What Are Standards on Auditing?
- A Consistent Framework: SAs provide a uniform set of principles for all auditors, regardless of the entity’s size or structure (profit or non-profit). This consistency means a financial statement audited in one place can be trusted almost anywhere, a key factor for global business and investment.
- Ensuring the Objective of “True and Fair View”: The primary goal of an audit conducted under SAs is to help the auditor express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework (like IFRS or GAAP). This provides stakeholders (investors, banks, regulators and the public) with high-quality, reliable information for decision-making.
- The Auditor’s Plan of Action: SAs cover every stage of the audit execution:
- Planning & Risk Assessment: Identifying where material misstatements (errors or fraud) might hide (SA 300/315).
- Gathering Evidence: Detailing how much and what kind of audit evidence is needed (SA 500 series).
- Reporting: Structuring the final report and opinion clearly (SA 700 series).
SA 600- Using The Work of Another Auditor
Standard on Auditing (SA) 600, issued by the ICAI, establishes principles for a principal auditor using the work of another/component auditor in group audits. The key aspects are designed to ensure sufficient audit evidence is obtained for the consolidated financial statements while clearly defining the division of responsibility.
When the auditor delegates work to assistants or uses work performed by other auditors and professional experts, he/she will continue to be responsible for forming and expressing his/her opinion on the stated financial information. However, the auditor will be entitled to rely on the work performed by the other auditors and professional experts, provided that he/she exercises adequate professional skill, expertise, data driven analysis and care and is not aware of any reason to believe that he/she should have not so relied.
In the case of any independent statutory appointment to perform the work on which the auditor has to rely in forming his/her opinion, such as in the case of the work of branch auditors appointed under the statutory framework of the Companies Act, the auditor’s report should completely disclose the fact of such reliance.
Who Is The Principal Auditor & The Other/Component Auditor?
It is to be noted that auditor who uses the work performed by other auditors and professional experts is known as the Principal Auditor.
Principal Auditor means the auditor with the responsibility for reporting on the financial information of a company when that financial data includes the financial information of one or more components audited by another auditor or professional expert.
Other Auditor means an auditor, other than the principal auditor, with responsibility for reporting on the financial information of a component which is included in the financial information audited by the principal auditor.
Component means a division, branch, subsidiary, joint venture, associated enterprises or other entity whose financial information is included in the financial statements audited by the principal auditor.
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 reports.
The Purpose of SA 600 (Using the work of another/component auditor) Is To:
SA 600 (Using the work of another auditor) has put in place statutory standards to be applied in situations where the Principal Auditor uses the work of other auditor with respect to the financial information of one or more components included in the financial information of the company.
Key Aspects of SA 600:
- Applicability: The standard applies when a principal auditor incorporates the financial information of components (such as a division, branch, or subsidiary) audited by another auditor. It is relevant even if components are individually immaterial but material in aggregate to the entity’s financial statements as a whole.
- Principal Auditor’s Responsibility: The principal auditor is responsible for the overall audit report. They must conduct due diligence and may choose to perform procedures on the component’s financial information or rely on the other auditor’s work. The principal auditor, the maestro of the overall performance, bears the ultimate accountability for the final standing ovation (the audit opinion). They must conduct thorough “due diligence”, deciding whether to personally verify the notes (perform their own procedures) or trust the component conductor’s interpretation/execution(rely on the other auditor’s work).
- Coordination and Communication: Sufficient liaison is required between the auditors. The principal auditor should advise the other auditor on the intended use of their work, areas requiring special consideration and the audit framework. This often involves written correspondence or a detailed questionnaire. The standard requires the principal auditor to coordinate with the other auditor. This can include written communications to ensure timely and clear communication about the audit of the component.
- Evaluation of Other Auditor’s Work: The principal auditor must evaluate the professional competence and independence of the other auditor and ascertain the quality of their work, especially if the other auditor is not a member of the ICAI. The Principal auditor must perform procedures to obtain sufficient appropriate audit evidence that the other auditor’s work is adequate for the principal auditor’s purposes.
- Documentation: The principal auditor must document the components audited by other auditors, their significance to the overall financial statements, the names of the other auditors and the conclusions reached. The principal auditor must keep detailed program notes, documenting which components were performed by whom, their significance in the overall audit execution, the names of the other performers and the final critical conclusions drawn about their integration into the masterpiece. The principal auditor’s working papers must document:
- The components audited by other auditors and their significance to the overall financial information.
- The names of the other auditors.
- The procedures performed regarding the components and conclusions reached.
- How any modifications in the other auditor’s report were addressed in the final report.
- Exclusions: The standard does not apply to situations where auditors are appointed as joint auditors or when dealing with a predecessor auditor. It also does not apply to components with immaterial financial information.
- Reporting Considerations: The principal auditor’s report must clearly state the division of responsibility by indicating the extent to which the financial information of components audited by other auditors has been included in the entity’s financial statements. If the principal auditor is unable to use the other auditor’s work and cannot perform sufficient additional procedures, they should express a qualified opinion or a disclaimer of opinion.
Proposed Revisions:
The National Financial Reporting Authority (NFRA) is working to revise SA 600 to align with the more stringent International Standard on Auditing (ISA) 600 (Revised 2022). The proposed changes would shift more responsibility onto the group (principal) auditor, moving towards a risk-based approach and potentially requiring greater involvement in component audits, including the ability to review work papers.
Key Aspects of the Proposed SA 600 Revision:
- Stricter Group Audit Rules: The revision levels up the principal auditor’s role, requiring deeper engagement with component auditors (of subsidiaries) and more rigorous evaluation of their work, preventing mechanical reliance.
- Joint Auditor Accountability: Mandates joint and several liability for joint auditors, aligning with international norms, which the ICAI has raised concerns about, citing potential cost increases.
- Scope: Applies primarily to Public Interest Entities (PIEs) like listed companies, but excludes public sector banks, PSUs and their branches.
- Reasons For Proposed Revisions: Driven by significant corporate failures where auditor oversight failed, leading to large-scale fund diversions, necessitating stronger regulatory oversight.
- Timeline & Implementation: The NFRA recommended these changes, along with others, to the Central Government in late 2024 for notification, aiming for adoption by April 2026, but public consultation is ongoing.
Why The Proposed Revision?
The existing SA 600 was seen as insufficient and lacking accuracy as the principal auditor to some extent relies on the work done by the other auditors, allowing principal auditors to avoid responsibility by relying too heavily on component auditors, leading to undetected frauds in large corporate groups. The new standard brings Indian practices closer to global standards and frameworks set by the IAASB (International Auditing and Assurance Standards Board).
