How it works
The definition of "component" under ISA 600 (Revised) is broader than many teams assume. It is not limited to subsidiaries. A branch that prepares separate trial balance data included in the consolidation is a component. So is a joint venture accounted for using the equity method. Business segments that report financial information used in the consolidation qualify too, as do foreign operations with their own accounting records. The question is whether financial information is prepared for that entity or activity and included in the group financial statements.
ISA 600 (Revised) requires the group engagement team to obtain an understanding of the group, its components, and their environments. This understanding drives the risk assessment and ultimately determines what work each component receives. Under the previous ISA 600, firms classified components as significant or non-significant, often using a percentage-of-revenue or percentage-of-assets threshold (typically 15% or 20%). The revised standard removed this classification entirely.
The replacement is a risk-based scoping model. ISA 600 (Revised) requires the group engagement team to determine the work to be performed on the financial information of components as a response to assessed risks of material misstatement. A €5M subsidiary with related-party transactions and unusual revenue patterns may warrant full-scope audit procedures while a €50M subsidiary with stable, recurring revenue may require only specified procedures on a few balances.
Key Points
- A component is not the same as a legal entity; it can be a division, branch, joint venture, or business activity.
- ISA 600 (Revised) removed the "significant component" classification used in the previous standard.
- The group engagement team determines work on each component based on assessed risks, not component size alone.
- Documentation must explain why each component received the scope of work it did, linked to the group risk assessment.
Worked example: Iberia Logística S.L.
Client: Spanish logistics group, FY2024, consolidated revenue €190M, IFRS reporter. The group consists of five components: the parent company in Madrid (€80M), a Portuguese trucking subsidiary (€45M), a French warehousing subsidiary (€35M), a Moroccan logistics joint venture accounted for using equity method (€20M share of net assets), and a newly acquired Italian last-mile delivery company (€10M, acquired July 2024).
Assess risks at the group level and allocate to components. The team identifies two significant risks: purchase price allocation on the Italian acquisition (IFRS 3) and revenue cut-off at the Portuguese subsidiary (which has a history of early revenue recognition on cross-border shipments).
Determine work on each component. The Madrid parent (€80M) receives a full audit by the group engagement team. The Portuguese subsidiary (€45M) receives specified procedures on revenue cut-off performed by the Lisbon component auditor, plus analytical procedures on remaining balances. For the French subsidiary (€35M), analytical procedures at the group level are sufficient because the group engagement team identified no significant risks. The Moroccan joint venture (€20M share) receives analytical procedures on the equity-method investment, supplemented by a review of the JV's audited financial statements. The Italian acquisition (€10M) receives a full audit of the PPA by the group engagement team, with specified procedures on post-acquisition revenue and cost integration performed by the Milan component auditor.
Conclusion: the Italian component represents 5% of group revenue but receives full audit procedures on its most significant balance. The French component represents 18% of group revenue but receives only analytical procedures. The scope follows the risk, not the size.
What reviewers and practitioners get wrong
- The most common transitional error is continuing to use percentage-of-revenue thresholds to classify components as "significant." ISA 600 (Revised) does not define significance by size. The FRC and PCAOB have both flagged group audit scoping as a recurring inspection finding, particularly where firms applied mechanical thresholds without considering the risk profile of individual components.
- Teams sometimes fail to identify components that are not separate legal entities. A division that prepares its own trial balance data and feeds it into the consolidation is a component under ISA 600 (Revised), even if it is not a separate legal entity. Missing it means missing the risk assessment and scoping determination for that financial information.
Key standard references
- ISA 600 (Revised).A1–A2: Defines the component concept broadly, including entities, divisions, and business activities.
- ISA 600 (Revised).14: Requires the group engagement team to obtain an understanding of the group, its components, and their environments.
- ISA 600 (Revised).29: Requires work on components to be responsive to assessed risks of material misstatement at the group level.
Related terms
Related reading
Frequently asked questions
Is a component the same as a legal entity?
No. A component under ISA 600 (Revised) can be a subsidiary, but it can also be a division, branch, joint venture, business segment, or foreign operation. The question is whether financial information is prepared for that entity or activity and included in the group financial statements. A division that prepares its own trial balance data and feeds it into the consolidation is a component even if it is not a separate legal entity.
How does ISA 600 (Revised) determine the scope of work on each component?
Through a risk-based scoping model rather than percentage-of-revenue thresholds. ISA 600 (Revised) requires the group engagement team to determine work on each component as a response to assessed risks of material misstatement at the group level. A small component with unusual transactions may warrant full-scope procedures while a large component with stable balances may require only analytical procedures.