ISSAI 1600 The International Standards of Supreme Audit Institutions, ISSAI, are issued by the International Organization of Supreme Audit Institutions, INTOSAI. For more information visit www.issai.org. I N T O S A I Financial Audit Guideline – Special Considerations― Audits of Group Financial Statements (Including the Work of Component Auditors) This Financial Audit Guideline draws on a not final redrafted version of International Standard on Auditing (ISA) 600, ”Special Considerations― Audits of Group Financial Statements (Including the Work of Component Auditors)” developed by the International Auditing and Assurance Standards Board (IAASB) and published by the International Federation of Accountants (IFAC). The proposed ISA is included in this Guideline with the permission of IFAC. Exposure Draft of INTOSAI Practice Note, pages 3-13 (ISA 600 enclosed for reference) For Comments 2 February-1 May 2009 This is trial version www.adultpdf.com 2 This is trial version www.adultpdf.com 1(4) Date: January 29, 2009 Ref no: 14-2008-0111 Request for comments: Draft Practice Notes for International Standards on Auditing (ISA) 600, 610, 700, 705, 706,710 and 720. The enclosed Practice Notes have been developed by the Special Expert Teams no 4 and 5 and approved for exposure by the Financial Audit Guidelines Subcommittee at their meeting in January, 2009. With this letter the Practice Notes are exposed for comments from the entire INTOSAI community. The exposure period expires on May 01, 2009. Format of Comments Commenting on exposure drafts is open to all members of INTOSAI and other interested stakeholders. All comments will be considered by the experts and back-office experts involved in development of the guidance before issuing the final guidance for approval by Financial Audit Guidelines Subcommittee and thereafter the Governing Board. Request for general comments Comments may be issued as desired, however it is preferable if the comments are structured to give an answer on the following basic questions: Do you agree with the stated applicability for the ISAs in the public sector environment? Do you agree with the stated additional guidance given in the Practice Notes? If not what additional areas/guidance do you think should be added? In your opinion, will the drafted guidance together with the respective ISA provide relevant guidance for the public sector auditor? This is trial version www.adultpdf.com 2(4) All comments provided will be exposed on the FAS website as well as on www.issai.org after the commenting period is closed. FAS especially encourage and highly appreciate comments from Courts of Accounts. Request for specific comments Practice Note for ISA 600 Paragraphs P3 and P4 is drafted to clarify that if the group auditor refers to a component auditor in the group auditor’s report and therefore not take the sole responsibility, the audit is not in compliance with the ISAs. This is no difference related to the public sector, and is already contained in the ISA. Do you consider it relevant to have the responsibility clarified as drafted? The practice Note has some appendices (Appendix 2-4) providing additional public sector related examples or matters related to the appendices of the ISA. Do you have additional suggestions to be included in the appendices? PN 600 does not provide additional guidance directed to the Court of Accounts environment. Representatives from Court of Accounts system are highly welcome to suggest any such guidance relevant for the PN 600. Practice Note for ISA 610 The FAS has considered that the issue of determining the independence for internal auditors needs to be explained as included in paragraph P4. Do you agree on the issues to consider in order to determining the independence and objectivity in the public sector in addition to those FAS out in ISA 610? The FAS did not identify a need for any specific Court of Accounts guidance. Representatives from Court of Accounts system are especially requested to suggest guidance if needed. Practice Note for ISA 700 The experts considered ISA 700 applicable for audits of financial statements in the public sector. The experts considered the illustrative example reports in the ISA to be relevant to the public sector as well and decided not to include any additional examples. Do you agree? The Practice Note to ISA 700 provides guidance on how to make reference to auditing standards that are applied in the public sector (paragraph P12). Do you consider the reference relevant? This is trial version www.adultpdf.com 3(4) The Practice Note addresses the issue on references to compliance with ethical requirements in the auditor’s report in P9. Do you agree with the guidance provided? INTOSAI Fundamental Principles (paragraph 4.0.20.) deals with inclusion of recommendations and responses from the audited entity within the auditor’s report. FAS considered such inclusion not to be acceptable in the Auditor’s report. Therefore the guidance in P5 has been drafted. Do you agree with the guidance provided? The Practice Note for ISA 700 does not provide additional guidance directed to the Court of Accounts environment. Experts representing the Court of Accounts system are highly welcome to suggest any such guidance relevant for the Practice Note for ISA 700. Practice Note for ISA 705 The FAS has considered ISA 705 applicable for audits of financial statements in the public sector as explained in paragraph P2. The FAS did not consider it necessary to include any additional examples of modified opinions in addition to the illustrative examples included in the ISA. The differences in the public sector would mainly relate to the addressee