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A principal auditor decides not to refer to the audit of another CPA who audited a subsidiary of the principal auditor's client. After making inquiries about the other CPA's professional reputation and independence, the principal auditor most likely would:

A)   Add an explanatory paragraph to the auditor's report indicating that the subsidiary's financial statements are not material to the consolidated financial statements.

B)   Document in the engagement letter that the principal auditor assumes no responsibility for the other CPA's work and opinion.

C)   Obtain written permission from the other CPA to omit the reference in the principal auditor's report.

D)   Contact the other CPA and review the audit programs and working papers pertaining to the subsidiary.


After you have replied below with your choice, and explanation if you are so inclined, go ahead and view the detailed answer:

Tags: AUD, MCQ

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Replies to This Discussion

D is correct

D is correct. The decision not to refer to another auditor's material work implies an acceptance/assumption of responsibility for that auditor's work. It is proper for the principal auditor to check the reputation of the second auditor, and also to do exactly as D says, to provide evidence to yourself that their work is of high enough quality for you to vouch for it and adopt it into your report.  

A is incorrect because you would not deal with any of this if the report was not material, let alone add an explanatory paragraph to the audit report.

B is incorrect because by not referring to the second auditor, the principal auditor has made it clear that they are assuming FULL responsibility for the other auditor's work. B might be true if the situation dealt with a principal auditor who made clear in all 3 main paragraph of the audit report that there was a division of responsibility, while also noting the relevant percentages of the overall revenues/assets/etc that the secondary auditor's audit report on a subsidiary, segemt, etc. covered.

C is incorrect because permission is not required to omit a CPA's name, but rather is required to ADD their name to a report, as this would divide responsibility and make the secondary auditor responsible for how their audit report influenced the audit report of the principal auditor.


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