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AAA – BY KASHIF KAMRAN

LECTURE 7- BLOCK 1
Topic 6: Using the work of others
Learning objective:

 Who others are? In the context of the external auditor

 Criteria to use the work of others (pre-requisite of using the work of others)
 Significant component / component auditor?
 Practice of past paper
Who others are?
ISA-600, ISA-610 & ISA-620

 ISA-600 – Group audit (Parent auditor versus the component auditor (Subsidiary auditor))
 ISA-610- Using the work of internal auditor
 ISA-620- Using the work on an expert
Criteria to use the work of others (pre-requisite of using the work of others)
Whenever the external auditor, uses the work of others, given in ISA-600 series, the external auditor should
ensure before using or relying on the work of others that: (ICED)

 The other is independent (I)

 The other is competent (C)
 The other is experienced (E)
 The work perform by other is well documented. (D)
Examples
1. If the internal auditor is working under directors is the internal audit independent? (e.g. the IA report
directly to finance director) – No
2. If the internal auditor in working under audit committee is the IA independent? Yes, definitely
3. The internal audit department was recently established? Is the department experienced? No
4. The legal expert is a friend of the finance directors or the legal expert has a shareholding in the company
of which he is a legal expert? Is the legal expert independent? No
5. Qualification/ certifications etc. to pick up the competence of the others?
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Group audit

 Group involve a parent company and subsidiaries

 Group audit-
o involves a parent auditor and a component(subsidiary) auditor
o parent auditor is also known as the principal auditor or is also known as the group auditor
o parent auditor is responsible for the audit of:
 the parent company financial statement
 the consolidated financial statement
o The group can involve many subsidiaries- some of which will be significant. What is a significant
subsidiary and how will you decide in exam paper is the subsidiary significant?
 A significant subsidiary is the one which is 15% or more of the group profit / or revenue
or total asset.
 Not only the 15% threshold is important to judge a significant components- if in the exam
the financial numbers are not given, and you cannot identify the % to judge whether the
component is significant or not , then use other criteria to judge whether the
component is significant or not
 New subsidiary acquired during the year
 Loss making subsidiary
 Subsidiary on which some legal case is going on/ or something special in the case
 What if a subsidiary is not 15% of the group total assets/ or profit / or revenue when you
find the % on the calculator BUT the question mention that the subsidiary is newly
acquired/ loss making/ has some legal case going on etc.
o Summary – for student
 If the subsidiary is 15% or more – conclude its significant
 If the subsidiary is less than 15% - look into other factors to conclude whether the
component is significant or not
 If the % calculation is not possible- then look into other factors to conclude whether the
component is significant or not
o Should the group auditor/ parent auditor identify – which component of the group are significant
at the planning stage of group audit? YES
Situation – involving significant components
Suppose, Unilever plc. In UK is audited by PWC so PWC is the parent auditor. The parent auditor identified one
subsidiary of Unilever which is significant i.e. for e.g. Unilever in China. What if?
1. Unilever China is audited by PWC in China (no application of ICED)
2. Unilever China is audited by another firm of auditor (Yes, ICED will be applied)
Conclusion

 For the parent auditor the first step is to identify the significant component/s of the group
 In the second step the parent auditor need to evaluate which of the significant component are audited
by another firm (which is not the same as parent auditor)
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Past papers – drill

1. 12/13- Q1C
2. 06/14-Q1B
3. 12/14-Q3A
4. 12/16-Q1B
5. 06/18-Q1B
06/18- Q1b

1(b) To assist the audit assistants’ understanding of our audit strategy in respect of Borzoi Co:
(i) Explain the term ‘significant component’ (2 mark) and assess whether Borzoi Co is a significant
component of the Group, and (if you find the % it will give you 1 mark+ you will get 2 mark to conclude on
the basis of % or other factors that Barzoi is a significant component)
(ii) Discuss the nature and extent of involvement which our firm should have with the audit risk assessment
to be performed by Saluki Associates. (8 marks)- (Each nature and extent is worth 2 marks – from above we
are now left with 5 marks/ 2 = 3 points to write here)

B(i)
Significant component
A significant component to the group can be on the basis of qualitative or quantitative factors. The quantitative
factors includes, that for a component to be significant must be 15% or more of the group total assets, revenue
or profit. The qualitative factors includes other special matters pertaining to the component like a new
subsidiary, or a foreign subsidiary etc. (2)

Borzoi
Borzoi total assets are 68 million Oska which at the current exchange rate coverts to $17 million. On this basis
Borzoi is 17.8% of the group total assets. (1)
On the basis of 17.8% Borzoi is a significant component for the Bassett group as it is more than 15% of the
threshold which define whether a component is significant or not (2).
Moreover, Borzoi is also significant on the basis of being the only foreign subsidiary in the group located out of
the home country and also facing issues like political turmoil and currency fluctuations. (2)

B(ii)- Nature and extent of involvement by Whippet with Saluki Associates.

 Whippet in order to ensure that risk assessment procedures have been well performed by Saluki in
context of Borzoi, Whippet will need to review the planning working papers of Saluki to conclude
whether risk assessment has been rightly performed (2)
 Further Whippet can ask Saluki to perform additional risk assessment procedures including asking
Saluki to focus on some other risk not identified by Saluki yet to ensure that risk assessment has been
thoroughly performed (2)

Tutor note: Please read the article GROUP AUDIT – as it will be excellent for your knowledge
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Dec 16- Q1b

1(b) Discuss the matters to be considered in determining the assistance which could be provided by, and the
amount of reliance, if any, which can be placed on the work of ZCG’s internal audit department; (7 marks)

Brainstorming
Discuss the matters – each matter discussed in worth 2 marks – i.e. 7 marks / 2 – you will be discussing 4 matters

 Assistance which can be provided by IA to EA

o Can it lead to efficiency ? yes
o Internal controls / test of control- can reduce amount of work in external audit
 Amount of reliance the EA can put on the work of IA
o ICED? Application to the case
o If ICED is in favour of IA - the reliance will increased
o If the ICED is against IA – the reliance will reduce

Points-

 Well established department ( old ones- a lot of experience)

 Range of services – so the scope of department work is good / lot of monitoring
 Qualified accountants – head the department
 Report to group finance department
 Irregularities (Assistance)
o Authorization of expenses
o IT controls
o Payroll fraud
Assistance – some suggestions

 Except for independence most of the matters goes in favour or reliance which means assistance is
possible from the IA
 The irregularities already identified will help improve efficiencies for external auditor as the EA can pick
the issues identified by IA as risky areas and during the course of audit EA can perform more procedures
in areas of irregularities and be skeptical. ( lot of time will be saved in identifying issues as they are
already identified by IA)

Tutor note: Complete this answer and email me as assignment at aaamock@gmail.com

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Lecture 7 assignment

 Read 2 articles – see the title slides

 Complete the Q-Dec 16 Q1b and email me
 Do the rest of these questions yourself and email me
o 12/13- Q1C
o 06/14-Q1B
o 12/14-Q3A
Lecture 8 coming up – what to expect

 Topic 7- opening balances

 Topic 8 – Joint audit