Question

SolarTubeGen is a start-up company in the renewable energy sector. The founder of SolarTubeGen, Fritz Herzberg, has developed cutting-edge technology to convert the energy in the sun’s rays to electricity via a novel system of mirrors designed to focus the sun’s rays onto tubes containing a patented type of gas, which then heats and expands to drive turbines. Ramirez & Walker LLP has won the contract for the first audit of SolarTubeGen on the basis of its expertise in the energy sector. However, the lead partner, Mark Ramirez, recognizes the success of the audit is dependent on the correct assessment of the technology being used at SolarTubeGen. Mark specified in the successful audit bid documents that the audit will use an external specialist to help with valuation of the company’s assets.

Fritz Herzberg is very protective of his company’s intellectual property and is resistant to Mark’s first suggested specialist, Manfred Hamburg. Fritz believes that Manfred Hamburg is hostile toward him because they clashed when they both worked for a German company making photovoltaic cells in the 1990s. Fritz has suggested another specialist, Lily Beilherz, with whom he has had good working relations over the last 20 years.

Required

1. a. Advise Mark Ramirez about the choice of a specialist for the audit of SolarTubeGen. What must he consider when making his choice? Refer to AU-C 620 Using the Work of an Auditor’s Specialist to support your answer. (ASB standards can be accessed at www.aicpa.org/research/standards.)
2. b. SolarTubeGen takes over another renewable energy company during the second-year audit. The new subsidiary is based in another country and has previously been audited by a local audit firm. Evaluate how Mark should handle the new audit responsibilities brought about by the client’s ­expansion.

Answer 1

a. Facts of the Case: The SoalrTubeGen startup company, Founder is Fritz Herzberg. Audit of the Company bagged by Ramizer Walker LLP, This Audit Firm Lead Partner advised for external valuation in respect of company assets.

But due to grudges between the Suggested specialist and the founder of the Founder, leads to un-acceptance of such valuation report, Instead founder himself suggested one of the valuer who is having bond with the founder since longer terms.

Issue: Whether can report of Lily , As Suggested by the Management is viable for reporting purpose.

Conclusion:

Where it is required to use the work of an expert, shall required to use the work of such specialist, however, such specialist can be either internal or external.

With the Use of external expert will not undermine the auditors responsibility in respect of the Audit opinion.

However, The following factors shall be evaluated:

- The Objectivity of the Audit expert

- Field of expertise and the experience

- Level of Independence is not at stake

- Aware about relationship with the management.

On above discussion it can be concluded that, Mark’s First choice is not to be taken as Management will disregard the valuation report and this may lose the second year audit contract also and management will not rely on the report. Secondly on the suggestion of the founder the Lily may be used by taking into account the above mentioned factor( level of expertise, independence and objectivity), However, before using the report auditor should evaluate whether such report can be used or not.

Hence, Lily can be referred for valuation expert with certain precautions.

b. Facts of the Case: The Solar Tube Gen has expended its business by expanding into another country by acquiring the another firm operating in foreign country.

Issue: The Issue of Audit report with the audit of the such subsidiary firm also.

Conclusion: Here, The Auditor may contact or hire the local audit firm for issuing the report over the functional and financial statement of the subsidiary.

The Principal Auditor will determine the work of another will be able to used for further or not. If not the principal shall specifically disclose its responsibility to the extent of the parent company, they specifically disclose the report of another auditor over the result and observation of the another auditor.

However, Principal Auditor should assess the independence and qualification for issuing report on the foreign subsidiary.

Hence, it can be concluded can use the another auditor report or hire local audit firm for such report. But caution shall be made in respect of independence and objectivity.