William & Plaud are group auditors for the Lowell Corporation. One of the subsidiaries of Lowell Corporation, Wilson Manufacturing Co., is audited by Lyle & Adams.a. If William & Plaud make reference in their report to reliance on the report of the component auditors are they qualifying their opinion? Explain.b. Regardless of whether William & Plaud make reference to reliance on the report of the component auditors, they should perform certain procedures with respect to Lyle and Adams' audit. What are these procedures?
What will be an ideal response?
a. No. The auditors are indicating a division of responsibility between them and the component auditors.
b. When a component auditor exists, the group auditor should determine whether sufficient appropriate audit evidence can reasonably be expected to be obtained regarding overall group controls, the consolidation process, and the financial information on the components. In addition, the group engagement team should obtain an understanding of whether the component auditor is competent and understands and will comply with all ethical requirements, particularly independence.
The extent to which the group engagement team will be involved with the component auditor.
Whether the group engagement team will be able to obtain necessary information on the consolidation process from the component auditor.
Whether the component auditor operates in a regulatory environment that actively oversees auditors.
The group auditor should communicate with the component auditor, including informing the component auditor of how its work will be used, ethical requirements, providing a list of related parties, and identifying significant risk of misstatements of the group financial statements.
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