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Audits of Group Financial Statements

Audits of Group Financial Statements . 2013 GAO / CIGIE Governmental Accounting and Auditing Update Jeff Markert, Department of Professional Practice, KPMG LLP Scot Janssen, Federal Audit Partner, KPMG LLP. New AICPA Standard on Group Audits.

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Audits of Group Financial Statements

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  1. Audits of Group Financial Statements 2013 GAO / CIGIE Governmental Accounting and Auditing Update Jeff Markert, Department of Professional Practice, KPMG LLP Scot Janssen, Federal Audit Partner, KPMG LLP

  2. New AICPA Standard on Group Audits AICPA AU-C Section 600 – Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors) Project on Clarifying Auditing Standards Effective: Now! Group Audits Ending After Dec. 15, 2012

  3. Group Audits – AICPA Technical References • "AU-C Section 600 – Audits of Group Financial Statements" an excerpt from the Clarified Auditing Standards Toolkit • SAS No. 127, Omnibus Statement on Auditing Standards—2013 • TIS Section 8800, Audits of Group Financial Statements and Work of Others, which is available in Technical Practice Aids, along with all other Technical Questions and Answers • Audit Risk Alert Understanding the Responsibilities of Auditors for Audits of Group Financial Statements • "What are Group Audits?" an excerpt from the Audit Risk Alert Understanding the Responsibilities of Auditors of Group Financial Statements

  4. Q: What Standards have Changed? Superseded: • AU Section 543 - Part of Audit Performed by Other Auditors • Focus was: Conducting audits that involve other auditors In Addition: • AU-C 600 significantly broadens scope • Brings together information that was throughout the standards • Assists understanding roles of group and component auditors • Focus now: How to conduct an effective audit of group financial statements

  5. Terminologies Changes

  6. When is an Audit a “Group Audit”? • Group Audit – Is the audit of a group of financial statements • Group – Always consists of two or more components • Component – Is an entity or business activity for which group or component management prepares financial information that should be included in group financial statements

  7. Identifying a Group Audit?

  8. What is a Component?

  9. Federal Agency Examples

  10. Federal Entities that MAY not be Group Audits • Stand-alone Audits Within a Group • Individual components, bureaus, OAs, etc… • Separate Reporting Entity Audits • Accountability of Tax Dollars Act Agencies • Government Corporations • Single Program Audits • Trust Fund Audits

  11. Knowledge Check #1 It is a group audit because air traffic control towers are in every major airport. It is a group audit because the its grants are material to the consolidated financial statements. It is a group audit based on the auditors judgment. It is a group audit because it has two components.

  12. Answer 2: Identifying Significant Components

  13. How Does the New Standard Affect My Audit? • Group Auditor • Acceptance • Identify Significant Components • Materiality • Working with Component Auditor • Communications • Forming an opinion • Component Auditor • Cooperation • Communications

  14. Engagement Acceptance AU-C 600 Shifts Mindset of Group Auditor… From: • “…group engagement team coverage of the principal amounts, and reliance on other (component) auditors…” To: • “…the sufficiency of the group engagement teams involvement in the performance of the audit…” (AICPA Audit Risk Alert 2012, par. 53) • [Group auditors’] “…ability to obtain “sufficient appropriate audit evidence…” (AICPA Audit Risk Alert 2012, par. 52)

  15. Identify Significant Components

  16. Identifying Significant Components • Significant components are determined based on Individual financial significance • Generally, select a benchmark and percentage that will be applied to determine the financially significant components • Significant components can also exist based on “risk of material misstatement” even if the component is not individually financially significant. • Non-significant component based on financial and risk evaluation. Type of component is based on group auditor judgment, and evaluation of whether the remaining financial information is significant

  17. Group Audit Strategy • If additional significant risks of material misstatements are identified, using auditor judgment, apply requirements of risk-based significant components • Interpretation • Audit of the complete set of component financial statements

  18. Group Audit Strategy (Flowchart)

  19. Component Matrix Example Financially Significant Not financially significant But with significant risks Non Significant

  20. Knowledge Check #2 • One or more benchmarks can be applied to determine financially significant components. • The group auditor must perform analytical procedures for non-significant components. • Significant components can exist based on risk of material misstatement even if the component is not financially significant. • The sum of financially significant components (using the chosen benchmark), must exceed 80% of the group total.

