SA 600 vs. ISA 600 on using the work of another auditor

?Standard of Auditing (SA) 600 has become a focal point in recent public discourse, particularly in light of the National Financial Reporting Authority’s (NFRA) findings regarding auditors' roles in the financial reporting failures of several major corporations. These findings have brought to light significant financial misconduct and scams. In response, the NFRA is examining the International Standard on Auditing (ISA) 600 to enhance the overall credibility and effectiveness of the auditing process.

The main issue concerns the principal auditor's authority in auditing Consolidated Financial Statements, particularly the work of component auditors. This brings to core the debate on reliance placed by the principal auditor on the work done by the component auditors and on the credibility of the component auditors.

What is SA 600?

The purpose of SA 600 is to establish standards to be applied while using the work of component auditor with respect to financial information of one or more subsidiaries/ components/ branches while reporting on the Consolidated Financial Statements.

The principal auditor can rely on another auditor's work if they exercise due skill and care and have no doubts. Effective communication is crucial, ensuring the principal auditor receives all necessary documents and resolves any queries to his satisfaction.

If the principal auditor cannot rely on the component auditor's work or lacks complete information, they would generally issue a qualified opinion, noting the extent to which the component's financial statements are included in the entity's financial statements.

Recent Developments in ISA 600

In 2022, ISA 600 underwent a significant revision, emphasizing a risk-based approach closely aligned with ISA 315. This revision places the responsibility on the principal auditor for identifying and assessing the risks of material misstatement for the group as a whole.

The revised ISA 600 offers guidelines for group audits involving component auditors. It enables the principal auditor to engage more with the component auditor's work and requires a thorough audit if information is incomplete. This gives a boost to the quality management aspect as under International Standard on Quality Management.

Public response to NFRAs Proposal to bring SA 600 in line with ISA 600

Under the NFRA proposal, the Principal or Group Auditor will have ultimate authority over the auditor's work and will evaluate the need for additional auditing. This change has raised concerns about potential negative impacts on small and medium-sized CA firms that usually handle audits for subsidiary companies.

The ICAI has expressed concern that a group auditor, under the pretext of ensuring quality oversight, may encourage companies to replace small audit firms for subsidiary audits with their own firms. This could lead to a concentration of audit work among fewer firms.