• a22162

Audits of Group Financial Statements

Updated: 5 days ago



A component auditor may be required by statute, regulation or for another reason, to express an audit opinion on the financial statements of a component. The group engagement team may decide to use the audit evidence on which the audit opinion on the financial statements of the component is based to provide audit evidence for the group audit.


Component means an entity or business activity for which group or component management prepares financial information that should be included in the group financial statements.


Component auditor means an auditor who, at the request of the group engagement team, performs work on financial information related to a component for the group audit.


The group engagement partner is required to be satisfied that those performing the group audit engagement, including component auditors, collectively have the appropriate competence and capabilities. The group engagement partner is also responsible for the direction, supervision and performance of the group audit engagement.


The objectives of the auditor of the group financial statements are:


(i) To communicate clearly with component auditors about the scope and timing of their work on financial information related to components and their findings; and


(ii) To obtain sufficient appropriate audit evidence regarding the financial information of the components and the consolidation process to express an opinion on whether the group financial statements are prepared, in all material respects, in accordance with the applicable financial reporting framework.


Responsibility

The 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 whether the auditor’s report that is issued is appropriate in the circumstances . As a result, the auditor’s report on the group financial statements shall not refer to a component auditor, unless required by law or regulation to include such reference. If such reference is required by law or regulation, the auditor’s report shall indicate that the reference does not diminish the group engagement partner’s or the group engagement partner’s firm’s responsibility for the group audit opinion.


Acceptance

The group engagement partner shall determine whether sufficient appropriate audit evidence can reasonably be expected to be obtained in relation to the consolidation process and the financial information of the components on which to base the group audit opinion. For this purpose, the group engagement team shall obtain an understanding of the group, its components, and their environments that is sufficient to identify components that are likely to be significant components. Where component auditors will perform work on the financial information of such components, the group engagement partner shall evaluate whether the group engagement team will be able to be involved in the work of those component auditors to the extent necessary to obtain sufficient appropriate audit evidence.


If the group engagement partner concludes that:


(a) it will not be possible for the group engagement team to obtain sufficient appropriate audit evidence due to restrictions imposed by group management; and


(b) the possible effect of this inability will result in a disclaimer of opinion on the group financial statements,


the group engagement partner shall not accept the new engagement.


Obtaining an Understanding at the Acceptance Stage


In the case of a new engagement, the group engagement team’s understanding of the group, its components, and their environments may be obtained from:


• Information provided by group management;


• Communication with group management; and


• Where applicable, communication with the previous group engagement team, component management, or component auditors.


The group engagement team’s understanding may include matters such as the following:


• The group structure, including both the legal and organizational structure (that is, how the group financial reporting system is organized).


• Components’ business activities that are significant to the group, including the industry and regulatory, economic and political environments in which those activities take place.


• The use of service organizations, including shared service centers.


• A description of group-wide controls.


• The complexity of the consolidation process.


• Whether component auditors that are not from the group engagement partner’s firm or network will perform work on the financial information of any of the components, and group management’s rationale for appointing more than one auditor.


• Whether the group engagement team:


o Will have unrestricted access to those charged with governance of the group, group management, those charged with governance of the component, component management, component information, and the component auditors (including relevant audit documentation sought by the group engagement team); and


o Will be able to perform necessary work on the financial information of the components.


Expectation to Obtain Sufficient Appropriate Audit Evidence


A group may consist only of components not considered significant components. In these circumstances, the group engagement partner can reasonably expect to obtain sufficient appropriate audit evidence on which to base the group audit opinion if the group engagement team will be able to:


(a) Perform the work on the financial information of some of these components; and


(b) Be involved in the work performed by component auditors on the financial information of other components to the extent necessary to obtain sufficient appropriate audit evidence.


Access to Information


The group engagement team’s access to information may be restricted by circumstances that cannot be overcome by group management, for example laws relating to confidentiality and data privacy, or denial by the component auditor of access to relevant audit documentation sought by the group engagement team. It may also be restricted by group management.


