AU 543: Part of Audit Performed by Other Independent Auditors
AU-C 600: Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors)
AU EFFECTIVE DATE AND APPLICABILITY
| Original Pronouncements |
Statement on Auditing Procedure (SAP) 45 (codified in Statement on Auditing Standards [SAS] 1) and SAS 64. |
| Effective Date |
These statements currently are effective. |
| Applicability |
Audits of financial statements in accordance with generally accepted auditing standards (GAAS) when the auditor uses the work and reports of other independent auditors. |
AU-C EFFECTIVE DATE AND SUMMARY OF CHANGES
SAS No. 122, Codification of Auditing Standards and Procedures, is effective for audits of financial statements with periods ending on or after December 15, 2012.
The AU 543 requirements will be superseded by AU-C 600. See the separate chapter on AU-C 600 for additional information.
AU DEFINITIONS OF TERMS
Other independent auditor. The auditor who expresses an opinion on the financial statements of a subsidiary, division, branch, or investee that are incorporated in the financial statements of the reporting entity.
Principal auditor. The auditor who expresses an opinion on the financial statements of the reporting entity. (The financial statements may be consolidated or combined, or the reporting entity may have significant investments accounted for by the equity method.) The principal auditor performs a significant portion of the work and has sufficient knowledge of the operations of the reporting entity. There is no strict quantitative measure for determining the principal auditor (see the section on “Techniques for Application”).
OBJECTIVES OF AU SECTION 543
The financial statements of a part of a reporting entity may be audited by auditors other than the principal auditor. The parts audited by other auditors may be subsidiaries, divisions, branches, or investments accounted for by the equity method.
This section provides guidance on the professional judgments the auditor makes in deciding
1. Whether he or she may serve as principal auditor and use the work and reports of other auditors.
2. The form and content of the principal auditor’s report when he or she uses the work and reports of other auditors.
NOTE: A principal auditor may refer to the work of other auditors in the report (see below) to indicate the divided responsibility of the auditors. This reference is not a qualification of the principal auditor’s opinion. A report that makes reference to other auditors is not inferior to a report without such reference.
The basic notion of a report that makes reference to the report of the other auditor is divided responsibility. The principal auditor divides responsibility with the other auditor. For this reason the report should clearly describe the portion of the financial statements audited by the other auditor.
FUNDAMENTAL REQUIREMENTS
The Principal Auditor Decision
When more than one auditor is involved in auditing the financial statements of the reporting entity, a decision must be made on which one is the principal auditor. In making the decision, the auditor should consider:
1. Proportions of assets, revenue, and income audited
2. Materiality and significance of the components audited
3. Overall knowledge and understanding of the reporting entity
Responsibility for the Work of Other Auditors
The principal auditor should decide whether to assume responsibility for the work of other auditors insofar as that work relates to his or her expression of an opinion on the financial statements taken as a whole.
Decision to Assume Responsibility
If the principal auditor decides to assume responsibility for the work of other auditors, he or she should not make reference in the report to the work of the other auditors.
Decision Not to Assume Responsibility
If the principal auditor decides not to assume responsibility for the work of other auditors, he or she should make reference in the report to the work of the other auditors (see Illustrations 1 and 2).
NOTE: The decision to assume or not assume responsibility has significant legal as well as professional consequences. In a report that makes reference, the principal auditor does not intend to assume any legal responsibility for the work of the other auditor.
Principal Auditor’s Report with Reference
In the introductory paragraph of the report, the principal auditor should indicate the division of responsibility for the audited financial statements by disclosing the magnitude of the portion of those statements audited by other auditors. This is done by stating either the dollar amounts or the percentages that these amounts are to total assets, total revenues, net income or other criteria. The criteria selected depend on what most clearly indicates the portion of the financial statements audited by other auditors. The scope paragraph should also refer to the other auditors. The opinion paragraph should indicate that the opinion is based in part on the report of the other auditors.
NOTE: The other auditor may be named only if he or she gives permission and if the report is presented with that of the principal auditor.
