The duty of the principal auditor is to report on the group accounts, which include balances and transactions of all the components of the group.


“Principal auditor” means the auditor with responsibility for reporting on the financial statements of an entity whose financial statements include financial information from one or more components audited by another auditor.


“Other auditor” means an auditor, other than the principal auditor, with responsibility for reporting on the financial information of a component that is included in the financial statements audited by the principal auditor. Other auditors include affiliated firms, whether using the same name or not, and correspondents, as well as unrelated auditors.


“Component” means a division, branch, subsidiary, joint venture, associated company or other entity whose financial information is included in financial statements audited by the principal auditor.


The principal auditor has sole responsibility for reporting on group financial statements even where they include amounts derived from accounts that have not been audited by him.  Therefore, he cannot discharge his responsibilities by an unquestioning acceptance of component company’s financial statements, whether audited or not.


Principal auditors have the right:

  • To require from auditors of subsidiaries the information and explanations they require and
  • To require from the principal company the necessary information and explanations from subsidiaries that they deem necessary.


The principal auditors have all the statutory rights and powers in respect of their audit of the holding company similar to individual companies.



ISA 600, using the work of another auditor, sets out the relevant guidelines to be considered.


When the principal auditor uses the work of another auditor, the principal auditor should determine how the work of the other auditor will affect the audit.


The auditor should consider whether his own participation is sufficient to be able to act as the principal auditor.  For this purpose the principal auditor should consider:

  • The materiality of the portion of the financial statements which he audits,
  • His degree of knowledge regarding the business of the components,
  • The risk of material misstatements in the financial statements of the components audited by the other auditor,
  • The performance of additional procedures on the components audited by the other auditor resulting in the principal auditor having significant participation in such audit,
  • The nature of his relationship with the firm acting as other auditor.


Principal auditor’s procedures

When planning to use the work of another auditor, the principal auditor’s consideration of the professional competence of the other auditor should include consideration of the professional qualifications, experience and resources of the other auditor in the context of the specific assignment.


The principal auditor should consider the standing of any firm with which the other auditor is affiliated and also should consider making reference to the other auditor’s professional organisation. The principal auditor’s assessment may be influenced by the review of the previous work of the other auditor.


The principal auditor should perform procedures to obtain sufficient appropriate audit evidence, that the work of the other auditor is adequate for the principal auditor’s purposes, in the context of the specific assignment.  The principal auditor would advise the other auditor of:

  • The independence requirements regarding both the entity and the component and obtain written representation as to compliance with them;
  • The use that is to be made of the other auditor’s work and audit report and make sufficient arrangements for the coordination of their efforts at the initial planning stage of the audit. He would inform the other auditor of matters such as areas requiring special consideration, procedures for the identification of inter-company transactions and the timetable for completion of the audit;
  • The accounting, auditing and reporting requirements and obtain written representation as to compliance with them.


The principal auditor might carry out some of the following procedures:

  • Discuss with the other auditor the audit procedures applied,
  • Review a written summary of the other auditor’s procedures which could be in the form of a questionnaire or checklist or
  • Review the working papers of the other auditor.


The principal auditor may wish to perform these procedures during a visit to the other auditor.


The nature, timing and extent of procedures will depend on the circumstances of the engagement and the principal auditor’s knowledge of the professional competence of the other auditor. This knowledge may have been enhanced from the review of previous audit work of the other auditor.


The principal auditor should consider the significant findings of the other auditor.

He may consider it appropriate to discuss with the other auditor and the management of the component, the audit findings or other matters affecting the financial information of the component and may also decide that supplementary tests of the records or the financial information of the component are necessary. Such tests may be performed by the principal auditor or the other auditor.


Co-operation between auditors

The other auditor, knowing the context in which the principal auditor will use the other auditor’s work, should co-operate with the principal auditor.


For example, the other auditor would bring to the principal auditor’s attention any aspect of the other auditor’s work that cannot be carried out as requested. Similarly, subject to legal and professional considerations, the other auditor will need to be advised of any matters that come to the attention of the principal auditor that may have an important bearing on the other auditor’s work.


Where the component is a subsidiary, the other auditors may be under a statutory obligation to co-operate.  Where there is no statutory duty but the principal auditor declares his intention to use the other auditor’s work, then the other auditor may need to obtain permission from his client to communicate with the principal auditor.

Where such permission is refused, the other auditor should inform the principal auditor so that the latter can discuss with management what action to take.


It is also possible that the principal auditor may need to communicate matters to the other auditor but this is subject to the normal rules of confidentiality.


Reporting considerations

When the principal auditor concludes that the work of the other auditor cannot be used and he has not been able to perform sufficient additional procedures regarding the financial information of the component audited by the other auditor, the principal auditor should express a qualified opinion or disclaimer of opinion because there is a limitation in the scope of the audit.


If the other auditor intends to issue a qualified auditor’s report, the principal auditor should consider whether the subject of the qualification is of such a nature and significance, in relation to the financial statements of the entity on which the principal auditor reports, that a qualification of the principal auditor’s report is required.


