Question

ABC and Associates, Certified Public Accountants, audits the financial statements of XYZ, Inc. During the audit, ABC engaged Eric and Evan LLP, a London, England public accounting firm, as a component auditor to audit XYZ’s wholly owned English subsidiary.

a. Should ABC make reference to the component auditor in its audit report? Explain.

b. Assume that Eric and ABC issued a qualified report on the English subsidiary. Should ABC include the same qualification in its report on Jordan Toys?

Answer 1

a. ABC and Associates, the CPAs are the principal auditor for the financial statements of XYZ, Inc. During the audit ABC engaged Eric and Evan LLP as the component auditor to the wholly owned London subsidiary of XYZ, Inc.

It is the sole responsibility of ABC and Associates to report on the financial statements of both the standalone and consolidated financial statements of XYZ, Inc. Hence they are not to make refernce to the component auditor in their audit report.

b. It is matter of professional judgement to the principal auditor about whether to incorporate the modifications given by the component auditors in its own report. If judging by the materiality and reasonableness at the consolidated level the principal auditor concludes that he is to modify his report, he may do so on those grounds. Otherwise he can proceed without incorporating those modifications, if judged immaterial.

Sameway, ABC and Associates is to deal the qualifications given by the component auditor, Eric and Evan, LLP accordingly at the consolidated level based on professional judgement of overall materiality.

(I think that in part b of the question it is actually "Eric and Evan" rather than "Eric and ABC")