This article provides guidance concerning the decision to reference component auditors in group audits.
Does your firm audit consolidated financial statements that contain a subsidiary audited by another firm? How about a governmental audit that contains a component unit audited by another firm? Or maybe an audit of an entity that has an equity-method investment audited by another firm?
Decision – Assume Responsibility or Not
If you audit an entity (e.g., Father Company, Inc.) that contains a component (e.g., Son Company, Inc.) audited by another firm, you will make a decision to reference or not reference the component auditor.
If you reference the component auditors, you are not taking responsibility for the component.
If you don’t reference the component auditors, you are, in effect, taking responsibility for the audit of all entities comprising the entity. (There will be additional work for the group auditor as he directs audit activities related to the entity as a whole, including procedures of the component auditor.)
1. When to Reference Component Auditors
First Question – Are there any significant components of the consolidated financial statements that are audited by an external audit firm?
If yes, go to the next question.
Second Question – Do you (the group auditor) want to assume responsibility for the work of the component auditor?
Sometimes the answer will be “no,” and you will reference the other firm.
When referencing occurs, the group auditor’s report will normally state “we did not audit the financial statements of X Company” and that “those statements were audited by other auditors.”
The component auditor is usually not named, but you may, if you wish, provided that you:
- Obtain permission from the component auditor
- Include the component auditor’s report with the group auditor’s report
Communication with Component Auditor
Whether you name the component auditor or not, AU-C 600 requires the group auditor to check (orally or in writing) on the component auditor’s:
- Compliance with independence and ethical requirements
Referencing should not occur unless the following is true:
- The financial statements were prepared using the same accounting framework as the group financial statements.
- The component auditor follows GAAS (or, when required by law, PCAOB audit standards).
- The component auditor’s report is not restricted as to use.
2. How to Reference Component Auditors
Changes will be made to two auditor’s report paragraphs:
Auditor’s Responsibility Paragraph
You will add a paragraph like the following:
We did not audit the financial statements of ABC Company, Inc., a wholly owned subsidiary, which statements reflect total assets of $3,020,000 as of March 31, 2013, and total revenues of $7,050,200 for the year then ended. Those statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for ABC Company, Inc., is based solely on the report of the other auditors.
Notice you will disclose the magnitude of the financial statements not audited in:
- Dollar amounts or
Those magnitudes may be expressed using one or more of the following:
- Total assets
- Total revenues
- Other appropriate criteria (whichever appropriately describes the portion not audited)
The opinion paragraph will state “In our opinion, based on our audits and the report of the other auditors…”