The International Standards of Supreme Audit Institutions, ISSAIs, are issued by the

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Practice Note to ISA 600

Special Considerations – Audits of Group

INTOSAI Financial Statements (Including the Work
of Component Auditors)
 INTO S AI Pr o f e s si o n a l S t an d ar ds Co m mitt e e
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This Practice Note in combination with the International Standard on Auditing (ISA) 600 “Special Considerations – Audits of
Group Financial Statements (Including the Work of Component Auditors)” issued by the International Federation of Accountants
(IFAC) constitute ISSAI 1600.
 ISSAI 1600
practice note 600

Practice Note1 to International Standard on Auditing (ISA) 600

Special Considerations – Audits of Group

Financial Statements (Including the Work
of Component Auditors)

Background

This Practice Note provides supplementary guidance on ISA 600 – Special Considerations― Audits
of Group Financial Statements (Including the Work of Component Auditors). It is read together with
the ISA. ISA 600 is effective for audits of group financial statements for periods beginning on or after
December 15, 2009. The Practice Note is effective the same date as the ISA.

Introduction to the ISA

The ISAs apply to group audits. ISA 600 deals with special considerations that apply to group audits, in
particular those that involve component auditors.

An auditor may find ISA 600, adapted as necessary in the circumstances, useful when that auditor
involves other auditors in the audit of financial statements that are not group financial statements. For
example, an auditor may involve another auditor to observe the inventory count or inspect physical fixed
assets at a remote location.

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 pro-
vide audit evidence for the group audit, but the requirements of ISA 600 nevertheless apply.

In accordance with ISA 2202, the group engagement partner is required to be satisfied that those per-
forming the group audit engagement, including component auditors, collectively have the appropriate
competence and capabilities. The group engagement partner is also responsible for the direction, super-
vision and performance of the group audit engagement.

The group engagement partner applies the requirements of ISA 2202 regardless of whether the group en-
gagement team or a component auditor performs the work on the financial information of a component.
ISA 600 assists the group engagement partner to meet the requirements of ISA 2202 where component
auditors perform work on the financial information of components.

1 All Practice Notes are considered together with ISSAI 1000, “General Introduction to the INTOSAI Financial Audit Guidelines.”
2 ISA 220, “Quality Control for an Audit of Financial Statements.” paragraphs 14 and 15.

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Audit risk is a function of the risk of material misstatement of the financial statements and the risk that
the auditor will not detect such misstatements3. In a group audit, this includes the risk that the compo-
nent auditor may not detect a misstatement in the financial information of the component that could
cause a material misstatement of the group financial statements, and the risk that the group engagement
team may not detect this misstatement. ISA 600 explains the matters that the group engagement team
considers when determining the nature, timing and extent of its involvement in the risk assessment pro-
cedures and further audit procedures performed by the component auditors on the financial information
of the components. The purpose of this involvement is to obtain sufficient appropriate audit evidence on
which to base the audit opinion on the group financial statements.

Content of the Practice Note

P1. The Practice Note provides additional guidance for public sector auditors related to:
(a) Overall Considerations.
(b) Definitions.
(c) Acceptance and Continuance.
(d) Understanding the Group, Its Components and Their Environments.
(e) Understanding the Component Auditor.
(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.

Applicability of the ISA in Public Sector Auditing

P2. ISA 600 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 ref-
erence does not diminish the group auditors’ responsibility for the group audit opinion, the audit
is not in compliance with paragraph 11 of the ISA.

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 the ISA, are
advised to seek guidance from other sources, such as national auditing standards and other gener-
ally 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

3 ISA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing.” paragraph A32.

Special Considerations – Audits of Group Financial Statements

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in order to achieve a proper review of matters affecting the consolidation process for the group
financial statements.

Additional Guidance on Public Sector Issues

Overall Considerations
P5. The objectives of a financial audit in the public sector are often broader than expressing an opin-
ion whether the financial statements have been prepared, in all material respects, in accordance
with the applicable financial reporting framework (i.e. the scope of the ISAs). The objectives may
include additional auditing and reporting objectives related to, for example, compliance with au-
thorities including budgets and accountability frameworks, and/or effectiveness of internal con-
trol. The audit mandate, or obligations arising from legislation, regulation, ministerial directives,
government policy requirements, or resolutions of the legislature, may result in additional report-
ing 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 the ISA, in addition to referring to the guid-
ance in paragraphs A2 to A4 of the ISA, additional characteristics may apply in the public sector
as follows;
(a) Component- In a public sector environment, components may also include agencies, depart-
ments, bureaus, corporations, funds, component units, districts, joint ventures and non-gov-
ernmental organizations; and
(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.

