Document ID: chunk:federal_register_of_legislation:F2023C00341:reg:4:p25
Version: federal_register_of_legislation:F2023C00341
Segment Type: reg
Provision Reference: reg 4 (pt 25/42)
Character Range: 79715–82747

level.  Where this is the case, the component auditor uses component materiality for purposes of assessing the risks of material misstatement of the financial information of the component and to design further audit procedures in response to assessed risks as well as for evaluating whether detected misstatements are material individually or in the aggregate.

Responding to Assessed Risks

Determining the Type of Work to Be Performed on the Financial Information of Components (Ref: Para. 26‑27)

A47.         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:

(a)                The significance of the component;

(b)                The identified significant risks of material misstatement of the group financial report;

(c)                The group engagement team's evaluation of the design of group‑wide controls and determination whether they have been implemented; and

(d)                The group engagement team's understanding of the component auditor.

    The following 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.

Significant Components (Ref: Para. 27(b)‑(c))

A48.         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 report 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, in the situation described in paragraph A6, 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 (see paragraph 40) takes account of the fact that many financial report items are interrelated.

A49.         The group engagement team may design audit procedures that respond to a likely significant risk of material misstatement of the group financial report.  For example, in the case of a likely significant risk of inventory obsolescence, the group engagement team may perform, or request a component auditor to perform, specified audit procedures on the valuation of inventory at a component that holds a large volume of potentially obsolete inventory, but that