Where access to information is restricted by circumstances, the group engagement team may still be able to obtain sufficient appropriate audit evidence; however, this is less likely as the significance of the component increases. For example, the group engagement team may not have access to those charged with governance, management, or the auditor (including relevant audit documentation sought by the group engagement team) of a component that is accounted for by the equity method of accounting. If the component is not a significant component, and the group engagement team has a complete set of financial statements of the component, including the auditor’s report thereon, and has access to information kept by group management in relation to that component, the group engagement team may conclude that this information constitutes sufficient appropriate audit evidence in relation to that component. If the component is a significant component, however, the group engagement team will not be able to comply with the requirements relevant in the circumstances of the group audit. For example, the group engagement team will not be able to comply with the requirement to be involved in the work of the component auditor. The group engagement team will not, therefore, be able to obtain sufficient appropriate audit evidence in relation to that component.


The group engagement team will not be able to obtain sufficient appropriate audit evidence if group management restricts the access of the group engagement team or a component auditor to the information of a significant component.


Although the group engagement team may be able to obtain sufficient appropriate audit evidence if such restriction relates to a component considered not a significant component, the reason for the restriction may affect the group audit opinion. For example, it may affect the reliability of group management’s responses to the group engagement team’s inquiries and group management’s representations to the group engagement team.


Appendix 1 contains an example of an auditor’s report containing a qualified opinion based on the group engagement team’s inability to obtain sufficient appropriate audit evidence in relation to a significant component accounted for by the equity method of accounting, but where, in the group engagement team’s judgment, the effect is material but not pervasive.


Terms of Engagement


The terms of engagement identify the applicable financial reporting framework. Additional matters may be included in the terms of a group audit engagement, such as the fact 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, those charged with governance 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:


o Access to component information, those charged with governance of components, component management, and the component auditors (including relevant audit documentation sought by the group engagement team); and


o To perform work or request a component auditor to perform work on the financial information of the components.


Restrictions imposed on:


• the group engagement team’s access to component information, those charged with governance of components, component management, or the component auditors (including relevant audit documentation sought by the group engagement team); or


• the work to be performed on the financial information of the components, after the group engagement partner’s acceptance of the group audit engagement, constitute an inability to obtain sufficient appropriate audit evidence that may affect the group audit opinion. In exceptional circumstances it may even lead to withdrawal from the engagement where withdrawal is possible under applicable law or regulation.


Understanding the Group, Its Components and Their Environments

The group engagement team shall obtain an understanding of the consolidation process, including the instructions issued by group management to components.


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.


Matters about Which the Group Engagement Team Obtains an Understanding


Appendix 2 contains guidance on matters specific to a group, including the consolidation process.


Instructions Issued by Group Management to Components


To achieve uniformity and comparability of financial information, group management ordinarily issues instructions to components. Such instructions specify the requirements for financial information of the components to be included in the group financial statements and often include financial reporting procedures manuals and a reporting package. A reporting package ordinarily consists of standard formats for providing financial information for incorporation in the group financial statements. Reporting packages generally do not, however, take the form of complete financial statements prepared and presented in accordance with the applicable financial reporting framework.


The instructions ordinarily cover:


• The accounting policies to be applied;


• Statutory and other disclosure requirements applicable to the group financial statements, including:


The identification and reporting of segments;


o Related party relationships and transactions;


o Intra-group transactions and unrealized profits;


o Intra-group account balances; and


• A reporting timetable.


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


• The clarity and practicality of the instructions for completing the reporting package.


• Whether the instructions:


o Adequately describe the characteristics of the applicable financial reporting framework;


o Provide for disclosures that are sufficient to comply with the requirements of the applicable financial reporting framework, for example disclosure of related party relationships and transactions, and segment information;


o Provide for the identification of consolidation adjustments, for example, intra-group transactions and unrealized profits, and intra-group account balances; and


o Provide for the approval of the financial information by component management.


The group engagement team may obtain an understanding of the component auditor in a number of ways. In the first year of involving a component auditor, the group engagement team may, for example, request the component auditor to confirm in writing. Appendix 4 contains an example of written confirmations by a component auditor;


The Component Auditor’s Professional Competence


The group engagement team’s understanding of the component auditor’s professional competence may include whether the component auditor, where relevant, possesses an understanding of the applicable financial reporting framework that is sufficient to fulfill the component auditor’s responsibilities in the group audit (instructions issued by group management to components often describe the characteristics of the applicable financial reporting framework).