and the subject for modification. Do you agree, or would you prefer that examples were included in the Practice Note? The FAS did not identify a need for any specific Court of Accounts guidance. Experts representing the Court of Accounts system are especially requested to suggest guidance if needed. Practice Note for ISA 706 The FAS considered ISA 706 applicable for audits of financial statements in the public sector, and have concentrated on providing additional guidance relevant to the public sector. P3 provides examples relevant to the public sector on circumstances when an Emphasis of Matter(s) paragraph may be issued, in addition to the examples of circumstances in paragraph A1 of the ISA. If you have examples of other relevant circumstances that can render an Emphasis of Matter(s) paragraph, please provide such examples. The FAS did not identify a need for any specific Court of Accounts guidance. Experts representing the Court of Accounts system are especially requested to suggest guidance if needed. Practice Note for ISA 710 The FAS considered ISA 710 applicable for audits of financial statements in the public sector both related to comparative financial statements and corresponding figures. However, the experts were a bit concerned with not being aware of the extent This is trial version www.adultpdf.com 4(4) of the existence of comparative financial statements in the public sector. It would therefore be helpful if you could include in your response information regarding whether you are auditing comparative financial statements and if so, if the guidance provide is relevant. The FAS did not identify a need for any specific Court of Accounts guidance. Experts representing the Court of Accounts system are especially requested to provide and suggest specific guidance if needed Practice Note for ISA 720 Paragraph A1 of the ISA addresses other reporting responsibilities. The FAS considered that there was no additional need for guidance in this respect. Do you agree? The FAS did not identify a need for any specific Court of Accounts guidance. Experts representing the Court of Accounts system are especially requested to provide and suggest specific guidance if needed Thank you very much for taking the time to consider these Practice Notes. Jonas Hällström FAS Director Please send your comments by January, 31 2009 to: projectsecretariat@riksrevisionen.se or by mail to: Riksrevisionen The FAS Project Secretariat 114 90 Stockholm Sweden or by fax to: +46-8-5171 4111 This is trial version www.adultpdf.com Table of Contents BACKGROUND 3 SCOPE OF THE ISA 3 CONTENT OF THE PRACTICE NOTE 3 APPLICABILITY OF THE ISA IN PUBLIC SECTOR AUDITING 4 ADDITIONAL GUIDANCE ON PUBLIC SECTOR ISSUES 4 OBJECTIVES 4 DEFINITIONS 4 ACCEPTANCE AND CONTINUANCE 5 UNDERSTANDING THE GROUP, ITS COMPONENTS AND THEIR ENVIRONMENTS 5 UNDERSTANDING THE COMPONENT AUDITORS 6 MATERIALITY 6 RESPONDING TO ASSESSED RISKS 7 CONSOLIDATION PROCESS 7 COMMUNICATION WITH THE COMPONENT AUDITOR 8 COMMUNICATION WITH GROUP MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE OF THE GROUP 8 APPENDIX 1 9 EXAMPLE OF BASIS FOR QUALIFIED OPINION AND REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENT FOR USE IN THE PUBLIC SECTOR 9 APPENDIX 2 11 EXAMPLES OF MATTERS ABOUT WHICH THE GROUP ENGAGEMENT TEAM OBTAINS AN UNDERSTANDING 11 APPENDIX 3 12 EXAMPLES OF CONDITIONS OR EVENTS THAT MAY INDICATE RISKS OF MATERIAL MISSTATEMENT OF THE GROUP FINANCIAL STATEMENTS 12 APPENDIX 4 13 REQUIRED AND ADDITIONAL MATTERS INCLUDED IN THE GROUP ENGAGEMENT TEAM’S LETTER OF INSTRUCTION 13 This is trial version www.adultpdf.com 3 ISSAI 1600 Practice Note 1 to International Standard on Auditing 600 (Revised and Redrafted) – Special Considerations― Audits of Group Financial Statements (Including the Work of Component Auditors) Background This Practice Note provides supplementary guidance on ISA 600 (Revised and Redrafted) – Special Considerations― Audits of Group Financial Statements (Including the Work of Component Auditors). It is read together with the ISA. The Practice Note is effective the same date as the ISA. Scope of the ISA The International Standards on Auditing (ISAs) apply to group audits. The ISA 600 deals with special considerations that apply to group audits, in particular those that involve component auditors. This ISA is effective for audits of group financial statements for periods beginning on or after December 15, 2009 Content of the Practice Note P1. The Practice Note provides additional guidance for public sector auditors related to: a. Objectives b. Definitions c. Acceptance and Continuance d. Understanding the Group, Its Components and Their Environments e. Understanding the Component Auditors f. Materiality g. Responding to Assessed Risks h. Consolidation Process i. Communication with the Component Auditor j. Communication with Group Management and Those Charged with Governance of the Group 1 All Practice Notes are considered together with General Considerations in the Financial Audit Guidelines. This is trial version www.adultpdf.com 4 Applicability of the ISA in Public Sector Auditing P2. ISA 600 (Revised and Redrafted) is applicable to auditors of public sector entities in their role as auditors of the group financial statements. P3. In some public sector environments it may be required by law or regulation or common practice to make reference to a component auditor in the group auditor’s report on the group financial statements. In these situations, if the group auditors’ report does not clearly indicate that the reference does not diminish the group auditors’ responsibility for the group audit opinion, the audit is not in compliance