ACC614 Week 6 Discussion 2 Audit of Group Financial Statements

Lando Corporation is a domestic company with two wholly-owned subsidiaries. Michael, CPA, has been engaged to audit the financial statements of the parent company and one of its subsidiaries and to serve as the group auditor. Thomas, CPA, has audited the financial statements of the other subsidiary whose operations are material in relation to the consolidated financial statements. The work performed by Michaels is sufficient for serving as the group auditor and to report as such on the financial statements. Michael has not yet decided whether to refer to the part of the audit performed by Thomas. Referencing this week’s lecture, please answer the following:

• What responsibilities does Michael have with respect to Thomas when deciding whether to rely on the work of Thomas?

These steps should be taken by Michaels, the principal auditor, regardless of whether he chooses to refer to Thomas’s audit or not.

1. Investigate Thomas’s professional standing and reputation by contacting: The American Institute of Certified Public Accountants (AICPA), the state society of certified public accountants (if relevant), other practitioners, and other appropriate sources.

2. Have Thomas make some guarantees about the CPA firm’s impartiality with respect to the client and familiarity with the report’s intended application.

3. Take the necessary precautions to ensure that your operations are coordinated with Thomas’s in order to conduct an effective examination of issues affecting the consolidating accounts in the financial statements.

• What are the reporting requirements with which Michael must comply in naming Thomas and referring to the work done by Thomas?

Michaels' report should make it very clear in the introduction scope and opinion paragraphs which parts of the financial statements they audited and which parts were audited by Thomas if Michaels chose to make reference to Thomas' audit. Thomas’s auditing contribution to the financial statements should be detailed in the report. To achieve this, simply indicate the monetary amounts of whatever financial metric(s) Thomas used to determine what was inspected (total assets, total income, etc.).

• What report should be issued if Michael does not wish to assume responsibility for Thomas’s work or refer to Thomas’s work?

Sarbanes-Oxley and Auditing Standard 2201 (AS 2201) require two new kinds of reports: 1. A management evaluation of the entity’s internal control over financial reporting. 2. The auditors' report on the state of the company’s internal control over financial reporting (Louwers et al., 2021). The division of labor would need to be detailed in a report issued by Michael. Thomas’s audit of the subsidiary’s financial accounts may prompt him to submit a second report. This report still needs to be issued in accordance with auditing standards, and it needs to make it abundantly apparent that Thomas did the work in question and that the consolidated financial statements are not included in the scope of this report.

References

Louwers, T. J., Bagley, P. L., Blay, A. D., Strawser, J. R., & Thibodeau, J. C. (2021). Auditing & assurance services (8th ed.). McGraw Hill.