Required Procedures
Whether the principal auditor decides to make reference to the work of other auditors or makes no reference, he or she should:
1. Make inquiries concerning the professional reputation and independence of the other auditors
2. Coordinate his or her activities with those of the other auditors
(See “Techniques for Application.”)
Additional Procedures under Decision to Assume Responsibility
The extent of additional procedures is determined by the principal auditor. These procedures might include the following:
1. Visit the other auditor and discuss his or her audit procedures
2. Review the other auditor’s audit program
NOTE: The principal auditor should consider directing the other auditor as to the scope of his or her work.
3. Review the other auditor’s audit documentation
4. Participate in discussions with management of the component whose financial statements are being audited by the other auditor
5. Perform supplemental tests of the accounting records of the component whose financial statements are being audited by the other auditor
Modification of Opinion
If he or she decides neither to assume responsibility for the other auditor’s work nor to accept a division of responsibility with him or her, the principal auditor should qualify his or her opinion or disclaim an opinion. The reasons should be stated, and the magnitude of the portion of the financial statements responsible for the qualification or disclaimer should be disclosed.
Modifications in Other Auditor’s Report
If the other auditor’s opinion is other than a standard report, the principal auditor should decide whether to recognize the modification in his or her own report. The decision is based on the nature and significance of the modification and its materiality in relation to the financial statements of the reporting entity taken as a whole.
NOTE: If the subject of the modification is not material and the other auditor’s report is not presented, the principal auditor is not required to make reference to the matter in the report. If the other auditor’s report is presented, however, the principal auditor may decide to refer to the modification even if the matter is not material to the financial statements of the reporting entity. For example, he or she may state that the matter is not material.
INTERPRETATIONS
Specific Procedures Performed by the Other Auditor at the Principal Auditor’s Request (Issued April 1979; Revised November 1996)
When the principal auditor requests that the other auditor perform procedures, the principal auditor should provide specific instructions on procedures to be performed, materiality considerations for that purpose, and other information that may be necessary in the circumstances. The other auditor should perform the requested procedures in accordance with the instructions and report the findings solely for the use of the principal auditor. These auditor-to-auditor communications do not have to meet the requirements of an agreed-upon procedures engagement.
Inquiries of the Principal Auditor by the Other Auditor (April 1979)
The other auditor should inquire of the principal auditor regarding related-party transactions. The other auditor should consider whether to make additional inquiries based on whether there are unusual or complex transactions or relationships between the component he or she is auditing and the components audited by the principal auditor. Also, the other auditor should consider whether, in the past, matters relevant to his or her own audit were known by the principal auditor.
The other auditor might provide the principal auditor with a draft of the financial statements and audit report expected to be issued to facilitate the principal auditor’s response.
Form of Inquiries of the Principal Auditor Made by the Other Auditor (April 1979)
See the “AU Illustrations” section for an example of the form of inquiry letter the other auditor might send the principal auditor.
If the principal auditor’s response is limited because his or her audit has not progressed to a point that enables a meaningful response, the other auditor should consider whether acceptable alternative procedures can be applied, whether to delay report issuance, or whether to qualify or disclaim an opinion because of the scope limitation.
Form of Principal Auditor’s Response to Inquiries from Other Auditors (April 1979)
The principal auditor’s response may be written or oral, depending on what the other auditor has requested.
See “AU Illustrations” for an example of a principal auditor’s written response. Information that may have a significant effect on the other auditor’s audit should be in writing.
Procedures of the Principal Auditor (April 1979)
The principal auditor’s response should ordinarily be made by the auditor with final responsibility for the engagement. This auditor should take reasonable steps to be informed of matters pertinent to the other auditor’s inquiry, such as inquiring of principal assistants and directing them to keep him or her informed of significant matters. Procedures directed solely toward responding to the other auditor that would not affect his or her own audit are not required. However, the principal auditor should update the response for significant matters that come to his or her attention after the original response, but before completion of the audit.