Where law or regulation prohibits access to relevant parts of the audit documentation of the component auditor, the group engagement team may request the component auditor to overcome this by preparing a memorandum that covers the relevant information.


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, the group engagement team shall obtain an understanding of the following:


(a) Whether the component auditor understands and will comply with the ethical requirements that are relevant to the group audit and, in particular, is independent;


(b) The component auditor’s professional competence;


(c) Whether the 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.


(d) Whether the component auditor operates in a regulatory environment that actively oversees auditors.


If a component auditor does not meet the independence requirements that are relevant to the group audit, or the group engagement team has serious concerns about the other matters listed above, the group engagement team shall obtain sufficient appropriate audit evidence relating to the financial information of the component without requesting that component auditor to perform work on the financial information of that component.


Involvement in the Work Performed by Component Auditors

Factors that may affect the group engagement team’s involvement in the work of the component auditor include the significance of the component.


In the case of a component that is not a significant component, the nature, timing and extent of the group engagement team’s involvement in the work of the component auditor will vary based on the group engagement team’s understanding of that component auditor. The fact that the component is not a significant component becomes secondary. For example, even though a component is not considered a significant component, the group engagement team nevertheless may decide to be involved in the component auditor’s risk assessment, because it has less than serious concerns about the component auditor’s professional competency (for example, lack of industry specific knowledge), or the component auditor does not operate in an environment that actively oversees auditors.


Forms of involvement in the work of a component auditor may, based on the group engagement team’s understanding of the component auditor, include one or more of the following:


(a) Meeting with component management or the component auditors to obtain an understanding of the component and its environment.


(b) Reviewing the component auditors’ overall audit strategy and audit plan.


(c) Performing risk assessment procedures to identify and assess the risks of material misstatement at the component level. These may be performed with the component auditors, or by the group engagement team.


(d) Designing and performing further audit procedures. These may be designed and performed with the component auditors, or by the group engagement team.


(e) Participating in the closing and other key meetings between the component auditors and component management.


(f) Reviewing other relevant parts of the component auditors’ audit documentation.


Consolidation Process

The group engagement team obtains an understanding of group-wide controls and the consolidation process, including the instructions issued by group management to components. The group engagement team, or component auditor at the request of the group engagement team, tests the operating effectiveness of group-wide controls if the nature, timing and extent of the work to be performed on the consolidation process are based on an expectation that group-wide controls are operating effectively, or if substantive procedures alone cannot provide sufficient appropriate audit evidence at the assertion level.


The group engagement team shall evaluate the appropriateness, completeness and accuracy of consolidation adjustments and reclassifications, and shall evaluate whether any fraud risk factors or indicators of possible management bias exist.


If the group financial statements include the financial statements of a component with a financial reporting period-end that differs from that of the group, the group engagement team shall evaluate whether appropriate adjustments have been made to those financial statements in accordance with the applicable financial reporting framework.


Consolidation Adjustments and Reclassifications


The group engagement team’s evaluation of the appropriateness, completeness and accuracy of the adjustments may include:


• Evaluating whether significant adjustments appropriately reflect the events and transactions underlying them;


• Determining whether significant adjustments have been correctly calculated, processed and authorized by group management and, where applicable, by component management;


• Determining whether significant adjustments are properly supported and sufficiently documented; and


• Checking the reconciliation and elimination of intra-group transactions and unrealized profits, and intra-group account balances.


Communication with the Component Auditor

The group engagement team shall communicate its requirements to the component auditor on a timely basis. This communication shall set out the work to be performed, the use to be made of that work, and the form and content of the component auditor’s communication with the group engagement team. It shall also include the following:


(a) A request that the component auditor, knowing the context in which the group engagement team will use the work of the component auditor, confirms that the component auditor will cooperate with the group engagement team.


(b) The ethical requirements that are relevant to the group audit and, in particular, the independence requirements.


(c) A list of related parties prepared by group management, and any other related parties of which the group engagement team is aware.


