When an entity's financial statements include a branch, subsidiary, division, joint venture, associate or another component audited by a different auditor, the principal auditor cannot simply attach the other auditor's report to the file and move on. ICAI's SA 600, Using the Work of Another Auditor sets out how the principal auditor should decide whether that work can be used, coordinate with the other auditor, evaluate significant findings, document the process and deal with reporting consequences.
SA 600 continues to appear in ICAI's current Engagement and Quality Control Standards repository. The standard is especially relevant to branch and component audits and to consolidated financial statements where different auditors cover parts of the reporting entity.
What SA 600 covers
SA 600 uses the term principal auditor for the auditor responsible for reporting on financial information that includes one or more components audited by another auditor. The other auditor is the auditor responsible for reporting on the financial information of such a component.
The standard does not govern joint audits, which are dealt with separately, and it does not deal with the relationship between a current auditor and a predecessor auditor. It also says that the detailed procedures need not apply when a component is immaterial. However, where several components are individually immaterial but together become material to the entity as a whole, the SA 600 procedures should be considered.
Step 1: Decide whether your own participation is sufficient
Before acting as principal auditor, the auditor should assess whether the level of personal participation in the overall engagement is sufficient. SA 600 points to four practical considerations:
- the materiality of the portion audited directly by the principal auditor;
- the principal auditor's knowledge of the businesses of the components;
- the risk of material misstatement in component information audited by the other auditor; and
- whether additional procedures over those components will give the principal auditor significant participation in the audit.
This is a useful planning test. A parent with one small overseas component may require a different level of involvement from a group where most revenue, assets or key risks sit in components audited by other firms.
Step 2: Evaluate whether the other auditor's work can be used
The principal auditor should perform procedures to obtain sufficient appropriate audit evidence that the other auditor's work is adequate for the principal auditor's purposes. Where the other auditor is not a member of ICAI, SA 600 specifically requires the principal auditor to consider that auditor's professional competence in the context of the assignment.
The principal auditor should also tell the other auditor how the work and report will be used and establish coordination at the planning stage. Important communications can include areas requiring special attention, identification of inter-component transactions, the completion timetable, and significant accounting, auditing and reporting requirements. SA 600 also contemplates obtaining a representation from the other auditor regarding compliance with those requirements.
Step 3: Review findings, not just the final opinion
A clean component audit report does not eliminate the need to understand what happened during the component audit. Depending on the circumstances, the principal auditor may discuss procedures with the other auditor, review a written summary, questionnaire or checklist, visit the other auditor, or request supplemental testing.
The principal auditor should consider the other auditor's significant findings. If an issue affects the component's financial information, the principal auditor may discuss it with both the other auditor and component management and may decide that additional tests are necessary.
Practical example
Assume an Indian parent has three subsidiaries, and one material subsidiary is audited by another firm. The component auditor reports no modified opinion but identifies a significant revenue cut-off issue that was corrected before signing. The principal auditor should not treat the unmodified report as the entire evidence package. A sensible SA 600 workflow would obtain the component auditor's summary of the issue, understand the procedures performed, assess whether similar risks could affect group-level reporting or other components, and document why the work is adequate for the group audit purpose.
Step 4: Build a clear component-auditor communication pack
A practical written instruction or questionnaire can make coordination more reliable. It should be tailored to the engagement rather than treated as a boilerplate form. Depending on the facts, the pack can cover:
- reporting framework and significant accounting policies;
- materiality or other thresholds communicated for component work;
- identified group-level or component-specific risks requiring attention;
- related-party and inter-component transactions;
- uncorrected and corrected misstatements relevant to group reporting;
- significant deficiencies, fraud indicators, litigation or going-concern matters where relevant;
- expected deliverables, reporting format and completion dates; and
- confirmation of compliance with communicated accounting, auditing and reporting requirements.
The objective is not to recreate the component audit. It is to obtain enough information and evidence to decide whether the other auditor's work is fit for the principal auditor's purpose.
Step 5: Document the SA 600 conclusion
SA 600 requires the principal auditor's working papers to identify components audited by other auditors, their significance to the entity's financial information, the names of the other auditors, procedures performed and conclusions reached. Where a component is treated as immaterial, that conclusion should also be documented.
If the other auditor's report contains a qualification or adverse matter, the principal auditor should document how that matter was dealt with when framing the principal auditor's own report. Good documentation therefore connects the component finding to the group-level materiality and reporting conclusion instead of merely filing the component report.
What happens when the other auditor's work cannot be used?
If the principal auditor concludes that the other auditor's work cannot be used and cannot obtain sufficient evidence through additional procedures, SA 600 requires a qualified opinion or disclaimer of opinion because of the resulting scope limitation. Separately, if the other auditor issues or intends to issue a modified report, the principal auditor must consider whether the nature and significance of that matter require modification of the principal auditor's report.
Where the principal auditor bases the overall opinion on financial information and reports of other auditors, SA 600 also requires the report to state clearly the division of responsibility by indicating the extent of component information audited by other auditors.
How this applies to consolidated financial statements
ICAI's clarification on the Guidance Note on Audit of Consolidated Financial Statements specifically states that, while considering component-auditor observations such as modifications, emphasis-of-matter or other-matter issues, the parent auditor should comply with SA 600. That makes SA 600 a practical bridge between component-level reporting and the final consolidated audit conclusion.
A concise SA 600 file-review checklist
- Identify every component audited by another auditor and assess its significance.
- Document why your own participation is sufficient to act as principal auditor.
- Communicate the planned use of the other auditor's work, key risks and reporting requirements.
- Obtain and evaluate the other auditor's findings, not only the signed report.
- Perform or request additional procedures when the evidence is not adequate.
- Assess every component modification for its effect on the entity-level audit opinion.
- Document the work performed, conclusions reached and division-of-responsibility reporting.
Practical takeaway
SA 600 is fundamentally an evidence-and-coordination standard. The principal auditor may use work performed by another auditor, but should first determine that the engagement structure permits sufficient participation, communicate expectations, evaluate the adequacy of component work, investigate significant findings and document the reporting conclusion. The strongest files show a clear chain from component risk to component evidence to group-level conclusion, rather than treating the other auditor's signed report as a substitute for the principal auditor's own SA 600 responsibilities.
