3) Whether the internal audit function applies a systematic and disciplined approach,
including quality control.

Factors for such determination include the following:

 Existence, adequacy and use of documented internal audit procedures or guidance
covering such areas as risk assessments, work programs, documentation and reporting,
nature and extent of which is matching with size and circumstances of an entity.
 Whether they has appropriate quality control policies and procedures. (e.g. leadership,
human resources and engagement performance) or quality control requirements in
standards set by relevant professional bodies for internal auditors. Such bodies may also
establish other appropriate requirements such as conducting periodic external quality
assessments

External auditor shall not use the work of the internal audit function if he evaluates that some or
all of the above 3 factors are not present.
ISA 610 Page 137

Factors Affecting the Determination of the Nature and Extent of the Work of the Internal
Audit Function that Can Be Used (Ref: 17-20, A15-A23)

Examples of work of internal audit function that can be used by external auditor
 Testing of the operating effectiveness of controls.
 Substantive procedures involving limited judgment.
 Observations of inventory counts.
 Tracing transactions through the information system relevant to financial reporting.
 Testing of compliance with regulatory requirements.
 Audits or reviews of financial information of subsidiaries that are not significant
components to the group (ISA 600)

External auditor shall make all significant judgments in audit engagement and shall plan to
use less of the work of the internal audit function and perform more of the work directly

Amount of judgment needed in planning, performing and evaluating such work and the
assessed risk of material misstatement at the assertion level are inputs to the external
auditor's determination.

External auditor shall also communicate with TCWG how the external auditor has planned to
use the work of the internal audit function.

Using the Work of the Internal Audit Function (Ref: 21-25, A24-A30)

The external auditor is required to evaluate whether:

 The work was properly planned, performed, supervised, reviewed and documented;
 Sufficient, appropriate evidence was obtained to draw reasonable conclusions;
 Appropriate conclusions were reached, consistent with any reports prepared;
 Any exceptions or unusual matters were properly resolved.

It useful for the external auditor to agree the following in advance with internal audit:
 Nature, timing and extent of such work
 Materiality and performance materiality
 Methods of item selection and sample sizes
 Documentation of work performed
 Review and reporting procedures.

After evaluating specific areas of work, external auditor may then perform further procedures:
 Making inquiries of appropriate individuals within the internal audit function;
 Observing procedures performed by internal audit;
 Reviewing the internal audit function’s work program and working papers;
 Re-performing a sample of the procedures to validate conclusions reached.
ISA 610 Page 138

Nature, timing and extent of testing specific work of internal audit function will depend upon:
 External auditor’s judgment of the risk and materiality of each area concerned;
 Preliminary assessment of the internal audit function; and
 Evaluation of specific work of the internal audit function.

Documentation

 Conclusions about the adequacy of the internal audit function and its work
 The audit procedures performed by him on that work.

Direct assistance (Ref: 26-32, A31-A41)

Direct assistance: Direct assistance is defined as the use of internal auditors to perform audit
procedures under the direction, supervision and review of the external auditor

Internal auditors may not provide direct assistance if:

 There are significant threats to the objectivity of the internal auditor; or
 The internal auditor lacks sufficient competence to perform the proposed work.

When determining nature and extent of work to be assigned, external auditor shall consider:
 Amount of judgment involved;
 Assessed risk of material misstatement;
 External auditor’s evaluation of the existence of threats to the objectivity and level of
competence of the internal auditors;
 Whether in aggregate the external auditor would remain sufficiently involved in the audit

ISA 610 precludes the use of internal audit to perform direct assistance procedures that:
 Involve making significant judgements in the audit;
 Relate to higher assessed risks of material misstatement where higher judgment is
required in performing relevant audit procedures or evaluating audit evidence gathered;
 Relate to work with which internal auditors have been involved and which has already
been, or will be, reported to management or TCWG by the internal audit function; or
 Relate to the decisions of using work of internal auditor or using his direct assistance.