The group engagement team’s requirements are often communicated in a letter of instruction. Appendix 5 contains guidance on required and additional matters that may be included in such a letter of instruction. The component auditor’s communication with the group engagement team often takes the form of a memorandum or report of work performed. The group engagement team may visit the component auditor to discuss identified significant risks or review relevant parts of the component auditor’s audit documentation.


In cooperating with the group engagement team, the component auditor, for example, would provide the group engagement team with access to relevant audit documentation if not prohibited by law or regulation.


Where a member of the group engagement team is also a component auditor, the objective for the group engagement team to communicate clearly with the component auditor can often be achieved by means other than specific written communication. For example:


• Access by the component auditor to the overall audit strategy and audit plan may be sufficient to communicate the group engagement team’s requirements; and


• A review of the component auditor’s audit documentation by the group engagement team may be sufficient to communicate matters relevant to the group engagement team’s conclusion.


Evaluating the Sufficiency and Appropriateness of Audit Evidence Obtained

Evaluating the Component Auditor’s Communication and Adequacy of their Work


The group engagement team shall evaluate the component auditor’s communication. The group engagement team shall determine whether it is necessary to review other relevant parts of the component auditor’s audit documentation.


If the group engagement team concludes that the work of the component auditor is insufficient, the group engagement team shall determine what additional procedures are to be performed, and whether they are to be performed by the component auditor or by the group engagement team.


Sufficiency and Appropriateness of Audit Evidence


The group engagement team shall evaluate whether sufficient appropriate audit evidence has been obtained from the audit procedures performed on the consolidation process and the work performed by the group engagement team and the component auditors on the financial information of the components, on which to base the group audit opinion.


Communication with Those Charged with Governance of the Group


The group engagement team shall communicate the following matters with those charged with governance of the group:


(a) An overview of the type of work to be performed on the financial information of the components.


(b) An overview of the nature of the group engagement team’s planned involvement in the work to be performed by the component auditors on the financial information of significant components.


Evaluating the Sufficiency and Appropriateness of Audit Evidence Obtained

Reviewing the Component Auditor’s Audit Documentation


What parts of the audit documentation of the component auditor will be relevant to the group audit may vary depending on the circumstances. Often the focus is on audit documentation that is relevant to the significant risks of material misstatement of the group financial statements. The extent of the review may be affected by the fact that the component auditor’s audit documentation has been subjected to the component auditor’s firm’s review procedures.


Sufficiency and Appropriateness of Audit Evidence


If the group engagement team concludes that sufficient appropriate audit evidence on which to base the group audit opinion has not been obtained, the group engagement team may request the component auditor to perform additional procedures. If this is not feasible, the group engagement team may perform its own procedures on the financial information of the component.


Documentation

The group engagement team shall include in the audit documentation the following matters:


(a) An analysis of components, indicating those that are significant, and the type of work performed on the financial information of the components.


(b) The nature, timing and extent of the group engagement team’s involvement in the work performed by the component auditors on significant components including, where applicable, the group engagement team’s review of relevant parts of the component auditors’ audit documentation and conclusions thereon.


Component

The structure of a group affects how components are identified. For example, the group financial reporting system may be based on an organizational structure that provides for financial information to be prepared by a parent and one or more subsidiaries, joint ventures, or investees accounted for by the equity or cost methods of accounting; by a head office and one or more divisions or branches; or by a combination of both. Some groups, however, may organize their financial reporting system by function, process, product or service (or by groups of products or services), or geographical locations. In these cases, the entity or business activity for which group or component management prepares financial information that is included in the group financial statements may be a function, process, product or service (or group of products or services), or geographical location.


Significant Component

As the individual financial significance of a component increases, the risks of material misstatement of the group financial statements ordinarily increase. The group engagement team may apply a percentage to a chosen benchmark as an aid to identify components that are of individual financial significance. Identifying a benchmark and determining a percentage to be applied to it involve the exercise of professional judgment. Depending on the nature and circumstances of the group, appropriate benchmarks might include group assets, liabilities, cash flows, profit or turnover. For example, the group engagement team may consider that components exceeding 15% of the chosen benchmark are significant components. A higher or lower percentage may, however, be deemed appropriate in the circumstances.