  21. Answer 2: Identifying Significant Components

  22. Materiality for Group Audits – Key Terms • Group Materiality • Component Materiality • Group Aggregation Risk

  23. Component Materiality Factors to consider when setting component materiality: • Number of Components • Nature and extent of misstatements expected in the current period • Nature and extent of accounting judgments made at the components • Proportion of the group not subject to audit – untested balances • Set component materiality less than group materiality • Must still evaluate the risk of misstatement in untested balances

  24. Determining Component Materiality A B C D E

  25. Group Auditor – Aggregation Risk The risk that the aggregate of (1) uncorrected and undetected misstatements and (2) individually immaterial misstatements may cause the group financial statements to be materially misstated.

  26. Group Auditor: Evaluation of Untested Amounts Evaluate whether the remaining financial information is significant B A A C C 85%

  27. Knowledge Check #3 Component materiality is always the same for all components. Component materiality cannot exceed 75% of group materiality. Component materiality must be set below group materiality. The sum of untested line item balances in components cannot exceed performance materiality.

  28. Answer 3: Materiality

  29. Group Auditor: Involvement in Component Audit • Involvement • (Extent of involvement increases along with the significance of the component) OLD Standard (AU 543) . Start AddRequirements • Component business understanding • Risk assessment • Evaluate misstatement due to fraud • Review significant risks of material misstatement in component (Remove Requirement) • That portion audited by the other auditor is • not material NEW Standard (AU-C 600) . Finish

  30. Communications with Component Auditor • Communications • (All Previous AU-543 Requirements Apply) (When Making Reference – par.41) • Confirm use of component auditors report and cooperation with group auditor • Ethical requirements relevant to group audit • List of related parties, and commitment to inform of changes promptly • Identified significant risks of material misstatement of the group financial statements relevant to work of component auditor (Additional requirements for component auditor to report to the group) AU-C 600 -- Places Emphasis on Effective Two-Way Communications And… (When Accepting Responsibility – par.61) • Compliance with audit instructions • Instances of non-compliance with L&R • Significant risks of misstatement due fraud or error • List of corrected and misstatements • Indicators of management bias • Description of MW and SD in internal control • Other findings and issues and should be communicated to those charged with governance

  31. Documentation from Component Auditor • Documentation • (All Previous AU-543 Requirements Apply) (When Making Reference para. 50 ) • The financial statements of the component and auditors’ report • The basis for determination that component audit was performed in accordance with applicable standards and framework • Group report discloses the amounts audited by component auditor • AU-C 600 -- Clarifies and adds documentation requirements Such as …. (When Accepting Responsibility para. 65 ) • All communications required by para. 61 • Extent of group involvement in significant components, and risk areas • Evaluation of the appropriateness of materiality used at component level • Group engagement team’s review of component auditor’s work • Additional subsequent event procedures

  32. Group and Component Auditor Subsequent Events • Group or component auditors perform subsequent event procedures through date of group audit report • Practical considerations: • Timing of component auditors report • Legal / Governance structure • Group managements process to identify component subsequent events • Subsequent Events • (AU-C 600 Clarified Requirements Apply) In addition – When Making Reference • Request written representation from component management on subsequent events • Read available interim financial information of the component and make management inquiries • Read communications from regulators and auditors, OMB, GAO, Treasury, OIG, etc… • Read minutes and relevant communications from internal sources and those with governance responsibility • Inquire of group management, legal, budget, etc…

  33. Knowledge Check #4 The group auditor is not responsible for subsequent events of components after the date of the other auditor’s opinion The group auditor can refer to either the audit opinion or review report issued by the component auditor The group engagement team or component auditors should perform subsequent events procedures through the date of the group auditors’ report Subsequent events procedures on components should only be performed by the auditor that audited the component

  34. Answer 4: Subsequent Events

  35. Evaluating Sufficiency and Appropriateness of Audit Evidence Obtained • Evaluate component auditor’s communication including: • Significant findings and issues • Component management • Group management • Evaluate sufficiency of audit evidence obtained from audit procedures performed by both the group and component auditors on the financial information of the components • Evaluate effect of any uncorrected misstatements (either identified by group engagement team or communicated by component auditors) and instances where there has been an inability to obtain sufficient appropriate audit evidence • Group auditor must obtain “sufficient appropriate audit evidence” Other (additional) procedures required when not making reference

  36. Group Audit – Efficiency Opportunities • Adapt audit of a significant component to meet specific needs of the group and other components • Exclude certain accounts from audit of component because they are performed at the group level • Shared service centers may be tested at the group or component level • If same audit team is performing audit of group and components: • Flexibility in organizing workpapers and maintaining documentation • Test and rely on group-wide controls • Component auditor may issue conclusion memorandum. • Efficiency options are more substantial when group • and component auditor are the same

  37. Thank You for Attending!

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