with paragraph 11 of ISA 600 (Revised and Redrafted). P4. Public sector group auditors who refer to a component auditor in the group auditors’ report, without making such indication of responsibility as described in paragraph 11 of ISA 600 (Revised and Redrafted), are advised to seek guidance from other sources, such as national auditing standards and other generally accepted sources. These other sources may direct the public sector group auditor to inquire about the professional reputation and independence of the component auditor and to develop appropriate measures to assure the coordination of activities with those of the component auditor in order to achieve a proper review of matters affecting the consolidation process for the group financial statements. Additional Guidance on Public Sector Issues Objectives P5. The objectives of a financial audit in the public sector are often broader than just reporting on financial statements. The objectives may include additional auditing and reporting objectives related to, for example, compliance with authorities including budget, accountability and/or effectiveness of internal control. The audit mandate, or obligations arising from legislation, regulation, ministerial directives, government policy requirements, or resolutions of the legislature, may result in additional reporting requirements. However, even where there are no such additional reporting requirements, there may be public expectations in regard to compliance with authorities or to the effectiveness of internal controls, and the auditor's attention to such matters. Therefore, public sector group auditors keep such expectations in mind, are alert throughout the audit to areas that may give rise to such non-compliance and communicate with component auditors regarding such expectations. Definitions P6. When considering the definitions in paragraph 9 of ISA 600, in addition to referring to the guidance in A2 to A4 of ISA 600, additional characteristics may apply in the public sector as follows; a. Component- In a government environment, components may also include agencies, departments, bureaus, corporations, funds, component units, districts, joint ventures and non-governmental organizations. b. Significant Component- In a public sector environment the determination of significant components may also involve matters that have heightened public sensitivity, such as national security issues, donor funded projects or the reporting on tax revenue. This is trial version www.adultpdf.com 5 Acceptance and Continuance P7. Paragraphs 12 to 14 of ISA 600 establish requirements for acceptance and continuance as group auditor. The inability to be involved in the work of a component auditor as discussed in paragraph 12 and the inability to obtain sufficient appropriate audit evidence is less likely to occur in a public sector environment, because laws or regulations may prohibit restrictions of access to information. P8. When complying with the requirements of paragraph 13 of ISA 600, in addition to referring to the guidance in paragraph A18 of ISA 600, public sector group auditors may communicate with the legislature or other regulatory bodies as appropriate, about removing restrictions on access to audit evidence imposed by group management or laws or regulations. Appendix 1 of this Practice Note provides an example of a modified opinion due to restriction of access to evidence and an example report to the legislature. P9. The significant changes that affect the group engagement team’s ability to obtain sufficient appropriate audit evidence as mentioned in paragraph A12 of ISA 600 may in the public sector be affected by additional changes, such as; Changes in laws and regulations affecting the financial management information system, and Changes in the nature, sources or amounts of funding, including changes in the structure of public debt. Understanding the Group, Its Components and Their Environments P10. Paragraphs 17 to 18 of ISA 600 establish requirements for the group auditor to understand the group and its components and guidance is provided in paragraph A23 to A26 of ISA 600. In certain cases in the public sector, the Government may have relationships with independent entities through transfers or through its role as a regulator for certain industries. In these cases it can be difficult to determine whether the Government’s relationship with an entity justifies their inclusion in the group. For example; The application of the financial reporting framework may result in the exclusion of a specific type of agency, department, bureau, corporation, fund, district, joint venture or non-governmental organization from the group financial statements. In such cases, if the public sector group auditor believes that this outcome would result in misleading group financial statement presentation, the public sector group auditor may, in addition to considering the impact on the auditor’s report, also consider the need to communicate the matter to the legislature or other appropriate regulatory bodies. This is trial version www.adultpdf.com . ISSAI 1600 The International Standards of Supreme Audit Institutions, ISSAI, are issued by the International Organization of Supreme Audit Institutions, INTOSAI. For. version of International Standard on Auditing (ISA) 600, ”Special Considerations― Audits of Group Financial Statements (Including the Work of Component Auditors)” developed by the International Auditing. Considerations― Audits of Group Financial Statements (Including the Work of Component Auditors). It is read together with the ISA. The Practice Note is effective the same date as the ISA. Scope of the