Application of Additional Procedures Concerning the Audit Performed by the Other Auditor (December 1981; Revised March 2006)
The principal auditor’s judgment about the extent of additional procedures to be applied, if any, to obtain information about the adequacy of the other auditor’s audit may be affected by knowledge of the other auditor’s quality control policies and procedures.
Other factors that might affect the extent of additional procedures are previous experience with the other auditor, the materiality of the portion of the financial statements audited by the other auditor, the extent of control of the principal auditor over the other auditor’s work, and results of the principal auditor’s other procedures.
TECHNIQUES FOR APPLICATION
Determination of Principal Auditor
There are no simple rules or precise formulas for determining who is the principal auditor. The decision is based on professional judgment; however, consideration should be given to the following:
1. Proportions of assets, revenue, and income audited
2. Materiality and significance of the components audited
3. Overall knowledge and understanding of the reporting entity
Presumption of Securities and Exchange Commission
There is no rule that the principal auditor should audit a specific proportion of the financial statement amounts; however, the Securities and Exchange Commission (SEC) staff informally has taken the position that a majority coverage of total assets, revenue, or net income, whichever is appropriate, is presumed necessary.
Many auditors use the same guidelines that the SEC follows. Before serving as principal auditor, they would ordinarily need to audit at least a majority of total assets or total revenue. This guideline is used as a goal, however, rather than as an arbitrary cutoff. Some of the factors that may cause auditors not to adhere to percentages of total assets or total revenue are:
1. Unusual years. The financial position or operating results in a particular year may have been affected by unusual circumstances that cause the normal relationships among components to be temporarily out of line.
2. Centralization of control. The parent or controlling entity may exert such control over the operations and accounting of other components that the auditor of that entity has sufficient knowledge of the other components without auditing them.
3. Unusual components. The nature of the business of components may be such that asset size is out of proportion to the importance of such components. For example, a financial institution may be large in size but not proportionately important to a consolidated group.
4. Equal components. The components may be nearly equal in size so that no single component has a majority of assets or revenue, and each component may historically have had different auditors. In this case, someone has to act as principal auditor, and the principal auditor will ordinarily gain sufficient knowledge of the other components by applying some of the procedures suggested in the section for circumstances when there is a decision not to make reference.
5. Past experience. The auditor may have audited the financial statements of some components in prior years and, thus, have sufficient knowledge of them to act as principal auditor.
6. Change of auditors planned. A change in auditors may be planned so that an auditor who will audit a majority of assets or revenue in future years considers it efficient to obtain sufficient knowledge of those components in the current year.
Decision to Assume Responsibility
Ordinarily, the principal auditor is able to assume responsibility for the work of other auditors when:
1. The other auditor is an associated or correspondent firm.
2. The other auditor was retained by the principal auditor, and the work was supervised by the principal auditor.
3. The principal auditor applies procedures he or she considers necessary to be satisfied about the quality of the other auditor’s audit.
4. The portion of the financial statements audited by other auditors is not material to the financial statements reported on by the principal auditor.
Other factors the principal auditor should consider are:
1. The quality control policies and procedures of the other auditor and the results of past peer reviews (see discussion in “Reputation and Independence of Other Auditors”)
2. Previous experience with the other auditor
3. Control that he or she will exercise over the conduct of the other auditor’s audit
Decision Not to Assume Responsibility
The principal auditor may decide not to assume responsibility for the work of other auditors because:
1. It is impracticable to review their work or perform other procedures.
2. The financial statements of the components audited by other auditors may be extremely material in relation to the total, regardless of any other considerations.
Reputation and Independence of Other Auditors
To determine the reputation and independence of the other auditors, the principal auditor might apply such procedures as:
1. Communicate with the American Institute of Certified Public Accountants (AICPA), the applicable state societies of CPAs, or, in the case of a foreign auditor, the corresponding professional organization.
a. The Professional Ethics Division will respond to inquiries about whether individuals are members of the Institute and whether complaints against members have been adjudicated.
b. The Division for CPA Firms will:
(1) Respond to inquiries about whether specific firms are members of either the AICPA Alliance for CPA Firms (formerly the Private Companies Practice Section) or the SEC Practice Section.
