Question

Nazim Kali, the auditor-in-charge of Valo, a Brazilian mining company, was reviewing the expert’s report on the valuation of reserves for the world’s largest bauxite deposits. The mining plans of Valo have met with strong criticism from scientists, environmentalists, and the Brazilian population.

The bauxite operations had required the use of local auditors of another international public accounting firm. The group engagement partner, Lori Lake, met with Nazim to discuss the reliance their firm would be placing on the component auditors. She was concerned that the component auditor’s conclusions were not based on adequate evidence. The financial statements being audited by the component auditors are a material part of the consolidated statements of Valo.

Required:

a)    What role does Nazim have in assessing the expert’s report on the bauxite deposits?

b)    What role does Nazim and his firm have before they make a decision to use the work of another auditor?

c)    What is the engagement partner’s role once her firm has assigned the work to a component auditor?

Answer 1

Requirement a

       It is vital that an expert's report be written in such a way that an auditor, who is a layman being reported on, can decipher the technical content of the report. The report ought to feature each stage of the development used in arriving at the complete opinion or deduction of the report. It should contain information about the data sources or estimation models used, or calculations conducted. The auditor assesses the appropriateness of the data sources used — it is essential that the expert uses data sources that are trustworthy and dependable. The auditor evaluates the uniformity of any assumptions made with those made in prior years and with other known information. The auditor evaluates the constancy of information encompassed in the expert's report with their understanding of the client. Finally, the auditor evaluates the uniformity of the deductions drawn with corroborating evidence gathered by the audit team.

Requirement b

     When making a client approval or extension judgement an auditor such as Nazim will contemplate their capacity to take on the audit. The primary auditors should also reflect the share of the financial statements for which they will have to trust on another auditor (component auditor). The group engagement partner's firm should audit the majority of a client's financial statements and be conversant about the constituents of the financial statements that they do not audit themselves. If this is not the case, the firm should not agree or continue to audit the client.

    When conveying work to a component auditor, the group engagement partner will cogitate the capacity of the other auditor to take on the work. The group engagement partner will also contemplate the status of the component auditor and certify that they are a member of a trustworthy professional body. It is the accountability of the group engagement partner to make certain that the work completed by a component auditor meets the group engage­ment partner's necessities and standards.

Requirement c

     CAS 600 sets out the accountabilities of the group engagement partner when consuming the work of a component auditor. The group engagement partner sets out the work to be steered by a component auditor. The two auditors may debate the comprehensive pro­cedures to be used and the group engagement partner then analyses the main deductions drawn in the working papers of the component auditor. The magnitude of review of the com­ponent auditor's work be subject to on a number of features. The group engagement partner will have to spend more time since the constituent of the client's financial statements being audited by a component auditor is material and/or at risk of material misstatement. The group engagement partner will expend less time if the component auditor has a good standing and/or has done audit work for the group engagement partner in the past.

    The group engagement partner uses the substantiation provided by a component auditor when drawing a final deduction on the fair presentation of a client's financial statements. The find­ings of a component auditor on a component of the financial statements will be placed in the perspective of the audit as a whole. If the group engagement partner is concerned about the assumptions arrived at by a component auditor, they will converse the findings with the component auditor. They may also debate the consequences of those findings with those charged with governance at the client to gain a more complete indulgent of the component of the financial statements audited by the component auditor. If the group engagement partner decides that the conclusions arrived at by the component auditor indicate a material misstatement in the component audited, the group engagement partner will consider issuing a modified audit opinion if the impact of the misstatement is material to the financial statements taken as a whole.

    Because the group engagement partner, Lori Lake is concerned that the component auditor has not been able to gather adequate suitable audit evidence concerning the component of the financial statements audited, she will ask that further confirmation be gathered. If the component auditor cannot access sufficient evidence, Lori Lake will consider issuing a modified audit opinion due to a scope limitation. This will occur when the group engagement partner is unable to obtain additional evidence on the elements of the component audited by a com­ponent auditor.