Final answer:
When reference is made to a component auditor, the auditor's responsibility paragraph is modified to show the part of the financial statements audited by them, without transferring the principal auditor's overall responsibility for the financial statements.
Step-by-step explanation:
When reference is made to a component auditor, the correct response to the student's question is A) The auditor's responsibility paragraph is modified to indicate the portion of the group financial statements that were audited by the component auditor. In group audits, the principal or group auditor may decide to make reference to the audit conducted by a component auditor on parts of the financial statements. This reference does not mean that the principal auditor's responsibility is reduced; instead, it shows collaboration and delineation of efforts within the audit process.
However, the principal auditor remains fully responsible for the opinion expressed on the group financial statements. The component auditor assists with the audit of a subsidiary, division, branch, or component of a group. In no way do these references transfer liability for the fairness of the financial statements (option C) or have a defined effect on inherent risk (option D).