NCA 600 : un changement inévitable

By Chi Ho Ng
Illustration: Ryan Snook

For auditing standards to keep pace with the times, change is inevitable

Like the 2008 US presidential elections, change is the buzzword in the public accounting profession. One of the new standards that epitomizes this change is Canadian Auditing Standard (CAS) 600, “Special Considerations — Audits of Group Financial Statements (Including the Work of Component Auditors).” It will replace current Section 6930, “Reliance on Another Auditor” and becomes effective for periods beginning on or after December 15, 2009.

As Thomas Jefferson wrote: “I am not an advocate for frequent changes in laws and constitutions, but laws and constitutions must go hand in hand with the progress of the human mind. As that becomes more developed, more enlightened, as new discoveries are made, new truths discovered and manners and opinions change, with the change of circumstances, institutions must advance also to keep pace with the times.” So too must the auditing standards change to keep pace with the times.

CAS 600 is an adoption of International Standard on Auditing (ISA) 600 issued by the International Auditing and Assurance Standards Board. The IAASB started to revise ISA 600 in 2002. The project took a long time to finalize because it was difficult to reach consensus on complex issues associated with group audits and the inappropriately diverse practices followed in auditing group financial statements. After significant input from stakeholders (including those in Canada), the IAASB developed more stringent requirements and guidance that are capable of consistent application, which the IAASB believes will improve the quality of group audits. Following its policy of adopting ISAs as CASs, the Auditing and Assurance Standards Board approved CAS 600 in November 2007.

Section 6930 “Reliance on Another Auditor” is quite old (it became effective in January 1981). Times have changed. CAS 600 introduces a number of new concepts and will require a significantly increased work effort from that required by current Section 6930.

When do I have to apply CAS 600? As most auditors would expect, CAS 600 applies in circumstances where the auditor is auditing consolidated financial statements of a parent and its subsidiaries (or joint ventures or investees accounted for by the equity method) when other auditors are involved in auditing one or more components. But CAS 600 can also apply when the audit does not encompass investees or the work of other auditors. The key driver for the use of CAS 600 is whether components are significant to the preparation (and consequently the audit) of the entity’s financial statements. A component is defined in the CAS as an “entity or business activity for which group or component management prepares financial information that should be included in the group financial statements.” A component can exist if management prepares financial information for various categories or groups of functions, products or services (perhaps a geographic area) and then aggregates the information in preparing the entities’ financial statements. For example, various projects of a construction company or the foreign operations of a charitable organization may be considered components even though they are part of a single legal entity.

What is my role as group engagement partner? Section 6930 focuses on the reliance of a primary auditor on the work of one or more secondary auditors. The concept of reliance does not underlie CAS 600. Rather, the standard clearly emphasizes and provides specific requirements and guidance on the overall responsibilities of the group engagement team, in particular, the group engagement partner, for the group audit. The group engagement team is composed of the partners, including the group engagement partner and staff who establish the overall group audit strategy, communicate with component auditors, perform work on the consolidation process and evaluate the conclusions drawn from the audit evidence as the basis for forming an opinion on the group financial statements. Regarding the specific responsibilities of the group engagement partner, CAS 600 echoes requirements in other standards, such as those dealing with quality control and terms of engagement. It states, for example, that the group engagement partner is responsible for the direction, supervision and performance of the group audit engagement in compliance with professional standards and regulatory and legal requirements, and whether the auditor’s report issued is appropriate in the circumstances.

Are there circumstances when my firm should not become group auditor? The public accountant will no longer be able to accept an engagement or will be required to resign from the engagement, if he or she concludes it will not be possible for the group engagement team to obtain sufficient appr0priate audit evidence due to restrictions imposed by group management and the possible effects of this inability will result in a disclaimer of opinion on the group financial statements. Section 6930 discusses such situations but only requires that the auditor express a reservation of opinion.

How do I determine materiality in a group audit situation? Setting materiality in group audit situations has always been a difficult matter for auditors to come to grips with. It may be easy to set materiality for the group level as a whole but how does an auditor set materiality for particular classes of transactions, account balances or disclosures in the group financial statements and the component materiality? CAS 600 contains requirements and guidance for the auditor to determine four levels of materiality:

materiality level for group financial statements as a whole;
particular classes of transactions, account balances or disclosures in the group financial statements;
component materiality; and
threshold above which misstatements cannot be regarded as clearly trivial.

Will the work effort on group audits increase as a result of this CAS? Based on stakeholders’ responses, the requirements in the CAS may result in substantially more effort. It depends how advanced the current practices followed by the auditor are. For example:

The group engagement team is required to establish an overall group audit strategy and develop a group audit plan that will be reviewed by the group engagement partner.
The group engagement team is required to obtain an understanding of the group, its components and their environments.
The group engagement team is required to obtain a deeper understanding of the attributes of component auditors, such as whether it will be able to be involved in the work of the component auditor to the extent necessary to obtain sufficient appropriate audit evidence, as well as whether the component auditor operates in a regulatory environment that actively oversees auditors.
The group engagement team is required to communicate more extensively with the component auditors. For example, matters such as ethical requirements that are relevant to the group audit must be communicated.

The CAS also contains requirements beyond those in Section 6930 relating to:

different work efforts depending on whether the component is considered to be significant or not significant;
the audit of the consolidation process and subsequent events;
communications with group management and those charged with the group’s governance and documentation requirements.

Steps to cope with these significant changes:

Familiarize yourself with CAS (ISA) 600. ISA 600 is now posted online (www.ifac.org/Members/DownLoads/ISA_600_%28Revised_and_Redrafted%29_Final.pdf). It is a very substantial standard containing 50 requirements, 66 application material paragraphs and example reports.
Identify clients that may be in a group audit situation. Find out whether “components” are significant to the preparation (and consequently the audit) of the entity’s financial statements.
Assess the impact on your audit methodology. Depending on your current practice, you may need to change your audit methodology in group audit situations.
Provide training to your staff. The changes to audits of group financial statements are extensive and your staff needs to be kept up to date with these changes.
Communicate with your client, component auditors and other stakeholders. Meeting the requirements of CAS 600 has the potential to affect everyone. For example, your communications with your client may be more extensive and you may be much more involved in the work of the component auditors. It is your responsibility to make sure that they are aware of that.

And remember Charles Darwin’s words: “It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.”

Chi Ho Ng, CA, is a principal with CICA’s Assurance Standards

Technical editor: Ron Salole, vice-president, Standards, CICA