I keep reading this explanation and can't understand it. But I also have a migraine
Pell, CPA, is the group engagement partner in the audit of the financial statements of Tech Consolidated, Inc. Smith, CPA, audits one of Tech’s subsidiaries. In which situation(s) should Pell refer to Smith’s audit?
I Pell reviews Smith’s audit documentation and assumes responsibility for Smith’s work but expresses a qualified opinion on Tech’s financial statements.
II Pell is unable to review Smith’s audit documentation but reads the financial statements and gains an understanding that Smith has an excellent reputation for professional competence and integrity.
A. II only.
Answer (A) is correct.
Regardless of the decision to make reference, the group engagement team should obtain an understanding of the component auditor’s professional competence and compliance with ethical requirements (especially independence). The understanding also addresses (1) the extent of the team’s involvement in the component auditor’s work, (2) whether (s)he operates under regulatory oversight, and (3) whether the team will be able to obtain information about the consolidation process from the component auditor. Serious concerns about (1) compliance with ethical requirements or (2) lack of competence preclude a reference to the audit of the component auditor. Moreover, the group engagement partner’s assumption of responsibility for the component auditor’s audit indicates a decision not to refer to the audit of component auditor.
B. Both I and II.
C. Neither I nor II.
D. I only.
.