Acceptance and Continuance

P7. Paragraphs 12 to 14 of the ISA establish requirements for acceptance and continuance as group
auditor. The inability to be involved in the work of a component auditor as discussed in para-
graph 12 of the ISA 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 the ISA, in addition to referring to
the guidance in paragraph A18 of the ISA, 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.

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P9. The significant changes that affect the group engagement team’s ability to obtain sufficient
appropriate audit evidence as mentioned in paragraph A12 of the ISA may in the public sector
be affected by additional changes, such as;
• Changes in laws and regulations affecting the financial management information system and/or
the financial reporting framework; 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 the ISA establish requirements for the group auditor to understand the
group and its components and guidance is provided in paragraphs A23 to A26 of the ISA. In
certain cases, 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 deter-
mine 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-governmen-
tal organization from the group financial statements. In such cases, if the public sector group au-
ditor believes that this outcome would result in a misleading group financial statement presenta-
tion, 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; or
• The financial reporting framework may not provide specific guidance for inclusion or exclu-
sion of a specific type of agency, department, bureau, corporation, fund, district, joint venture
or non-governmental organization in the group financial statements. In such cases, the public
sector group auditor may participate in discussions between group management and component
management to determine whether the treatment of the component in the group financial state-
ments will result in fair presentation.

In addition, this difficulty may have implications for using the work of the component auditors.
It is possible that group management may not agree with the inclusion of the component in the
group financial statements, which, in turn, may limit the ability of the group auditor to communi-
cate with and use the work of the component auditor.

Understanding the Component Auditor

P11. Where the public sector group auditor plans to request a component auditor to perform additional
audit work on financial information related to a component or the group, the guidance in para-
graph A33 of the ISA is particularly relevant. In certain public sector environments the group
auditor’s methodology may differ from the methodology or practices of component auditors. In
such cases the group auditor may prescribe procedures consistent with the group auditor’s meth-
odology.

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P12. When considering paragraph A37 of the ISA public sector auditors may note that in the public
sector, the component auditor may also be subject to the requirements of INTOSAI Code of Eth-
ics4 as adopted by the public sector audit organization.

P13. The second bullet of paragraph A38 of the ISA discusses the group engagement team’s under-
standing of the component auditor’s professional competence and whether the component auditor
possesses the special skills (e.g. industry specific knowledge) necessary to perform the work. In
the context of the public sector environment this would include knowledge of that environment
and applicable laws and regulations relevant to the group audit.

P14. Paragraph A41 of the ISA discusses circumstances where law or regulation prohibits access to
relevant parts of the audit documentation of the component auditor. In such circumstances, the
public sector also may consider whether to communicate the matter to the legislature or other ap-
propriate regulatory bodies.

Materiality
P15. When determining materiality for the group financial statements as required by paragraphs 21
to 23 of the ISA, public sector auditors may use the guidance in ISSAI 13205 paragraphs P8 and
P9, which addresses determining materiality in the public sector. In the context of group finan-
cial statements, materiality for classes of transactions, account balances, disclosures as well as
component materiality may be assessed at a low level in the public sector. This may occur for
a variety of reasons, including the context of the matter, or the nature and characteristics of the
systems and entities involved. In addition, there might be requirements for separate opinions
on components, thus indicating a need for lower materiality for the components. Furthermore,
certain procedures may be required to be performed by audit mandate or legislation, or the public
sector auditors may design audit procedures for transactions that are significant solely because of
their nature.

P16. As required by paragraph 21(d) of the ISA the determination of a threshold, above which mis-
statements cannot be regarded as clearly trivial to the group financial statements, may be influ-
enced by the nature of the subject matter and public sensitivity. Public sector group auditors also
take into account the broader public sector perspective by which they may be required to com-
municate all misstatements, including those that have been corrected by the entity, and all control
deficiencies, and instances of non-compliance with authorities. In such cases no thresholds would
be established.

Responding to Assessed Risks

P17. When applying the requirements of paragraph 24 of the ISA at the group level, public sector
group auditors may consider that in the public sector the nature of activities performed by dif-
ferent components is a major determinant of risk of material misstatement. For instance, the risk

4 ISSAI 30,”INTOSAI Code of Ethics.”

5 ISSAI 1320,”Materiality in Planning and Performing an Audit.”

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of material misstatements in a disaster-relief operation will usually be higher than the risk of
material misstatements in a more stable operation such as payment of salaries to schoolteachers.
To assess the risk of material misstatements in group wide operations, the group auditor may cat-
egorize components according to the nature of their operations, assessing risk for each category
separately. Such an exercise may enable the group auditor to determine the nature, timing and
extent of the work to be performed.

Consolidation Process
P18. When considering the guidance in paragraph A56 of the ISA, in the context of the public sector
there may be a variety of transactions recorded only at the group level especially in the consoli-
dated financial statements of the government. Such transactions may include recording of natural
resources or historical treasures. In such cases, group public sector auditors are responsible for
obtaining sufficient appropriate audit evidence for these transactions.