(2) Indicate whether a firm has undergone peer review. (For a fee, copies of peer review reports will be supplied.)
(3) Indicate whether any sanctions against a firm have been announced.
c. The AICPA Practice Monitoring Staff or the appropriate state society can respond as to whether firms are members and indicate whether the firm had a quality review.
2. Make inquiries of bankers, credit agencies, other credit grantors, attorneys, and other professionals about the reputation of the other auditors.
3. Obtain a representation (see “AU Illustrations”) from the other auditors that they are independent as required by the AICPA and, if appropriate, the SEC.
Coordination of Activities
The principal auditor may wish to have the other auditor perform certain procedures. In these circumstances, he or she should provide specific instructions on procedures to be performed, materiality considerations for this purpose, and other necessary information.
NOTE: The other auditor should perform the requested procedures in accordance with the principal auditor’s instructions.
The principal auditor should communicate with the other auditor to determine that:
1. The auditor is aware that the financial statements he or she will audit will be included in the financial statements on which the principal auditor will report.
2. The auditor is aware that his or her report will be relied on or, if applicable, referred to by the principal auditor.
3. The auditor has knowledge of financial reporting requirements of regulatory agencies, such as the SEC, if appropriate.
4. The auditor is aware that a review will be made to determine uniformity of accounting practices and elimination of intercompany transactions and accounts.
NOTE: For foreign auditors, the principal auditor should determine that they are familiar with US generally accepted accounting principles (GAAP) and GAAS and that they will conduct their audits and report in accordance with these principles and standards.
Long-Term Investments
Equity Method
For investments accounted for under the equity method, the investor’s auditor is similar to a principal auditor. In these circumstances, it is prudent for the investor’s auditor to refer to the work of the investee’s auditor.
Cost Method
For investments accounted for under the cost method, the work and reports of other auditors may be a significant part of the evidence for these investments. In these circumstances, depending on the materiality of the investments in relation to the financial statements taken as a whole, the investor’s auditor may be similar to a principal auditor.
AU ILLUSTRATIONS
The following principal auditor reports are illustrated below:
1. Reference to subsidiary’s auditor
2. Reference to investee’s auditor
The following also are illustrated:
3. Representation letter from the other auditor.
4. Letter of inquiry from other auditor to principal auditor.
5. Principal auditor’s response to letter of inquiry from other auditor.
Illustration 1. Reference to Subsidiary’s Auditor (Adapted from AU 543.09)
To the Board of Directors
Widget Company
Main City, USA
Independent Auditor’s Report
We have audited the accompanying balance sheet of Widget Company and subsidiaries as of December 31, 20X5, and the related consolidated statements of income and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Basic Company, a wholly owned subsidiary, which statements reflect total assets and revenues constituting 20% and 22%, respectively, of the related consolidated totals. 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 Basic Company, is based solely on the report of the other auditors.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Widget Company as of December 31, 20X5, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Smith and Jones
February 15, 20X6
Illustration 2. Reference to Investee’s Auditor
To the Board of Directors
Widget Company
Main City, USA
Independent Auditor’s Report
We have audited the consolidated balance sheet of Widget Company and subsidiaries as of December 31, 20X5, and the related consolidated statements of income and retained earnings and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements of Basic Company, an affiliated company, owned 25% in 20X5, which is accounted for in the accompanying financial statements by the equity method of accounting. The equity in net income of this affiliated company constitutes 15% of net income for the year ended December 31, 20X5. The financial statements of the affiliated company were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Basic Company, is based solely on the report of the other auditors.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit and the report of the other auditors provides a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Widget Company as of [at] December 31, 20X5, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
Smith and Jones
February 15, 20X6
Illustration 3. Representation Letter from Other Auditor
[Other auditor’s letterhead]
[Date]
Principal Auditor
[Address]
Gentlemen:
We have audited the financial statements of ABC, Inc., for the year ended December 31, 20X6. Because you will report on the consolidated financial statements of Widget Company for the year ended December 31, 20X6, which will include the financial statements of ABC, Inc., we have been requested to furnish you with the following information for the period covered by our report.
