Statement on Auditing Standards, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors)

1. Supersedes SAS No. 1 section 543, Part of Audit Performed by Other Independent Auditors (AICPA, Professional Standards, vol. 1, AU sec. 543).

2. Drafted to apply the Auditing Standards Board’s (ASB’s) clarity drafting conventions and to converge with ISA 600, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors).

3. Will be effective for audits of financial statements for periods beginning on or after December 15, 2012.

4. The SAS was drafted using ISA 600 as a base.

(1) ISA 600 addresses group audits. It defines a group audit as an audit of group financial statements. Group financial statements are financial statements with more than one component. Component is defined as an entity or business activity for which management prepares financial information that should be included in the group financial statements.

(2) Under both ISA 600 and the proposed SAS, the auditor responsible for signing the auditor’s report on the group financial statements (referred to as the group engagement partner) is responsible for:

(a) the direction, supervision, and performance of the group audit engagement in compliance with professional standards and regulatory and legal requirements and

(b) determining whether the auditor’s report that is issued is appropriate in the circumstances.

b) Diverges from ISA 600 in that ISA 600 does not permit the auditor’s report on the group financial statements to make reference to another independent auditor (referred to as a component auditor), unless required by law or regulation to include such reference.

5. The SAS, consistent with extant AU section 543, permits the auditor’s report to make reference to a component auditor.

6. Contains requirements and application material that are not in ISA 600, which results in substantive differences in the wording of the objectives, requirements, and application material between ISA 600 and the proposed SAS.

7. The ASB’s convergence policy requires compelling reasons for differences between its standards and those of the IAASB. The ASB believes:

a) That the ability to make reference to the report of another auditor is appropriate in the United States.

b) No compelling practice issues suggest a need to change an approach that has always been permitted by generally accepted auditing standards (GAAS) in the United States.

c) The size, complexity, and diversity of some audits, in particular the federal government in which withdrawal or disclaimer of opinion are not viable options, make eliminating the option to make reference to a component auditor problematic.

d) That there will be considerable practical problems with access issues, particularly with equity investments, under the ISA approach.

e) That there is no difference in the effectiveness of the audit following either approach when the audits are conducted in accordance with GAAS.

8. When no reference is made to a component auditor in the auditor’s report on the group financial statements, no substantive differences in the requirements exist between ISA 600 and the proposed SAS.

9. This SAS contains Exhibit G “Comparison of Requirements of Statement on Auditing Standards, Special Considerations, Audits of Group Financial Statements (Including the Work of Component Auditors)” that shows the differences in requirements between the SAS and ISA 600.

10. The SAS is broader than AU section 543. It lists the procedures necessary for the group engagement team to perform in order to be involved with component auditors to the extent necessary for an effective audit. It explains the degree of involvement required when reference is made to component auditors in the auditors’ report.

11. Requirements —The requirements of the SAS address the following:

a) Acceptance and continuance considerations

b) The group engagement team’s process to assess risk

c) The determination of materiality to be used to audit the group financial statements

d) The determination of materiality to be used to audit components

e) The selection of components and account balances for audit testing

f) Communications between the group engagement team and component auditors

g) Assessing the adequacy and appropriateness of audit evidence by the group engagement team in forming an opinion on the financial statements

12. In situations when the group engagement partner does not make reference to a component auditor in the audit report on the group financial statements, all of the requirements of the proposed SAS apply, when relevant in the context of the specific group audit engagement.