Question

You are an auditor for Bigger Warehouses, who recently completed an acquisition of Smaller Group Inc. Smaller Group represents a material amount of the financial statements for Bigger. As the group engagement partner, you decide to reference the work done by the auditor for Smaller Group. Because you referenced the work of this component audit, which of the following statements is correct?

1) You are assuming responsibility for the work of the component auditor and your opinion is based solely on the report of the component auditors.
2) You are assuming responsibility for the work of the component auditor and your opinion is not based solely on the report of the component auditors.
3) You are not assuming responsibility for the work of the component auditor and your opinion is not based solely on the report of the component auditors.
4) You are not assuming responsibility for the work of the component auditor and your opinion is based solely on the report of the component auditors.

Answer 1

Statement 2 is correct: the group engagement partner assumes responsibility for the component auditor's work and the opinion is not based solely on the report of the component auditors, it also requires additional procedures and evaluations.

Step-by-step explanation:

When referencing the work of the component auditor in an audit, the group engagement partner does not fully rely on the component auditor's work without further consideration. Statement 2 is correct: You are assuming responsibility for the work of the component auditor and your opinion is not based solely on the report of the component auditors.

The group engagement partner uses judgment to decide whether to refer to the component auditor's work, but also needs to perform additional procedures, particularly when the component's financial statements are material to the group financial statements. It is expected that the group engagement partner evaluates the component auditor's competence and work for adequacy before integrating it into the overall audit opinion for Bigger Warehouses.

The group engagement partner is responsible for the direction, supervision, and performance of the group audit engagement in compliance with professional standards. They need to understand and assess the component auditor's work to ensure it is aligned with the group audit requirements. Therefore, they are accountable for any conclusions that are drawn based on the component auditor's work, even though the audit opinion reflects the collective evidential matter, including work done by both the group engagement team and the component auditors.