TaxTMI 
TaxTMI 
Responsibilities of Principal Auditor and Other Auditors in Group Audits
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....SAs addressing various aspects during the entire life cycle of an audit; and c) Code of Ethics including Independence standards. 2. Audit of SFS, where the company has branches, and the audit of CFS of companies with subsidiaries, associates etc, called as audit of Group Financial Statements (GFS), requires special considerations by the auditor (called Principal Auditor), who is ultimately responsible for issue of group audit opinion, and also by the auditors (called Other Auditor) engaged to undertake audit of components such as branches and subsidiaries etc. 'SA 600 - Using the Work of Another Auditor' deals with the requirements in the audit of GFS. 3. In the contemporary business and economic environment, there are audit areas of material and/or significant risk in almost all the audits of GFS due to the following features (this list is not exhaustive). a. Complex group structures including special purpose vehicles, auto pilot structures, cross holdings of interests across group entities and shared service centres in different geographies b. Shell or dummy companies as a conduit to siphon off funds from Public Interest Entities (PIEs) c....
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....rdination/discussion with Component Auditors at most stages of audit b. Discrepancies in the number of components as per CFS and mandatory filings in MCA 21 which were not assessed by the auditors, c. Non-assessment of inclusion by Management of unaudited financial statements of some components in the CFS. In respect of the latter, the Principal Auditor stated that "........ preparation of consolidated financial statements (CFS) is the responsibility of management and accordingly, use of component's unaudited financial statements, considering the non-availability of audited financial statements, was also decision of management. As an auditor, we had no role to play in this regard. As a holding company auditor, it is not in our realm to insist on the management that all components financial statements should be audited". Such approach by the Principal Auditor went against the very objective of the audit of CFS as per the SAs i.e., to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. d. SA 600 provides that Principal Auditor would normally be entitle....
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....Auditor. At the same time, the Principal Auditor, in their submissions to NFRA, denied that they relied on the Branch Auditors' Report and said that they did branch audits based on ERP System at HO. Neither the Principal Auditor nor the Branch Auditors verified group-wide internal control systems, in particular the controls relating to the appraisal and sanction of loans at the head office level and branch level. The Principal Auditor failed to properly evaluate non-consolidation of a subsidiary resulting in material understatement of liability in the CFS. i. In the case of another company 100 % of the revenue of the company was being generated from its overseas branch (country A) and the auditor of this component was located in another overseas location (country B). The Principal Auditor was located in India where the entity had no business activities. The company had disclosed in its annual report that they were engaged in the Software business, whereas Revenue from operations reported in the financial statements was from construction business activities in overseas locations. The Principal Auditor did not evaluate the sufficiency of his participation in this audit which....
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.... of financial statements are the same for a Principal Auditor or a Component/Other auditor. Thus, Principal Auditors cannot contend that they did not perform adequate procedures in audits of GFS if in their opinion a particular SA, by itself, did not require them to do so. 11. Paragraphs 18-23 of SA 200 state that the auditor shall comply with all SAs relevant to the audit. SA 200 further states that the auditor shall not represent compliance with SAs in the auditor's report unless the auditor has complied with the requirements of this SA and all other SAs relevant to the audit. An SA is relevant to the audit when the SA is in effect, and the circumstances addressed by the SA exist. The auditor shall have an understanding of the entire text of an SA, including its application and other explanatory material, to understand its objectives and to apply its requirements properly. 12. SA 200 further states that "The SAs contain objectives, requirements and application and other explanatory material that are designed to support the auditor in obtaining reasonable assurance. The SAs require that the auditor exercise professional judgment and maintain professional skepticism throughou....
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.... similar requirement is there in paragraph 22 of SA 600 which requires that when the principal auditor concludes, based on his procedures, that the work of the Other Auditor cannot be used and he has not been able to perform sufficient additional procedures regarding the financial information of the component audited by the Other Auditor, he should express a qualified opinion or a disclaimer. 14. Under SA 600 the principal auditor continues to remain responsible for forming and expressing his opinion on the group financial statements. A combined reading of the provisions of SA 600 such as paragraph 5, which states that 'When the principal auditor uses the work of another auditor, the principal auditor should determine how the work of the other auditor will affect the audit', and paragraph 12, which states that "The principal auditor should perform procedures to obtain sufficient appropriate audit evidence, that the work of the other auditor is adequate for the principal auditor's purposes, in the context of the specific assignment', show that under SA 600 as well, the auditor is required to obtain sufficient appropriate audit evidence to provide a basis for his overall opini....
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.... c. Paragraph 12 of SA 600 states that "The Principal Auditor should perform procedures to obtain sufficient appropriate audit evidence, that the work of the other auditor is adequate for the principal auditor's purposes, in the context of the specific assignment." d. Paragraph 15 of SA 600 states that "The Principal Auditor should consider the significant findings of the other auditor". 18. The word 'should' has been used on over twenty occasions in the substantive text of the SA 600 and the word 'shall' has not been used even once. Considering these provisions as directory and not performing the required procedures frustrates the basic purpose of the audit and the objectives of this Standard and results in non-compliance of the Section 143(2), Section 143(3), Section 143(9) of CA 2013 and the Standards of Auditing. 19. The Hon'ble Supreme Court of India in a case [Juthika Bhattacharya v. State of M.P., (1976) 4 SCC 96: 1976 SCC (L&S) 561] has held: "...The mere use of the word "should" does not mean necessarily that the compliance with the rule is discretionary. It is well-settled that whether a provision is directory or mandatory depends on its object....
