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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Auditing, Assurance and Professional Ethics

Case: Himalaya Textiles Ltd has a subsidiary, Sutlej Spinners, audited by a different firm, M/s Bedi & Co. The group auditor, M/s Anand & Co, finds Sutlej is a significant component because of its size. Bedi & Co is in a jurisdiction with comparable standards, but Anand & Co has no prior experience with them. Which step is most appropriate for Anand & Co as group engagement team?

Anand & Co should obtain an understanding of Bedi & Co's independence, competence and regulatory setting, and be involved in the component auditor's risk assessment for the significant component. The group auditor retains responsibility for the opinion and cannot accept the component work unquestioningly.

  1. AAccept Bedi's work without any inquiry, since a significant component auditor is always reliable
  2. BObtain an understanding of the component auditor's independence, professional competence and regulatory environment, and be involved in the component auditor's risk assessment for the significant componentCorrect
  3. CTake sole responsibility but refer in the report to Bedi & Co as the reason for a modified opinion
  4. DReplace Bedi & Co and have Sutlej audited by Anand & Co only if the subsidiary is wholly owned

Explanation

The group engagement team must understand the component auditor's independence, competence, and the regulatory environment, and for a significant component be involved in the risk assessment. Blind acceptance is wrong. Reference to the component auditor does not reduce the group auditor's responsibility for the opinion. Replacement is not required by ownership structure.

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