Using internal auditors to provide direct assistance (Ref: 33-35, A24-A30)

Prior to using internal auditors to provide direct assistance, the external auditor shall:
 Obtain written agreement from an authorized representative of the entity that the internal
auditors will be allowed to follow the external auditor’s instructions, and that the entity
will not intervene in that work; and
 Obtain written agreement from internal auditors that they will keep confidential specific
matters as instructed by the external auditor and inform external auditor of any threat to
their objectivity.
ISA 610 Page 139

Direction, supervision and review by external auditor

 It must be sufficient in order to be satisfied that internal auditors have obtained sufficient
appropriate audit evidence to support the conclusions based on that work.
 External auditor shall remain alert for indications that existence and significance of threats
to objectivity and level of competence of the internal auditors are no longer appropriate.

Documentation (Ref: 36-37)

The external auditor is required to document:

 The evaluation of existence and significance of threats to objectivity of internal auditors,
and the level of competence of the internal auditors used to provide direct assistance;
 Basis for decision regarding nature and extent of the work performed by internal auditors;
 Who reviewed the work performed and the date and extent of that review;
 Written agreements obtained from an authorized representative of entity and the internal
auditors; and
 Working papers prepared by internal auditors who provided direct assistance on the audit.

Communication with those charged with governance

External auditor shall communicate the planned use of the work of the internal audit function
to TCWG for their understanding of the proposed audit approach.

Important Paragraphs 15,16, 18, 23,24,28-30,33, 34, 36, 37, A1, A7, A8, A11, A16,
A24, A25, A32
ISA 620 Page 140

ISA 620

Auditor's expert An individual or organization possessing expertise in a field other than

accounting or auditing, whose work in that field is used by auditor to assist auditor in
obtaining sufficient appropriate audit evidence.
An auditor's expert may be either an auditor's internal expert (who is a partner or staff,
including temporary staff, of auditor's firm or a network firm), or an auditor's external expert.

Determining the Need for an Expert (Ref: 7, A4-A9)

An auditor may obtain a understanding of the field of expert through:

 Experience in auditing entities that require such expertise.
 Education or training in particular field.
 Discussion with auditors having performed similar engagements

Whether to use Auditor’s expert (Considerations)

 Nature and significance of the matter, including its complexity.

 Risks of material misstatement in the matter.
 Expected nature of procedures including auditor's knowledge of and experience with the
work of experts
 Availability of alternative sources of audit evidence.
 Whether management has used a management's expert
- Nature, scope and objectives of his work.
- Whether he is employee or outsourced
- Extent of possible control or influence of entity over him.
- His competence and capabilities.
- Whether he is subject to technical performance standards or other professional or
industry requirements
- Any controls within entity over his work.

Benefit of using Auditor’s expert

 Understanding of entity & environment including internal control.

 Identifying and assessing the risks of material misstatement.
 Determining and implementing further audit procedures.
 Designing & performing tests of controls or substantive procedures
 Evaluating sufficiency & appropriateness of audit evidence.
ISA 620 Page 141

Nature, Timing and Extent of Audit Procedures(Ref: 8, A10-A13)

Auditor shall consider matters including:

 Nature of the matter to which that expert's work relates;
 Risks of material misstatement;
 Significance of expert's work in context of audit;
 Auditor's knowledge of and previous experience with that expert
 Whether internal expert is subject to firm quality control policies
- Competence and capabilities (Recruitment & training)
- Objectivity (Ethical Requirements).
- Evaluation of the adequacy of the expert's work
- Adherence to regulatory and legal requirements.
- Agreement with the expert.

Need for different or more extensive procedures (factors):

 Work of expert involving subjective and complex judgments.

 Auditor has not previously used expert’s work, and has no prior knowledge of his
competence, capabilities and objectivity.
 Expert is performing procedures that are integral to the audit
 He is external expert (not subject to firm quality control policies)

Competence, Capabilities and Objectivity of Expert & Obtaining an Understanding of

the Field of Expertise of Expert (Ref: 9, A14-A20)
Similar to that of Management Expert (Please Refer to ISA-500)

Agreement with the Expert (Ref: 11, A23-A31)

