Seminar in Auditing - Shared Audits
22
December 18, 2008
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This powerpoint presentation was completed in partial satisfaction of course requirements for ACCT 8400 - Seminar in Auditing - at Kennesaw State University during the Spring 2009 semester.
Transcript of Seminar in Auditing - Shared Audits
December 18, 2008
•Necessity of Auditors to Rely on Work of Other
Auditors
•Current Requirements for Shared Audit Reports
•Problems with Current Requirements
•Possible Changes
•Implications
•Conclusion / Future Model
TODAY WE WILL DISCUSS:
•Necessity of Auditors to Rely on Work of
Other Auditors
•Current Requirements for Shared Audit Reports
•Problems with Current Requirements
•Possible Changes
•Implications
•Conclusion / Future Model
TODAY WE WILL DISCUSS:
Why Do Auditors Need to Rely on the Work of Other
Auditors?GEOGRAPHY EXPERTISE
HUMAN RESOURCES
•Necessity of Auditors to Rely on Work of Other
Auditors
•Current Requirements for Shared Audit
Reports
•Problems with Current Requirements
•Possible Changes
•Implications
•Conclusion / Future Model
TODAY WE WILL DISCUSS:
Shared Audit Reports
Current Auditor Reporting Requirements
-Audit firm (principal auditor) or audit client may hire a subsidiary auditor to conduct
part of an audit.
-Principal auditor decides whether or not to mention work of subsidiary auditor in
audit report.
-Subsidiary auditor’s name is usually not mentioned.
-Wording is added to three standard paragraphs, no additional paragraph
is required
-End of introductory paragraph
-End of scope paragraph
-Beginning of opinion paragraph
-Principal auditor can be subject to legal and regulatory action for work of
subsidiary auditor.
•Necessity of Auditors to Rely on Work of Other
Auditors
•Current Requirements for Shared Audit Reports
•Problem with Current Requirements
•Possible Changes
•Implications
•Conclusion / Future Model
TODAY WE WILL DISCUSS:
GRANT THORNTON EXAMPLE-
GRANT THORNTON AS SUBSIDIARY AUDITOR:
Grant Thornton had been the auditor of Parmalat
for several years until Italian law required the
rotation of audit firms. Deloitte was then hired as
principal auditor but Grant Thornton was kept on
as a subsidiary auditor because of its familiarity of
the business. Much of the fraud that had taken
place in the company was hidden in these
subsidiaries. Deloitte relied on the subsidiary audit
of Grant Thornton and is now facing legal and
regulatory action.
GRANT THORNTON EXAMPLE (CONT’D)-
GRANT THORNTON AS PRINCIPAL AUDITOR:
The SEC has instituted fraud action against
Grant Thornton related to the audit of MCA
Financial Corporation’s 1998 financial
statements. The SEC claims Grant Thornton
“rented” its name to the audit work of a smaller
firm that did most of the work on the MCA audit.
MCA had inflated its books by utilizing related
party transactions. The fraud resulted in millions
of dollars in losses by public investors.
•Necessity of Auditors to Rely on Work of Other
Auditors
•Current Requirements for Shared Audit Reports
•Problems with Current Requirements
•Possible Changes
•Implications
•Conclusion / Future Model
TODAY WE WILL DISCUSS:
OBJECTIVE: Limit principal auditor’s liability for subsidiary auditor’s work.
Amend audit report
-Proposal #1 – Modify wording in current audit report by adding name of audit firm upon whose work principal auditor will rely.
-Proposal #2 – Modify wording in current audit report by adding name of audit firm upon whose work principal auditor will rely as well as what that auditor audited.
-Proposal #3 – Include a disclosure paragraph that states:
-Work of other auditor was used
-Amount of work other auditors did related to audit
-Name of audit firm
The audit report of the subsidiary auditor is to be attached to the audit report of the principal auditor.
•Necessity of Auditors to Rely on Work of Other
Auditors
•Current Requirements for Shared Audit Reports
•Problems with Current Requirements
•Possible Changes
•Implications
•Conclusion / Future Model
TODAY WE WILL DISCUSS:
Implications:
› Principal – may increase (or decrease) the
reliability of opinion due to reputation of
subsidiary
› Subsidiary – slightly increases liability
› Investors – slight increase in investor confidence
of company
› Auditing industry – hold subsidiary to higher
standard
Implications:
› Principal – shows extent of their work ->
decrease liability
› Subsidiary – name -> increase liability
Extent holds firm more accountable
› Investors – know who else worked and what they
did -> decrease/increase confidence in
company
› Industry – hold firms more accountable
May increase outsourcing to other auditors
Implications:
› Principal – lower liability of firm -> shows what they audited and did not audit
› Subsidiary – more responsible for poor reports -> increased liabilities
GT example
› Investors – may miss modified wording -> increase/decrease confidence
› Industry – decrease principal liability
May increase work slightly
Implications:
› Principal – liable to the extent of audit work performed
No punishments for poor subsidiary work
› Subsidiary – complete liability for their work
Extent and scope mentioned
› Investors – see the number of auditors, extent of work -> increase/decrease confidence
› Industry – increase quality of audit by holding firms accountable for their OWN work
•Necessity of Auditors to Rely on Work of Other
Auditors
•Current Requirements for Shared Audit Reports
•Problems with Current Requirements
•Possible Changes
•Implications
•Conclusion / Future Model
TODAY WE WILL DISCUSS:
Audit report should refer to other auditors
involved.
Reference other audit firms by name.
Include audit reports from other auditors.
Must be consistent with the sufficiency
and appropriateness of evidence
gathered by all auditors involved.
Clearly show extent of the divided
responsibility.
We did not audit the financial statements of GeorgiaTech Company, a consolidated subsidiary, whichstatements reflect total assets constituting 30 percentin 2007 and 34 percent in 2006, and total revenuesconstituting 15 percent in 2007, 17 percent in 2006,and 14 percent in 2005 of the related consolidatedtotals, or the 2006 and 2005 financial statements ofBumblebee Company, used as a basis for recordingthe company’s equity in net income of thatcorporation. Those statements were audited byBarrow and Debeb, CPAs, whose reports have beenfurnished to us and are attached, and our opinion,insofar as it relates to the amounts included forGeorgia Tech Company and Bumblebee Company,is based solely on the reports of Barrow and Debeb.
“
”
We believe that our audits and the reports of Barrow and Debeb provide a reasonable basis for our opinion.
“
“In our opinion, based upon our audits and the
reports of Barrow and Debeb, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position….
”
”
Thank you.
