Page 65 - CA Final PARAM Digital Book.

QNO Accepting appointment of Principle auditor & determination of New Course – (SM23)
103.800 Materiality
TITANIUM CNO-- "SA600.040 / GA.120"
CA Tushar is engagement partner conducting audit of consolidated financial statements of a group which
includes parent entity and its 3 subsidiaries. The standalone financial statements of its subsidiaries are
audited by component auditors. He is considering accepting such appointment. What specific
considerations have to be kept in mind by him before accepting appointment as principal auditor of the
group? After acceptance, he is in quandary with regard to determination of materiality during audit of
consolidated financial statements. What specific considerations have to be kept in mind while
determining materiality during audit of above group?
Answer SA 600 requires auditor should consider whether the auditor's own participation is sufficient to be able to
act as the principal auditor. For this purpose, the auditor would consider: -

(i) the materiality of the portion of the financial information which the principal auditor audits

(ii) the principal auditor's degree of knowledge regarding the business of the components
(iii) the risk of material misstatements in the financial information of the components audited by the
other auditor and
(iv) the performance of additional procedures as set out in SA 600 regarding the components audited by
other auditor resulting in the principal auditor having significant participation in such audit.

With regard to determination of materiality during the audit of consolidated financial statements (CFS), the
auditor should consider the following: -

• The auditor is required to compute the materiality for the group as a whole. This materiality should
be used to assess the appropriateness of the consolidation adjustments (i.e., permanent
consolidation adjustments and current period consolidation adjustments) that are made by the
management in the preparation of CFS.

• The parent auditor can also use materiality computed on the group level to determine whether the
component's financial statements are material to the group to determine whether they should
scope in additional components and consider using the work of other auditors as applicable.

• While considering the observations (for instance, modification and /or emphasis of matter/other
matter in accordance with SA 705/706) of the component auditor in his report on the standalone
financial statements, the parent auditor should comply with the requirements of SA 600 “Using the
Work of Another Auditor”.

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