For a component that is significant due to its individual financial significance to the group, the group engagement team, or a component auditor on its behalf, shall perform an audit of the financial information of the component using component materiality.


For a component that is significant because it is likely to include significant risks of material misstatement of the group financial statements due to its specific nature or circumstances, the group engagement team, or a component auditor on its behalf, shall perform one or more of the following:


(a) An audit of the financial information of the component using component materiality.


(b) An audit of one or more account balances, classes of transactions or disclosures relating to the likely significant risks of material misstatement of the group financial statements.


(c) Specified audit procedures relating to the likely significant risks of material misstatement of the group financial statements.


The group engagement team may identify a component as a significant component because that component is likely to include significant risks of material misstatement of the group financial statements due to its specific nature or circumstances. In that case, the group engagement team may be able to identify the account balances, classes of transactions or disclosures affected by the likely significant risks. Where this is the case, the group engagement team may decide to perform, or request a component auditor to perform, an audit of only those account balances, classes of transactions or disclosures. For example, the work on the financial information of the component may be limited to an audit of the account balances, classes of transactions and disclosures affected by the foreign exchange trading of that component. Where the group engagement team requests a component auditor to perform an audit of one or more specific account balances, classes of transactions or disclosures, the communication of the group engagement team takes account of the fact that many financial statement items are interrelated.


Significant Components—Risk Assessment


If a component auditor performs an audit of the financial information of a significant component, the group engagement team shall be involved in the component auditor’s risk assessment to identify significant risks of material misstatement of the group financial statements. The nature, timing and extent of this involvement are affected by the group engagement team’s understanding of the component auditor, but at a minimum shall include:


(a) Discussing with the component auditor or component management those of the component’s business activities that are significant to the group;


(b) Discussing with the component auditor the susceptibility of the component to material misstatement of the financial information due to fraud or error; and


(c) Reviewing the component auditor’s documentation of identified significant risks of material misstatement of the group financial statements. Such documentation may take the form of a memorandum that reflects the component auditor’s conclusion with regard to the identified significant risks.


Determining the Type of Work to Be Performed on the Financial Information of Components

The group engagement team’s determination of the type of work to be performed on the financial information of a component and its involvement in the work of the component auditor is affected by the significance of the component.


The diagram shows how the significance of the component affects the group engagement team’s determination of the type of work to be performed on the financial information of the component.


Is the component of individual financial significance to the group?


YES

Audit of the component’s financial information


No

Is the component likely to include significant risks of material misstatement of the group financial statements due to its specific nature or circumstances?


YES

Audit of the component’s financial information; or Audit of one or more account balances, classes of transactions or disclosures relating to the likely significant risks; or Specified audit procedures relating to the likely significant risks


No

Analytical procedures performed at group level for components that are not significant components


Is the planned scope such that sufficient appropriate audit evidence on which to base the group audit opinion can be obtained?


YES

Communication with component auditors


No

For further selected components:

Audit of the component’s financial information; or

Audit of one or more accounts balances, classes of transactions or disclosures; or

Review of the component’s financial information; or

Specified procedures




If you have any questions in relation to the notes above, please contact professionals from Bestar.


Appendix 1

Illustration of Auditor’s Report Where the Group Engagement Team Is Not Able to Obtain Sufficient Appropriate Audit Evidence on Which to Base the Group Audit Opinion

Illustration - Example of a Qualified Opinion Where the Group Engagement Team Is Not Able to Obtain Sufficient Appropriate Audit Evidence on Which to Base the Group Audit Opinion


For purposes of this illustrative auditor’s report, the following circumstances are assumed:


• The group engagement team is unable to obtain sufficient appropriate audit evidence relating to a significant component accounted for by the equity method (recognised at $15 million in the statement of financial position, which reflects total assets of $60 million) because the group engagement team did not have access to the accounting records, management, or auditor of the component.


• In the group engagement partner’s judgement, the effect on the group financial statements of this inability to obtain sufficient appropriate audit evidence is material but not pervasive.


• Based on the audit evidence obtained, the auditor has concluded that a material uncertainty does not exist related to events or conditions that may cast significant doubt on the company’s ability to continue as a going concern.