When the principal auditor is satisfied that the work of the other auditors is adequate for the purposes of the audit, no reference to the other auditors is made in the principal auditor’s report.


The local regulations of some countries permit a principal auditor to base the audit opinion on the financial statements taken as a whole solely upon the report of another auditor regarding the audit of one or more components.  When the principal auditor does so, his report should state this fact clearly and should indicate the magnitude of the portion of the financial statements audited by the other auditor.


Other aspects


Supporting letters may be necessary from a parent company to a principal auditor in cases where the subsidiary does not appear to be a going concern.  This letter states the intention of the parent to continue to support the subsidiary, making it a going concern.


Developing countries

Consolidating accounts from a developing country may pose some problems.  The basis of the preparation of the accounts may not be in line with generally accepted accounting practices and as a result, the principal auditor may not be able to conclude that the accounts show a true and fair view.  This is of particular importance where the differences caused by the basis of preparation are material to the group.


This problem can be averted by the auditors requesting the directors to restate the accounts.  In addition, the increased convergence of standards worldwide will greatly reduce the risk of this problem arising.


Control environment and systems

Assessment of the control environment and systems will include the assessment of the overall group environment.  Factors to consider include:

  • Organisational structure of the group,
  • Level of involvement of the parent company in subsidiaries,
  • Degree of autonomy of management of subsidiaries,
  • Supervision of subsidiary management by parent company,
  • Information systems and information received centrally on a regular basis.


Management representations

When the auditors have responsibility for reporting on group financial statements they should obtain written confirmation of representations relating to specific matters regarding both the group financial statement and the financial statements of the parent undertaking.


Examples of specific work carried out by principal auditors in reviewing other auditor’s work:


Sending a questionnaire to all other auditors requesting detailed information such as:

  • An explanation of their general approach,
  • Details of the accounting policies of major subsidiaries,
  • Their opinion of the subsidiaries overall level of internal control and the reliability of their accounting records,
  • Any limitations placed on the scope of the auditors work,
  • Any qualifications and the reasons for them.


Carry out detailed review of the other auditor’s working papers on each subsidiary whose results materially affect the view given by the group’s financial statements.  This review will enable the principal auditors ascertain whether:

  • An up to date file exists with details of the nature of the subsidiaries business, its staff organization, its accounting records, previous year’s financial statements and copies of important legal documents;
  • A systems examination has been properly completed, documented and reported to management after discussion;
  • Tests of controls and substantive procedures have been properly and appropriately carried out and audit programmes properly completed and signed off;
  • All other working papers are comprehensive and explicit;
  • The overall review of the financial statements has been adequately carried out and adequate use of analytical procedures have been undertaken throughout the audit;
  • The financial statements agree in all respects with the accounting records and comply with all relevant legal requirements and accounting standards;
  • Minutes of board meetings have been scrutinised and important matters noted;
  • The audit work has been carried out in accordance with approved auditing standards;
  • The financial statements agree in all respects with the accounting records and comply with all relevant legal and professional requirements;
  • The audit work has been properly reviewed within the firm of auditors and any laid down quality control procedures adhered to;
  • Any points requiring discussion with the holding company’s management has been noted and brought to the principal auditor’s attention;
  • Adequate audit evidence has been obtained to form a basis for the audit opinion on both the subsidiaries financial statements and those of the group.



After receiving the subsidiaries’ accounts, the principal auditor can audit the consolidated accounts.  An important part of this work will be reviewing the consolidation adjustments that fall into two categories:

  • Permanent adjustments
  • Adjustments for the current year


The following audit steps are involved in the consolidation process:

  1. Check the transfer of data from the audited accounts to the consolidated schedules;
  2. Check the adjustments are appropriate and comparable with the previous year;
  3. Record the dates and costs of acquiring subsidiaries and the assets taken over;
  4. Calculate goodwill and pre-acquisition reserves arising on consolidation;
  5. Check combinations are appropriately treated (acquisition or uniting of interests);
  6. If acquisition accounting is used, check that the fair value of acquired assets and liabilities is reasonable;
  7. Check the appropriateness of the date used as the date of combination;
  8. Check the treatment of results of investments acquired during the year;
  9. Check that the amortisation of goodwill is reasonable;
  10. Check for disposals and the appropriateness of the date used as the date for disposal;
  11. Consider whether previous treatment of existing subsidiaries is still correct;
  12. Review the consolidated accounts for compliance with the legislation, accounting standards and other relevant regulations;
  13. Review for group companies that do not have coterminous accounting periods or where subsidiaries are not consolidated or where accounting policies of group members differ because foreign subsidiaries operate under different rules; Review treatment of participating interests and associates;
  14. Review the treatment of intangible assets and foreign currency translations;
  15. Review the treatment of loss making subsidiaries;
  16. Review the consolidated accounts to confirm they give a true and fair view.


The principal auditors are often requested to carry out the consolidation. In these circumstances the auditor is acting as an accountant and auditor and care must be taken to ensure that the audit function is carried out and evidenced as appropriate.



