Group Audit: Access Denied at a 22%-of-Assets Component

Group materiality - benchmark selection. Three candidates:

Benchmark	Amount	Rate	Materiality
Profit before tax	420m	5%	21.0m
Adjusted PBT (excluding one-off gain)	330m	5%	16.5m
Revenue	6,800m	0.5%–1%	34m–68m
Total assets	4,200m	1%–2%	42m–84m

PBT is the benchmark the shareholders use, but the reported 420m is distorted by a KES 90m disposal gain that will not recur. Using PBT on a non-recurring basis overstates materiality by 27%. Adopt adjusted PBT of KES 330m at 5% = KES 16.5m, with a documented note that had the unadjusted figure been used, a misstatement of up to KES 21m could pass undetected.

Component materiality. ISA 600 (Revised) requires component materiality to be set lower than group materiality, with the reduction driven by the risk of undetected misstatements aggregating across components and by the number and nature of components.

• Only one significant component; residual risk of aggregation is moderate
• But the component auditor is from a different firm, adding a review-risk layer
• Setting it at KES 12m (≈73% of group materiality) is defensible; KES 8m would be over-conservative for a single component and would drive unnecessary cost

Performance materiality at component level: 75% of 12m = KES 9m. Clearly trivial threshold: 5% of component materiality = KES 0.6m.

Document the rationale - a regulator inspecting the file will test the reasoning, not the arithmetic.

What ISA 600 (Revised) actually requires. The group auditor is responsible for the group opinion and must obtain sufficient appropriate evidence on the consolidation process and the financial information of components. The revised standard requires the group auditor to direct and supervise component auditors and to have unrestricted access to their working papers, and to be able to evaluate their competence and the adequacy of their work.

Access is not an end in itself, but here every route to evidence is closed:

1. No access to the component auditor's file or staff → cannot evaluate the sufficiency of their work or their independence and objectivity.
2. No access to the component's books through management → cannot perform direct procedures on the component's balances.
3. No local inspection reports relied on instead → no acceptable substitute evidence.
4. No alternative procedures identified → the limitation is real, not merely inconvenient.

Conclusion on evidence. The group team cannot obtain sufficient appropriate audit evidence over a component representing 22% of assets, 31% of revenue and 18% of profit. This is a scope limitation under ISA 705.

Material or pervasive?

• Material: the affected balances are large relative to the group figures and to the KES 16.5m materiality.
• Not pervasive: the limitation is confined to one subsidiary; the remaining 78% of assets are auditable, and the components of the financial statements affected can still be identified. A disclaimer would require the possible effects to be both material and pervasive.

Opinion: qualified - 'except for the possible effects of the matter described in the Basis for Qualified Opinion paragraph'.

Drafting discipline. The basis paragraph must quantify the component's share of each primary statement line and state that the group team was unable to obtain access, not merely that 'the component was audited by another auditor'. Auditing by another firm is not a limitation; denial of access is.

Before signing:

1. Escalate to TCWG in writing (ISA 260). The restriction is likely imposed by component management; TCWG must be told plainly that a qualification will result, in time for them to intervene. A written request to management, copied to the audit committee, creates the audit trail that shows the limitation was imposed and not accepted by the auditor.
2. Consider whether the restriction is management-imposed. If management could provide access and chooses not to, the auditor must consider the implications for the reliability of management's other representations - a management representation letter is worth little if management has blocked the principal evidence source.
3. Consider the effect on other opinion elements. The component's intercompany balances, goodwill and consolidation eliminations are also affected; the limitation is not confined to the component's own line items.
4. Document the significance of the component, the access requested and refused (with dates), the alternative procedures attempted, and the reasoning for 'material but not pervasive'.
5. Key audit matter - do not describe the matter as a KAM a second time where it is already the basis for qualification; that adds no information.

For the following year (ISA 600.13 acceptance and continuance):

• Re-evaluate whether the engagement can be accepted at all. If group management cannot guarantee access, the firm should either obtain a written commitment as a condition of appointment or decline the group engagement.
• Assess whether a different component auditor should be appointed, or whether the group team should perform procedures on the component itself.
• If the group audit opinion is qualified again next year, consider the effect on the firm's client-continuance assessment and on any loan covenants tied to an unmodified opinion.