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  Part of Audit Performed by Other Independent Auditors  2211  AU Section 543 Part of Audit Performed by Other Independent Auditors  Source: SAS No. 1, section 543; SAS No. 64.See section 9543 for interpretations of this section.Issue date, unless otherwise indicated: November, 1972. .01  This section provides guidance on the professional judgments theindependent auditor makes in deciding ( a ) whether he may serve as princi-pal auditor and use the work and reports of other independent auditors whohave audited the financial statements of one or more subsidiaries, divisions,branches,components,orinvestmentsincludedinthefinancialstatementspre-sented and ( b ) the form and content of the principal auditor's report in thesecircumstances. 1 Nothing in this section should be construed to require or im-ply that an auditor, in deciding whether he may properly serve as principalauditor without himself auditing particular subsidiaries, divisions, branches,components,orinvestmentsofhisclient,shouldmakethatdecisiononanybasisotherthanhisjudgmentregardingtheprofessionalconsiderationsasdiscussedin paragraphs .02 and .10; nor should an auditor state or imply that a reportthatmakesreferencetoanotherauditorisinferiorinprofessionalstandingtoareportwithoutsuchareference.[Asmodified,September1981,bytheAuditing Standards Board.] Principal Auditor’s Course of Action .02  The auditor considering whether he may serve as principal auditormay have performed all but a relatively minor portion of the work, or signifi-cantpartsoftheauditmayhavebeenperformedbyotherauditors.Inthelattercase,hemustdecidewhetherhisownparticipationissufficienttoenablehimtoserveastheprincipalauditorandtoreportassuchonthefinancialstatements.In deciding this question, the auditor should consider, among other things, themateriality of the portion of the financial statements he has audited in com-parison with the portion audited by other auditors, the extent of his knowledgeof the overall financial statements, and the importance of the components heaudited in relation to the enterprise as a whole. [As modified, September 1981,by the Auditing Standards Board.] .03  If the auditor decides that it is appropriate for him to serve as theprincipal auditor, he must then decide whether to make reference in his re-port 2 to the audit performed by another auditor. If the principal auditor de-cides to assume responsibility for the work of the other auditor insofar as 1 Section315appliesifanauditorusestheworkofapredecessorauditorinexpressinganopinionon financial statements. 2 See paragraph .09 for example of appropriate reporting when reference is made to the audit of other auditors.  AU §543.03  2212  The Fourth Standard of Reporting  that work relates to the principal auditor's expression of an opinion on thefinancial statements taken as a whole, no reference should be made to theother auditor's work or report. On the other hand, if the principal auditor de-cides not to assume that responsibility, his report should make reference to theaudit of the other auditor and should indicate clearly the division of responsi-bility between himself and the other auditor in expressing his opinion on thefinancial statements. Regardless of the principal auditor's decision, the otherauditorremainsresponsiblefortheperformanceofhisownworkandforhisownreport. Decision Not to Make Reference .04  Iftheprincipalauditorisabletosatisfyhimselfastotheindependenceand professional reputation of the other auditor (see paragraph .10) and takessteps he considers appropriate to satisfy himself as to the audit performed bythe other auditor (see paragraph .12), he may be able to express an opinionon the financial statements taken as a whole without making reference in hisreport to the audit of the other auditor. If the principal auditor decides to takethis position, he should not state in his report that part of the audit was madeby another auditor because to do so may cause a reader to misinterpret thedegree of responsibility being assumed. .05  Ordinarily, the principal auditor would be able to adopt this positionwhen: a.  Part of the audit is performed by another independent auditor whichis an associated or correspondent firm and whose work is acceptableto the principal auditor based on his knowledge of the professionalstandards and competence of that firm; or b.  The other auditor was retained by the principal auditor and the workwas performed under the principal auditor's guidance and control;or c.  The principal auditor, whether or not he selected the other auditor,nevertheless takes steps he considers necessary to satisfy himself asto the audit performed by the other auditor and accordingly is sat-isfied as to the reasonableness of the accounts for the purpose of inclusion in the financial statements on which he is expressing hisopinion; or d.  The portion of the financial statements audited by the other auditoris not material to the financial statements covered by the principalauditor's opinion. Decision to Make Reference .06  On the other hand, the principal auditor may decide to make refer-ence to the audit of the other auditor when he expresses his opinion on thefinancial statements. In some situations, it may be impracticable for the prin-cipal auditor to review the other auditor's work or to use other procedureswhich in the judgment of the principal auditor would be necessary for him tosatisfy himself as to the audit performed by the other auditor. Also, if the fi-nancial statements of a component audited by another auditor are materialin relation to the total, the principal auditor may decide, regardless of anyother considerations, to make reference in his report to the audit of the otherauditor.  AU §543.04  Part of Audit Performed by Other Independent Auditors  2213 .07  When the principal auditor decides that he will make reference tothe audit of the other auditor, his report should indicate clearly, in both theintroductory, scope and opinion paragraphs, the division of responsibility asbetween that portion of the financial statements covered by his own audit andthat covered by the audit of the other auditor. The report should disclose themagnitude of the portion of the financial statements audited by the other au-ditor. This may be done by stating the dollar amounts or percentages of one ormore of the following: total assets, total revenues, or other appropriate criteria,whichever most clearly reveals the portion of the financial statements auditedby the other auditor. The other auditor may be named but only with his ex-press permission and provided his report is presented together with that of theprincipal auditor. 