INDEPENDENT AUDITOR’S REPORT


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


Report on the Audit of the Financial Statements


Qualified Opinion


We have audited the financial statements of ABC Company (the Company) and its subsidiaries (the Group), which comprise the consolidated statement of financial position of the Group and the statement of financial position of the Company as at 31 December 20X1, and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows of the Group for the year then ended, and notes to the financial statements, 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 financial statements of the Group and the statement of financial position of the Company are properly drawn up in accordance with the provisions of the Companies Act, Chapter 50 (the Act) and Financial Reporting Standards in Singapore (FRSs) so as to give a true and fair view of the consolidated financial position of the Group and the financial position of the Company as at 31 December 20X1 and of the consolidated financial performance, consolidated changes in equity and consolidated cash flows of the Group for the year ended on that date.


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 balance sheet as at 31 December 20X1, and ABC’s share of XYZ’s net income of $1 million is included in the consolidated income statement 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 31 December 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 Singapore Standards on Auditing (SSAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Group in accordance with the Accounting and Corporate Regulatory Authority (ACRA) Code of Professional Conduct and Ethics for Public Accountants and Accounting Entities (ACRA Code) together with the ethical requirements that are relevant to our audit of the financial statements in Singapore, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the ACRA 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 Financial Statements and Auditor’s Report Thereon”]


[Reporting in accordance with the reporting requirements in SSA 720 (Revised) – see Illustration 6 in Appendix 2 of SSA 720 (Revised). The last paragraph of the other information section in Illustration 6 would be customised to describe the specific matter giving rise to the qualified opinion that also affects the other information.]


Responsibilities of Management and Directors for the Financial Statements


[Reporting in accordance with SSA 700 (Revised)3 – see Illustration 2 in SSA 700 (Revised).]


Auditor’s Responsibilities for the Audit of the Financial Statements


[Reporting in accordance with SSA 700 (Revised) – see Illustration 2 in SSA 700 (Revised). The last two paragraphs which are applicable for audits of listed entities only would not be included.]


Report on Other Legal and Regulatory Requirements


[Reporting in accordance with SSA 705 (Revised) – see Illustration 3 in SSA 705 (Revised).]



___________________________ (Firm)

Public Accountants and

Chartered Accountants

Singapore


_______________________(Date)




Appendix 2

Examples of Conditions or Events that May Indicate Risks of Material Misstatement of the Group Financial Statements

The examples provided cover a broad range of conditions or events; and the list of examples.


• A complex group structure, especially where there are frequent acquisitions, disposals or reorganizations.


• Poor corporate governance structures, including decision-making processes, that are not transparent.


• Non-existent or ineffective group-wide controls, including inadequate group management information on monitoring of components’ operations and their results.


• Components operating in foreign jurisdictions that may be exposed to factors such as unusual government intervention in areas such as trade and fiscal policy, and restrictions on currency and dividend movements; and fluctuations in exchange rates.


• Business activities of components that involve high risk, such as long-term contracts or trading in innovative or complex financial instruments.


• Uncertainties regarding which components’ financial information require incorporation in the group financial statements in accordance with the applicable financial reporting framework, for example whether any special-purpose entities or non-trading entities exist and require incorporation.


• Unusual related party relationships and transactions.


• Prior occurrences of intra-group account balances that did not balance or reconcile on consolidation.


• The existence of complex transactions that are accounted for in more than one component.


• Components’ application of accounting policies that differ from those applied to the group financial statements.


• Components with different financial year-ends, which may be utilized to manipulate the timing of transactions.


• Prior occurrences of unauthorized or incomplete consolidation adjustments.


• Aggressive tax planning within the group, or large cash transactions with entities in tax havens.


• Frequent changes of auditors engaged to audit the financial statements of components.



Appendix 3

Examples of a Component Auditor’s Confirmations


Confirmations often are obtained before work on the financial information of the component commences.


[Component Auditor Letterhead]


[Date]


[To Group Engagement Partner]


This letter is provided in connection with your audit of the group financial statements of [name of parent] for the year ended [date] for the purpose of expressing an opinion on whether the group financial statements present fairly, in all material respects (give a true and fair view of) the financial position of the group as of [date] and of its financial performance and cash flows for the year then ended in accordance with [indicate applicable financial reporting framework].