Communication with the Component Auditor

P19. When communicating with the component auditor in accordance with paragraph 40 of the ISA,
public sector group auditors may find it relevant to provide the component auditors with infor-
mation on the risk of non-compliance with laws or regulations that could give rise to a material
misstatement in the group financial statements or affect the nature, timing and extent of audit
procedures and reporting requirements.

Communication with Group Management and Those Charged with Gover-

nance of the Group
P20. Public sector group auditors may have reporting responsibilities regarding communicating fraud
identified at the component level in addition to the requirements in paragraph 47 of the ISA.
These responsibilities may include reporting to parties outside the entity, such as regulatory
and enforcement authorities. Further guidance on the public sector auditor’s responsibilities on
reporting fraud is included in ISSAI 12406.

6 ISSAI 1240, ”The Auditor´s Responsibilities Relating to Fraud in an Audit of Financial Statements.”

Special Considerations – Audits of Group Financial Statements

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Appendix 1: Example of Basis for Qualified Opinion and

Report on Other Legal and Regulatory Requirements for
Use in the Public Sector

Appendix 1 of the ISA 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.

ISSAI 42007 provides examples of opinions on compliance with laws and regulations.

In the public sector a basis for qualified opinion and a report on other legal and regulatory requirements
might appear as follows:

INDEPENDENT AUDITOR’S REPORT

[Appropriate Addressee]

Report on the Consolidated Financial Statements

We have audited the accompanying consolidated financial statements….

Management’s Responsibility for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial
statements……

Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audit…

…We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our qualified audit opinion.

Basis for Qualified Opinion

The government’s expenditures for program XX is reported as USD 15 million in the consolidated
income statement for the year ended December 31, 200X. We were unable to obtain sufficient appropri-
ate audit evidence about these expenditures because we were denied access to the financial information,
and/or management, and/or the auditors of that component. Consequently, we were unable to determine
whether any adjustments to these amounts were necessary.

7 ISSAI 4200, “Compliance Audit Guidelines Related to Audit of Financial Statements.”

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Qualified Opinion
In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion
paragraph, the consolidated financial statements present fairly, in all material respects……

Report on Other Legal and Regulatory Requirements

As described in the Basis for Qualified Opinion paragraph noted above, we were denied access to the
financial information, and/or management, and/or the auditors of the component responsible for pro-
gram XX. Law XXX (the mandate under which our office operates) provides our office with complete
and unrestricted access to all government information and employees. As a result the denial of access to
information regarding program XX is a violation of law XXX and we have begun legal action to obtain
this information. We also have requested the legislature to examine this issue.

[Auditor’s signature]

[Date of the auditor’s report]

[Auditor’s address]

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Appendix 2: Examples of Matters about Which the Group Engage-

ment Team Obtains an Understanding

Additional public sector related examples of matters may include:

• Controls over compliance with laws and regulations;
• Adherence to budgetary requirements and spending authorities;
• Consistent classification of codes for reporting budgetary and actual amounts; or
• Participation of group and/or components in public and private partnerships.

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Appendix 3: Examples of Conditions or Events that May Indicate

Risks of Material Misstatement of the Group Financial Statements

These are examples of public sector related conditions in addition to the examples included in Appendix
3 of the ISA, which might indicate risks of material misstatements of the group financial statements.

• Management’s lack of knowledge of applicable laws and regulations;

• Budget overspending due to weak budgetary controls;
• Privatizations of components;
• New programs or components;
• Major changes to existing programs or components;
• New financing sources for the group or components and between components;
• Changes in legislation and regulations or directives;
• Political decisions such as reorganization of components;
• Major programs within a component without sufficient allocated resources and/or funding;
• Increased public expectations;
• Procurement of goods and services in certain components , such as defense or national security;
• Outsourcing of component activities;
• Components subject to special investigations or parliamentary or legislative oversight;
• Changes in political leadership;
• Indications of waste or abuse;
• Higher than normal expectations to meet budget;
• Public and private partnerships;
• Political interference in allocation of public resources; or
• Direct influence of government in management and/or lack of professional experience in management
versus political appointment.

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Appendix 4: Required and Additional Matters Included in the Group

Engagement Team’s Letter of Instruction

Additional matters that may be relevant in the public sector in addition to requested or suggested matters
in appendix 5 of the ISA may include:

• A list of laws and regulations relevant to the audit of the component audit as well as a list of laws and
regulations relevant to the group audit; or
• A list of additional procedures that the group auditor determines is necessary to be performed by the
component auditor.

Special Considerations – Audits of Group Financial

(Including the Work of Component Auditors)