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....ho have no control over the performance of the duty, such provision should be treated as directory; Dattatraya Moreshwar (supra); (v) If a statute confers a concession or privilege and prescribes a mode of acquiring it, the mode so prescribed must be adopted as even affirmative words in such cases are construed imperative; Edward Ramia Ltd. v. African Woods Ltd., 1960 (1) ALL ER 627; (vi) Where a provision prescribes that a certain act has to be done in a particular manner by a person in order to acquire a right and it is coupled with another provision which confers an immunity on another when such act is not done in that manner, the former has to be regarded as mandatory one; (vii) Provisions which impose private duties or obligations upon private parties are ordinarily to be regarded as mandatory; Kedamath Jute Mfg, Co. Ltd. v. Commercial Tax Officer, AIR 1966 SC 12 = 1965 (4) TMI 91 - SUPREME COURT; (viii) If exceptions, exemptions or concessions are granted by a statute subject to fulfilment of certain conditions, then such conditions must be mandatorily fulfilled. Subject to fulfilment of conditions, the provision may be liberally construed;....
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....compliance with the specified responsibility was not necessary to achieve the objectives of the standard". In the note issued under the rule, the PCOAB stated that "in the rare circumstances in which the auditor believes the objectives of the standard can be met by alternative means, the auditor, as part of documenting the planning and performance of the work, must document the information that demonstrates that the objectives were achieved." 24. Importance of the Principal Auditor's obligations towards Group financial statements is further underscored in the Master circular for compliance with the provisions of the Securities and Exchange Board of India (Listing Obligations and Disclosure requirements) Regulations 2015, issued 11 July 2023 by SEBI. The circular provides [Chapter III Financial Disclosures, Section III A, part (C), paragraph 12] that the statutory auditor of a listed entity shall undertake a limited review of the audit of all the entities/companies whose accounts are to be consolidated with the listed entity as per the relevant accounting standard (AS 21/Ind-AS 110) in accordance with guidelines issued by the Board on this matter. The audit procedures, which e....
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.... consider the report of the branch auditor and report how (CA 1956)/in what manner (CA 2013) he considered it in respect of his overall reporting obligations. Relevant provisions in CA 2013 are discussed below in paragraphs 28-30. 28. Further, S. 143 of CA 2013 grants auditors a right of access to all books and vouchers of the company including right of access to the records of all the subsidiaries of the companies in so far as it relates to the consolidation of its financial statements with that of its subsidiaries. Auditors are entitled, under the provisions of this section, 'to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties as auditor...'. 29. The obligation of the auditor under the Companies Act lies towards 'every financial statement' which includes the CFS. Section 143 (2) of CA 2013 states that 'The auditor shall make a report to the members of the company on the accounts examined by him and on every financial statements which are required by or under this Act to be laid before the company in general meeting and the report shall after taking into account the provisions of this Act....
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....nder this section is answered in the negative or with a qualification, the report shall state the reasons therefor'. 31. Therefore, the law specifies unequivocal right of access of the Principal Auditor to records of holding company, subsidiaries, associates, JVs, branches, and to information and explanation from company officers (including subsidiaries, associates, JVs, branches), his obligations to report on all information and explanations which to the best of his knowledge and belief were necessary for purpose of audit, his obligations to report if any of the matters that are required to be reported in the audit report could not reported or are answered in negative or a qualification. 32. SA 600 also requires, in paragraph 12, that "The Principal Auditor should perform procedures to obtain sufficient appropriate audit evidence, that the work of the Other Auditor is adequate for the Principal Auditor's purposes, in the context of the specific assignment." SA 600 further requires under paragraph 5 that 'When the Principal Auditor uses the work of another auditor, the Principal Auditor should determine how the work of the other auditor will affect the audit.' 33. Abov....
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....firming whether the Other Auditor is a CA or not. There is no parallel of any such provisions in any other profession where acquiring a professional degree is taken to be synonymous with professional competence. Professional competence goes beyond acquiring a professional degree/certification and takes into account the experience of the auditor, in terms of years of experience, relevant skills, sectors audited, complexity of audit assignments handled, and availability of adequate resources to undertake the specific engagement etc., to name a few. As provided in the SA, this assessment of professional competence of the Component or the Other Auditor is meant to help the Principal Auditor in his evaluation of the work of the Other Auditor and to determine to what extent he has sufficient appropriate audit evidence that provides a sufficient basis for his opinion on the GFS. 36. To conclude, as explained above, a selective reading and interpretation of existing provisions in SA 600 by some auditors without keeping in view the overall purpose and objectives of the audit and the provisions of the Act is not in alignment with the Standards of Audit and provisions of the Companies Act,....
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....es accordingly. 39. While doing so, use of the word 'should' in the various paras of SA 600 shall not be treated as directory, giving an arbitrary choice to the Principal Auditor to perform or not to perform the procedures as specified in the SA 600. The word "should" in SA 600 casts responsibilities that are presumptively mandatory. Every Principal Auditor is, therefore, mandatorily required to perform all the procedures specified in SA 600 (regardless of the word 'should' in SA 600) and related SAs in fulfilment of his obligations under CA 2013 read with the overall objectives provided under SA 200, unless he has valid reasons to say that he has carried out alternate procedures to achieve these objectives and the absence of performance of such procedure would not materially impact his opinion of the accounts being true and fair. In circumstances in which the Principal Auditor believes the objectives of the SAs relevant to audit of GFS can be met by alternative means, the Principal Auditor, as part of documenting the planning and performance of the work, shall document the information that demonstrates how the objectives were achieved through the alternate means. 40. Section....