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:


1. 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].


2. The instructions are clear and we understand them. / We would appreciate it if you could clarify the following instructions [specify instructions].


3. We will cooperate with you and provide you with access to relevant audit documentation.


We acknowledge that:


1. The financial information of [name of component] will be included in the group financial statements of [name of parent].


2. 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].


3. You intend to evaluate and, if considered appropriate, use our work for the audit of the group financial statements 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:


1. We have an understanding of [indicate relevant ethical requirements] that is sufficient to fulfill our responsibilities in the audit of the group financial statements, 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].


2. We have an understanding of Singapore Standards on Auditing and [indicate other national standards applicable to the audit of the group financial statements] that is sufficient to fulfill our responsibilities in the audit of the group financial statements and will conduct our work on the financial information of [name of component] for the year ended [date] in accordance with those standards.


3. We possess the special skills (for example, industry specific knowledge) necessary to perform the work on the financial information of the particular component.


4. We have an understanding of [indicate applicable financial reporting framework or group financial reporting procedures manual] that is sufficient to fulfill our responsibilities in the audit of the group financial statements.


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]



Appendix 4

Required and Additional Matters Included in the Group Engagement Team’s Letter of Instruction

Matters that are relevant to the planning of the work of the component auditor:


• A request for the component auditor, knowing the context in which the group engagement team will use the work of the component auditor, to confirm that the component auditor will cooperate with the 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.


• The 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.


• The ethical requirements that are relevant to the group audit and, in particular, the independence requirements, for example, where the group auditor is prohibited by law or regulation from using internal auditors to provide direct assistance, it is relevant for the group auditor to consider whether the prohibition also extends to component auditors and, if so, to address this in the communication to the component auditors.


• In the case of an audit or review of the financial information of the component, component materiality (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures), and the threshold above which misstatements cannot be regarded as clearly trivial to the group financial statements.


• 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 by group management or the group engagement team.


• Work to be performed on intra-group transactions and unrealized profits and intra-group account 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 the financial information of the components and the group engagement team’s conclusion on the group financial statements 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 controls 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 financial statements, due to fraud or error, 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 financial statements, due to fraud or error, identified in the component and the component auditor’s response to such risks.


• The findings of the internal audit function, based on work performed on controls at or relevant to components.


• A request for timely communication of audit evidence obtained from performing work on the financial information of the components that contradicts the audit evidence on which the group engagement team originally based the risk assessment performed at group level.


• A request for a written representation on component management’s compliance with the applicable financial reporting framework, or a statement that differences between the accounting policies applied to the financial information of the component and those applied to the group financial statements 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:


o Significant accounting, financial reporting and auditing matters, including accounting estimates and related judgments.


o Matters relating to the going concern status of the component.


o Matters relating to litigation and claims.


o 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 the group engagement team be notified of any significant or unusual events as early as possible.


• A request that the matters listed below be communicated to the group engagement team when the work on the financial information of the component is completed:


(a) Whether the component auditor has complied with ethical requirements that are relevant to the group audit, including independence and professional competence;


(b) Whether the component auditor has complied with the group engagement team’s requirements;


(c) Identification of the financial information of the component on which the component auditor is reporting;


(d) Information on instances of non-compliance with laws or regulations that could give rise to a material misstatement of the group financial statements;


(e) A list of uncorrected misstatements of the financial information of the component (the list need not include misstatements that are below the threshold for clearly trivial misstatements communicated by the group engagement team;


(f) Indicators of possible management bias;


(g) Description of any identified significant deficiencies in internal control at the component level;


(h) Other significant matters that the component auditor communicated or expects to communicate to those charged with governance of the component, including fraud or suspected fraud involving component management, employees who have significant roles in internal control at the component level or others where the fraud resulted in a material misstatement of the financial information of the component;


(i) Any other matters that may be relevant to the group audit, or that the component auditor wishes to draw to the attention of the group engagement team, including exceptions noted in the written representations that the component auditor requested from component management; and


(j) The component auditor’s overall findings, conclusions or opinion.

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