Navigating the New Landscape of ISA 600 (Revised)
For UK businesses with international operations, how your foreign subsidiaries are audited has always been a key consideration. This year, however, the answer might be more significant than ever, thanks to the introduction of the revised International Standard on Auditing (ISA) 600, “Special Considerations – Audits of Group Financial Statements (Including the Work of Component Auditors).”
Effective for audits of financial statements for periods commencing on or after 15 December 2023 – typically for 31 December 2024 year-end audits onwards – this updated standard brings profound changes that will impact how group audits are conducted and, crucially, your engagement with your auditors.
A Renewed Focus on Group-Wide Risk and Responsibility
Historically, auditing group financial statements often involved relying on separate audits of individual components. While component auditors remain essential, ISA 600 (Revised) fundamentally shifts this principle. The new standard introduces a proactive, risk-based approach to group audits, placing significantly greater emphasis on the group engagement partner’s overall responsibility for the quality of the entire group audit.
The core of this shift lies in enhanced responsibilities. The group engagement partner is now unequivocally responsible for the audit opinion on the group financial statements, encompassing the work performed by component auditors. This means a more hands-on approach to directing, supervising, and reviewing all audit work across the group. Component auditors are now formally considered part of the “engagement team,” necessitating a more integrated and collaborative approach and promoting robust two-way communication.
The revised standard also demands a deeper understanding of the group’s structure, operations, and risks at both the group and component levels. The previous concept of “significant components” has been removed; instead, the focus is on identifying and assessing risks of material misstatement for each component, regardless of its individual size. Throughout the audit, auditors are now required to demonstrate enhanced professional scepticism, with correspondingly more stringent documentation requirements providing a clear audit trail of judgments and conclusions, particularly when relying on component auditors’ work.
What Does This Mean for You, the Client?
The revisions under ISA 600 will likely bring several key implications for your business:
- Increased Engagement from Your UK Auditor: Your primary UK audit firm will have a greater interest in understanding the intricacies of your foreign subsidiaries. Expect more in-depth discussions about their operations, internal controls, and financial reporting.
- Potential for Direct Auditor Involvement in Foreign Subsidiaries: While not guaranteed for every subsidiary, the heightened responsibility on your group auditor means direct involvement, potentially including physical visits, may become necessary. This will be driven by risk assessment, the complexity of operations, quality of financial reporting, and ability to obtain sufficient audit evidence remotely. High-risk jurisdictions, complex transactions, or challenges in providing timely information could necessitate a visit.
- Stronger Collaboration and Communication: Expect more rigorous communication requirements between your UK audit team and your foreign subsidiary’s local management or auditors. Proactive engagement and timely provision of information will be crucial for a smooth and efficient audit.
- Potentially Longer Timelines and Higher Costs: The increased scope and intensity of work required under ISA 600 (Revised) may, in some cases, lead to longer audit timelines and potentially increased audit fees. This reflects the greater responsibility and resources now dedicated to ensuring the quality of the overall group audit.
Preparing for the New Standard
To ensure a seamless audit process under the new ISA 600 (Revised), we strongly encourage you to initiate early discussions with your UK audit team well in advance of your year-end. Talk about your group structure, the nature of your foreign subsidiaries, and any potential areas of concern that might necessitate increased auditor involvement.
It’s also a good time to review the robustness of internal controls and financial reporting processes within your foreign subsidiaries; strong controls and clear, timely reporting will significantly aid the audit process. Most importantly, be prepared to facilitate open and efficient communication channels between your UK head office, foreign subsidiaries, and both your UK and component auditors.
The revised ISA 600 is a significant step towards enhancing audit quality and ensuring greater confidence in group financial statements. While it may mean a more comprehensive and potentially more visible audit process for your foreign subsidiaries, these changes are ultimately designed to provide greater assurance and transparency for all stakeholders.
If you would like to discuss the changes and ensure your audit remains efficient and effective, please get in touch with one of the team.
Head over to our Audits & Assurance page to see how else we can support you and your business.