3 .08  Reference in the report of the principal auditor to the fact that part of the audit was made by another auditor is not to be construed as a qualificationof the opinion but rather as an indication of the divided responsibility betweenthe auditors who conducted the audits of various components of the overallfinancialstatements.[Asmodified,September1981,bytheAuditingStandardsBoard.] .09  An example of appropriate reporting by the principal auditor indicat-ing the division of responsibility when he makes reference to the audit of theother auditor follows: Independent Auditor's ReportWe have audited the consolidated balance sheet of X Company and sub-sidiaries as of December 31, 20...., and the related consolidated statements of income and retained earnings and cash flows for the year then ended. Thesefinancial statements are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements based onour audits. We did not audit the financial statements of B Company, a wholly-ownedsubsidiary,whichstatementsreflecttotalassetsandrevenuesconstitut-ing 20 percent and 22 percent, respectively, of the related consolidated totals.Those statements were audited by other auditors whose report has been fur-nished to us, and our opinion, insofar as it relates to the amounts included forB Company, is based solely on the report of the other auditors.We conducted our audit in accordance with auditing standards generally ac-cepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether the finan-cialstatementsarefreeofmaterialmisstatement.Anauditincludesexamining,on a test basis, evidence supporting the amounts and disclosures in the finan-cialstatements.Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheover-all financial statement presentation. We believe that our audit and the reportof the other auditors provide a reasonable basis for our opinion.In our opinion, based on our audit and the report of the other auditors, theconsolidated financial statements referred to above present fairly, in all mate-rial respects, the financial position of X Company as of [ at ] December 31, 20....,and the results of its operations and its cash flows for the year then ended inconformity with accounting principles generally accepted in the United Statesof America. 3  As to filings with the Securities and Exchange Commission, see Rule 2-05 of Regulation S-X.  AU §543.09  2214  The Fourth Standard of Reporting  When two or more auditors in addition to the principal auditor participate inthe audit, the percentages covered by the other auditors may be stated in theaggregate. [Revised, April 1998, to reflect conforming changes necessary due tothe issuance of Statement on Auditing Standards Nos. 53 through 62. Revised,October 2000, to reflect conforming changes necessary due to the issuance of Statement on Auditing Standards No. 93.] Procedures Applicable to Both Methods of Reporting .10  Whether or not the principal auditor decides to make reference to theauditoftheotherauditor,heshouldmakeinquiriesconcerningtheprofessionalreputation and independence of the other auditor. He also should adopt appro-priate measures to assure the coordination of his activities with those of theother auditor in order to achieve a proper review of matters affecting the con-solidatingorcombiningofaccountsinthefinancialstatements.Theseinquiriesand other measures may include procedures such as the following: a.  Make inquiries as to the professional reputation and standing of theother auditor to one or more of the following:(i) The American Institute of Certified Public Accountants, 4 theapplicable state society of certified public accountants and/orthe local chapter, or in the case of a foreign auditor, his corre-sponding professional organization.(ii) Other practitioners.(iii) Bankers and other credit grantors.(iv) Other appropriate sources. b.  Obtain a representation from the other auditor that he is independentunder the requirements of the American Institute of Certified Public Accountants and, if appropriate, the requirements of the Securitiesand Exchange Commission (SEC). [4a] c.  Ascertain through communication with the other auditor:(i) Thatheisawarethatthefinancialstatementsofthecomponentwhich he is to audit are to be included in the financial state-ments on which the principal auditor will report and that theother auditor's report thereon will be relied upon (and, whereapplicable, referred to) by the principal auditor. 4 The AICPA Professional Ethics Division can respond to inquiries about whether individuals aremembers of the American Institute of Certified Public Accountants and whether complaints againstmembers have been adjudicated by the Joint Trial Board. The division cannot respond to inquiriesabout public accounting firms or provide information about letters of required corrective action issuedby the division or pending disciplinary proceedings or investigations. The AICPA Division for CPA Firms can respond to inquiries about whether specific public accounting firms are members of eitherthePrivateCompaniesPracticeSection(PCPS)ortheSECPracticeSection(SECPS),andcanindicatewhether a firm had a peer review in compliance with the Section's membership requirements andwhether any sanctions against the firm have been publicly announced. In addition, the division willsupply copies of peer-review reports that have been accepted by the applicable section of the divisionand information submitted by member firms on applications for membership and annual updates.The AICPA Practice Monitoring staff or the appropriate state CPA society can respond to inquiries asto whether specific public accounting firms are enrolled in the AICPA Peer Review Program and canindicate whether a firm had a peer review in compliance with the AICPA   Standards for Performingand Reporting on Peer Reviews  [PR section 100]. [As amended by the Auditing Standards Board, June1990.] [4a] [Footnote deleted, December 2001, to acknowledge the dissolution of the Independence Stan-dard Board.]  AU §543.10
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