A joint audit is one where two or more auditors are responsible for an audit engagement and jointly produce an audit report to the client.

The relationship between principal and other auditors is not the same as that between the auditors involved in a joint audit.


Two or more firms may act as joint auditors for a variety of reasons:

  • The holding company may insist that their auditors act jointly with those of the new subsidiary after a takeover.
  • A company operating from dispersed areas may find it easier to have joint auditors to get around locational problems.
  • Political problems of overseas subsidiaries may necessitate the need to employ local auditors to satisfy the laws of the country.
  • Some companies prefer to use local accountants while at the same time having a wider range of services provided by a large national firm.


Accepting a joint audit

Some points must be borne in mind before accepting a joint audit.  It will be necessary to assess the experience and standards of the other firm.  This can be done by reviewing the audit techniques used, scrutinising their working papers and establishing whether they have had any experience in similar type jobs.


The auditors should agree whether a joint or separate letters should be sent to the client.

Separate letters would need to be sent to the client where other services are provided. Once a joint position has been accepted, it will be necessary to discuss the audit plan and the detailed work programme.


A major criticism of joint audits is that they can be costly.  This can be reduced if the two firms have organised the work between them properly.  In addition, an increase in the fees can be justified by improved services due to more efficient work and a sense of professional pride.


Both firms must sign the audit report as both are responsible for the whole audit irrespective of what particular area they carried out the work.  Therefore, both firms will be jointly liable in the event of legal action.



The auditing of a foreign subsidiary can pose problems for auditors.  It is vital that one would have an appreciation of the features of doing business in the foreign country.


When an auditing firm has a client that owns overseas subsidiaries the client may choose to have the foreign subsidiary audited by local firms or request that its own auditors undertake the audit of the foreign subsidiary.


Where local offices audit the foreign subsidiaries, the principal auditor may often undertake an audit visit to a major foreign subsidiary each year.  Some audit firms have an international network and may be able to use an affiliated partnership to audit the foreign subsidiary.


Some difficulties and possible solutions in auditing foreign subsidiaries would include:

  • Difficulties with languages might be overcome by using a member of the office who speaks the language or the use of a translator.
  • Cultural differences can be tackled by the auditors learning about the country.
  • Differences in local accounting, auditing conventions and legislation can be overcome through learning before the audit begins.
  • Some countries might have very specific problems such as high inflation or currency restrictions.
  • The subsidiary’s country may have different company laws from the ones the auditor is familiar with.
  • The auditors may face difficulties obtaining the necessary work permit to work within the country. The auditors should seek help from the client company.



A new exposure draft of ISA 600 contains two new definitions referring to a related and unrelated auditor.


A related auditor is an auditor from the group auditor’s firm or from a network firm who operates under, and complies with, common monitoring policies and procedures under ISQC1 and performs work on one or more components for the purpose of group financial statements.


An unrelated auditor is an auditor other than the group or the related auditor who performs work on one or more components for the purpose of the group audit of financial statements.


A key requirement is the group auditor must perform work on the significant components of the group or be involved with the work of other auditors.


Another key issue is what constitutes a significant component.  This is a matter of judgment for the auditor.  The ISA suggests a general benchmark of 20% of key value items such as the group’s assets, liabilities, cash flows, profits or turnover.


The group auditor must:

  • Consider the ethics, professionalism and quality control of the other auditors,
  • Ensure the other auditors understand the relevant frameworks,
  • Assess the risks of material misstatement at group level,
  • Determine materiality levels for the other auditors to use,
  • Determine what type of tests other auditors will carry out in response to assessed risks,
  • Set out the required work in relation to subsequent events,
  • Evaluate the adequacy of the other auditors work,
  • Communicate various matters to management of the group.



Question 15.1


ABC has been an audit client of your firm for many years.  It is a business which manufactures soft furnishings. It also has a shop from which it sells its own soft furnishings and other manufacturers soft furnishings and small items of furniture.


On the first day of the year ending 30 June 2010, ABC Ltd undertook a major reconstruction of its operations.  It set up two subsidiary companies.  A Ltd and B Ltd.  It then transferred its trade to those companies.  A Ltd took the manufacturing trade and B Ltd took the retail trade.  On the same day, A Ltd entered into a joint venture with its former chief designer.  The joint venture AC designs will provide designs for the soft furnishings manufactured by A Ltd and will also operate an interior design service, which will be advertised strongly by B Ltd.

ABC Ltd is 100% owned by John Browne, ABC Ltd will charge A Ltd, B Ltd and AC designs management charges.


The former chief designer, now a 50% shareholder in AC designs is Jackie Browne, John’s only daughter.  They make decisions about AC designs jointly and have agreed that the audit of AC designs shall be carried out by David Beckham and co.  David Beckham is a friend of Jackie Browne.




  1. Outline the audit planning issues raised by your firm in the above scenario.

Briefly state the steps you would carry out to audit a consolidations.

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