This powerpoint presentation was completed in partial satisfaction of course requirements for ACCT 8400 - Seminar in Auditing - at Kennesaw State University during the Spring 2009 semester.

1. December 18, 2008

2. TODAY WE WILL DISCUSS:
•Necessity of Auditors to Rely on Work of Other
Auditors
•Current Requirements for Shared Audit Reports
•Problems with Current Requirements
•Possible Changes
•Implications
•Conclusion / Future Model

3. TODAY WE WILL DISCUSS:
•Necessity of Auditors to Rely on Work of
Other Auditors
•Current Requirements for Shared Audit Reports
•Problems with Current Requirements
•Possible Changes
•Implications
•Conclusion / Future Model

4. Why Do Auditors Need to Rely on the Work of Other
Auditors?
GEOGRAPHY EXPERTISE
HUMAN RESOURCES

5. TODAY WE WILL DISCUSS:
•Necessity of Auditors to Rely on Work of Other
Auditors
•Current Requirements for Shared Audit
Reports
•Problems with Current Requirements
•Possible Changes
•Implications
•Conclusion / Future Model

6. Current Auditor Reporting Requirements
Shared Audit Reports
-Audit firm (principal auditor) or audit client may hire a subsidiary auditor to conduct
part of an audit.
-Principal auditor decides whether or not to mention work of subsidiary auditor in
audit report.
-Subsidiary auditor’s name is usually not mentioned.
-Wording is added to three standard paragraphs, no additional paragraph
is required
-End of introductory paragraph
-End of scope paragraph
-Beginning of opinion paragraph
-Principal auditor can be subject to legal and regulatory action for work of
subsidiary auditor.

7. TODAY WE WILL DISCUSS:
•Necessity of Auditors to Rely on Work of Other
Auditors
•Current Requirements for Shared Audit Reports
•Problem with Current Requirements
•Possible Changes
•Implications
•Conclusion / Future Model

8. GRANT THORNTON EXAMPLE-
GRANT THORNTON AS SUBSIDIARY AUDITOR:
Grant Thornton had been the auditor of Parmalat
for several years until Italian law required the
rotation of audit firms. Deloitte was then hired as
principal auditor but Grant Thornton was kept on
as a subsidiary auditor because of its familiarity of
the business. Much of the fraud that had taken
place in the company was hidden in these
subsidiaries. Deloitte relied on the subsidiary audit
of Grant Thornton and is now facing legal and
regulatory action.

9. GRANT THORNTON EXAMPLE (CONT’D)-
GRANT THORNTON AS PRINCIPAL AUDITOR:
The SEC has instituted fraud action against
Grant Thornton related to the audit of MCA
Financial Corporation’s 1998 financial
statements. The SEC claims Grant Thornton
“rented” its name to the audit work of a smaller
firm that did most of the work on the MCA audit.
MCA had inflated its books by utilizing related
party transactions. The fraud resulted in millions
of dollars in losses by public investors.

10. TODAY WE WILL DISCUSS:
•Necessity of Auditors to Rely on Work of Other
Auditors
•Current Requirements for Shared Audit Reports
•Problems with Current Requirements
•Possible Changes
•Implications
•Conclusion / Future Model

11. OBJECTIVE: Limit principal auditor’s liability for subsidiary auditor’s work.
 Amend audit report
-Proposal #1 – Modify wording in current audit report by adding
name of audit firm upon whose work principal auditor will rely.
-Proposal #2 – Modify wording in current audit report by adding
name of audit firm upon whose work principal auditor will rely as well
as what that auditor audited.
-Proposal #3 – Include a disclosure paragraph that states:
-Work of other auditor was used
-Amount of work other auditors did related to audit
-Name of audit firm
 The audit report of the subsidiary auditor is to be attached to the
audit report of the principal auditor.

12. TODAY WE WILL DISCUSS:
•Necessity of Auditors to Rely on Work of Other
Auditors
•Current Requirements for Shared Audit Reports
•Problems with Current Requirements
•Possible Changes
•Implications
•Conclusion / Future Model

13.  Implications:
› Principal – may increase (or decrease) the
reliability of opinion due to reputation of
subsidiary
› Subsidiary – slightly increases liability
› Investors – slight increase in investor confidence
of company
› Auditing industry – hold subsidiary to higher
standard

14.  Implications:
› Principal – shows extent of their work ->
decrease liability
› Subsidiary – name -> increase liability
 Extent holds firm more accountable
› Investors – know who else worked and what they
did -> decrease/increase confidence in
company
› Industry – hold firms more accountable
 May increase outsourcing to other auditors

15.  Implications:
› Principal – lower liability of firm -> shows what
they audited and did not audit
› Subsidiary – more responsible for poor reports ->
increased liabilities
 GT example
› Investors – may miss modified wording ->
increase/decrease confidence
› Industry – decrease principal liability
 May increase work slightly

16.  Implications:
› Principal – liable to the extent of audit work
performed
 No punishments for poor subsidiary work
› Subsidiary – complete liability for their work
 Extent and scope mentioned
› Investors – see the number of auditors, extent of
work -> increase/decrease confidence
› Industry – increase quality of audit by holding
firms accountable for their OWN work

17. TODAY WE WILL DISCUSS:
•Necessity of Auditors to Rely on Work of Other
Auditors
•Current Requirements for Shared Audit Reports
•Problems with Current Requirements
•Possible Changes
•Implications
•Conclusion / Future Model

18.  Audit report should refer to other auditors
involved.
 Reference other audit firms by name.
 Include audit reports from other auditors.

19.  Must be consistent with the sufficiency
and appropriateness of evidence
gathered by all auditors involved.
 Clearly show extent of the divided
responsibility.

20. “ We did not audit the financial statements of Georgia
Tech Company, a consolidated subsidiary, which
statements reflect total assets constituting 30 percent
in 2007 and 34 percent in 2006, and total revenues
constituting 15 percent in 2007, 17 percent in 2006,
and 14 percent in 2005 of the related consolidated
totals, or the 2006 and 2005 financial statements of
Bumblebee Company, used as a basis for recording
the company’s equity in net income of that
corporation. Those statements were audited by
Barrow and Debeb, CPAs, whose reports have been
furnished to us and are attached, and our opinion,
insofar as it relates to the amounts included for
Georgia Tech Company and Bumblebee Company,
”
is based solely on the reports of Barrow and Debeb.

21. “We believe that our audits and the reports
of Barrow and Debeb provide a
reasonable basis for our opinion.
”
“In our opinion, based upon our audits and the
reports of Barrow and Debeb, the financial
statements referred to above present fairly, in all
material respects, the consolidated financial
position….
”

22. Thank you.