Following factors may suggest need for more detailed agreement or for the agreement to be
set out in writing:
 Expert will have access to sensitive or confidential information.
 Respective roles or responsibilities of auditor and expert are different from those normally
expected.
 Multi-jurisdictional legal or regulatory requirements apply.
 The matter to which the expert's work relates is highly complex.
 Auditor has not previously used work performed by that expert.
 Greater extent of expert's work, and its significance for audit.
ISA 620 Page 142

Agreement between the Auditor and External Expert (Appendix)

Nature, Scope and Objectives of External Expert's Work
- Nature and scope of procedures to be performed.
- Objectives of the external expert's work in context of audit
- Any relevant technical performance standards or other requirements.
- Assumptions and methods, including models, expert will use.
- Effective date and testing period (if applicable) for the subject matter.
The Respective Roles and Responsibilities of the Auditor and the Expert
- Relevant auditing & accounting standards, and regulatory requirements
- Expert's consent to intended use of his report, including any reference
- Nature and extent of the auditor's review of expert's work.
- Whether the auditor or the expert will test source data.
- Expert's access to records, files, personnel and management’s experts.
- Procedures for communication between the expert and the entity.
- Auditor's and the expert's access to each other's working papers.
- Ownership and control of working papers during & after engagement.
- Expert's responsibility to perform work with due skill and care.
- Expert's competence and capability to perform the work.
- Expectation that expert will use all knowledge for subject matter.
- Any restriction on expert's association with auditor's report.
Communications and Reporting
- Methods and frequency of communications, including:
 How expert's findings or conclusions will be reported.
 Identification of team members who will coordinate with expert.
- When expert will complete work and report findings or conclusions.
- Expert's responsibility to communicate
 Promptly any potential delay in completing work and any potential
reservation or limitation.
 Instances of scope limitation imposed by management.
 All information that expert believes may be relevant to the audit.
 Circumstances that may create threats & any relevant safeguards.
Need to observe Confidentiality
- Relevant ethical requirements of confidentiality applicable to auditor.
- Additional requirements that may be imposed by law or regulation.
- Specific confidentiality provisions requested by the entity, if any.

If there is no agreement, evidence of agreement may be included e.g.:

 Planning memoranda or related working papers
 Policies and procedures of the auditor's firm.
ISA 620 Page 143

Evaluating the Adequacy of the Expert's Work (Ref: 12-13, A32-A40)

a) Relevance and reasonableness of expert's findings or conclusions and consistency with
other audit evidence
Findings and Conclusions of the Expert
- Inquiries of the expert.
- Reviewing the expert's working papers and reports.
- Corroborative procedures, such as:
 Observing the expert's work;
 Examining published data e.g. authentic statistical reports etc;
 Confirming relevant matters with third parties;
 Performing detailed analytical procedures; and
 Re-performing calculations.
- Discussion with another expert with relevant expertise (if inconsistent)
- Discussing the expert's report with management.
Relevance and Reasonableness
- Presented in a manner consistent with standards of expert's profession;
- Clearly expressed, including reference to objectives agreed, scope of the work performed
and standards applied;
- Based on appropriate period and take into account subsequent events
- Subject to any reservation, limitation or restriction on use;
- Based on consideration of errors or deviations encountered.
b) If that expert's work involves use of significant assumptions and methods, relevance and
reasonableness of those assumptions and methods in the circumstances; and
c) If that expert's work involves the use of source data that is significant to that expert's
work, the relevance, completeness, and accuracy of that source data.

INADEQUATE WORK
If auditor determines that work of expert is not adequate, he shall:
 Agree with that expert on nature and extent of further work; or
 Perform additional audit procedures
- If auditor concludes that he cannot resolve matter through additional procedures, he
may express a modified opinion

Reference to the Expert in the Auditor's Report (Ref: 14-15, A41-A42)

Auditor shall not refer to work of an expert in auditor report containing an unmodified
opinion unless required by law
 If such reference is required by law, auditor shall indicate in report that reference does not
reduce auditor's responsibility.
If auditor makes reference to work of expert in report because such reference is relevant to
explain modification to the opinion,
 Indicate that reference does not reduce auditor's responsibility.
 May need the permission of expert before making such reference.
Important Paragraphs 8, 11, 12, 14, 15, A4, A7-A10, A13, A15, A20, A24, A33, A34