1. Our firm is independent with respect to the parent company, any subsidiary, or affiliated companies following the provisions of the AICPA Code of Professional Conduct and the independence rulings of the SEC; for example
a. None of the partners of our firm, nor any of the staff members employed by any office doing the work on this audit, has any direct or material indirect financial interest in or indebtedness owing from the parent company, any subsidiary, or affiliated companies.
b. None of the partners of our firm, nor any of the staff members employed by any office doing the work on this audit, is connected with the parent company, any subsidiary, or affiliated companies as a promoter, underwriter, voting trustee, director, officer, or employee.
c. To the best of our knowledge, there are no other relationships or circumstances that would impair our independence with respect to the parent company or any subsidiary or affiliate companies.
2. In connection with our audit of ABC, Inc., nothing has come to our attention that in our judgment would have a material effect on, or require mention in, the financial statements of Widget Company.
3. The financial statements as reported on by us are suitable for consolidation with Widget Company, with adjustment only for normal consolidation and elimination entries, as follows:
[Itemization]
_________________________________________________
_________________________________________________
4. We understand that in reporting on XYZ Company, you will cite your reliance on our report covering our audit of ABC, Inc.
Yours very truly,
[Other auditor’s firm signature]
Illustration 4. Letter of Inquiry from Other Auditor to Principal Auditor (from AU 9543.09)
We are auditing the financial statements of [name of client] as of [date] and for the [financial statement period] for the purpose of expressing an opinion on whether the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of [name of client] in conformity with accounting principles generally accepted in the United States of America.
A draft of the financial statements referred to above and a draft of our report are enclosed solely to aid you in responding to this inquiry. Please provide us [in writing/orally] with the following information in connection with your current audit of the consolidated financial statements of [name of parent company]:
1. Transactions or other matters [including adjustments made during consolidation or contemplated at the date of your reply] that have come to your attention that you believe require adjustment to or disclosure in the financial statements of [name of client] being audited by us.
2. Any limitation on the scope of your audit that is related to the financial statements of [name of client] being audited by us, or that limits your ability to provide us with the information requested in this inquiry.
Please make your response as of a date near [expected date of the auditor’s report].
NOTE: The letter should be addressed to the principal auditor and signed by the other auditor.
Illustration 5. Principal Auditor’s Response to Letter of Inquiry from Other Auditor (From AU 9543.14)
This letter is furnished to you in response to your request that we provide you with certain information in connection with your audit of the financial statements of [name of components], and [subsidiary, division, branch, or investment] of Parent Company for the year ended [date].
We are in the process of performing an audit of the consolidated financial statements of Parent Company for the year ended [date] (but have not completed our work as of this date). The objective of our audit is to enable us to express an opinion on the consolidated financial statements of Parent Company and, accordingly, we have performed no procedures directed toward identifying matters that would not affect our audit or our report. However, solely for the purpose of responding to your inquiry, we have read the draft of the financial statements of [name of component] as of [date] and for the [period of audit] and the draft of your report on them, included with your inquiry dated [date of inquiry].
Based solely on the work we have performed [to date] in connection with our audit of the consolidated cash flows, which would not necessarily reveal all or any of the matters covered in your inquiry, we advise you that:
1. No transactions or other matters (including adjustments made during consolidation or contemplated at this date) have come to our attention that we believe require adjustment to, or disclosure in, the financial statements of [name of component] being audited by you.
2. No limitation has been placed by Parent Company on the scope of our audit that, to our knowledge, is related to the financial statements [of name of component] being audited by you that has limited our ability to provide you with the information requested in your inquiry.
NOTE: The letter should be addressed to the other auditor and signed by the principal auditor.
