Predecessor Auditor Reporting Responsibilities

Introduction

In our last lesson, we established the crucial distinction between 'corresponding figures' and 'comparative financial statements' as defined in SA 710. We concluded that in India, the 'corresponding figures' approach is standard practice, meaning the auditor's opinion is only on the current period. We also touched upon a few scenarios that require special mention in the audit report, including when the prior period was unaudited or audited by someone else.

Today, we will do a deep dive into that last scenario. Our learning outcome is to describe the auditor's reporting responsibilities when the prior period was audited by a predecessor auditor.

This is a very common situation in practice and a frequent topic in exams. Building on your preference for logical understanding, we will explore why certain disclosures are required and what procedures you must follow if you discover an issue with the prior period figures audited by someone else. This will help you connect the dots between SA 710 (Comparative Information), SA 510 (Initial Audit Engagements), and SA 706 (Emphasis of Matter and Other Matter Paragraphs).

Part 1: Reporting on Corresponding Figures Audited by a Predecessor

As we established, India follows the 'corresponding figures' approach. Your audit opinion covers only the current period. However, the financial statements still present the prior year's figures for comparison. If you didn't audit those figures, users of the financial statements need to know who did and what their conclusion was.

This is not a matter that affects your opinion on the current year (unless an unresolved issue exists), but it's important contextual information. Therefore, you communicate this using an Other Matter (OM) paragraph in your audit report.

Let's look at the authoritative text from SA 710 to understand exactly what needs to be included.

As you just read, when the prior period was audited by a predecessor, the current auditor's report must include an Other Matter paragraph stating:

1. The fact that the financial statements of the prior period were audited by a predecessor auditor.
2. The type of opinion expressed by the predecessor auditor (e.g., unmodified, qualified, etc.) and, if the opinion was modified, the reasons for it.
3. The date of the predecessor's report.

The logic here is transparency. You are taking responsibility only for the current year's figures. The OM paragraph clearly delineates your responsibility from the predecessor's, while still providing the user with the necessary assurance context for the comparative numbers.

Part 2: Reporting on Comparative Financial Statements Audited by a Predecessor

Although less common in the Indian context, you also need to know the rules for the 'comparative financial statements' approach, where the auditor's opinion covers all periods presented. The requirements are very similar.

As you can see, the core disclosure requirements in the Other Matter paragraph remain the same. The video below provides a good conversational summary of this principle.

Part 3: A Critical Scenario - Discovering a Misstatement in the Prior Period

Now for a more complex and conceptually important scenario. What if, during your current year audit, you discover a material misstatement that affects the prior period financial statements, on which the predecessor auditor had issued an unmodified report?

This situation tests your understanding of professional responsibilities beyond just reporting. You can't simply ignore it, nor can you unilaterally change the prior year's figures. A specific protocol must be followed.

This is a scenario where understanding the 'why'—the protection of the integrity of financial reporting—is crucial.

Let's break down the process from paragraph 18:

1. Identify and Communicate: You, the current auditor, identify a material misstatement affecting the prior period. Your first step is to communicate this finding to the appropriate level of management and those charged with governance (TCWG).
2. Request Action: You request that they inform the predecessor auditor about this matter.
3. Ideal Resolution: Ideally, management works with the predecessor auditor. The prior period financial statements are amended, and the predecessor auditor issues a new, revised audit report on the amended statements.

If this ideal resolution occurs, your job becomes simpler. You would report only on the current period, as the prior period issue has been formally corrected by the party responsible for it.

However, as paragraph A11 of SA 710 (in resource LINK) notes, the predecessor auditor might be unable or unwilling to reissue their report. In such more complex cases, the current auditor's reporting responsibilities would increase, potentially involving modifying the opinion with respect to the comparatives or including further explanatory paragraphs.

Part 4: Practical Application - Wording the Report

Knowing the rules is one thing; applying them with the precise wording required by ICAI is another. Let's look at a concrete example of an audit report that includes the 'Other Matter' paragraph for a predecessor auditor.

The example paragraph is a model of clarity and conciseness:

"The financial statements of the Company for the year ended March 31, 20X1, were audited by another auditor who expressed an unmodified opinion on those statements on June 30, 20X1."

This single sentence perfectly fulfills the requirements of paragraph 13 of SA 710.

Self-Assessment

Let's test your understanding with a couple of quick questions.

1. You are the auditor of XYZ Ltd. for FY 2023-24. The audit for FY 2022-23 was done by ABC & Co., who gave a qualified opinion. What are the key elements you must disclose in your audit report regarding the prior period, and in which paragraph?
2. During your audit of XYZ Ltd. for FY 2023-24, you find a material misstatement in the inventory valuation of FY 2022-23, on which ABC & Co. had given an unmodified opinion. What is your immediate course of action as per SA 710?

Take a moment to formulate your answers based on what we've covered.

Answers:

1. You must include an Other Matter paragraph. It should state that the prior period was audited by another auditor (ABC & Co.), that they issued a qualified opinion (and the reasons for it), and the date of their report.
2. Your immediate action is to communicate the misstatement to management and Those Charged with Governance and request them to inform the predecessor auditor (ABC & Co.).

Conclusion

You have now completed a detailed examination of your responsibilities when a predecessor auditor was involved. This is a common scenario where simply knowing the rule isn't enough; you must also understand the communication protocol and precise reporting language.

Key Takeaways:

• When a predecessor auditor has audited the prior period, you must add an Other Matter paragraph to your report.
• This paragraph must state: (1) the fact of the predecessor's audit, (2) the type of opinion they gave (including reasons if modified), and (3) the date of their report.
• This requirement applies under both the 'corresponding figures' and 'comparative financial statements' approaches.
• If you discover a material misstatement in the prior period financials, you have a duty to communicate it to management and TCWG and request that they inform the predecessor auditor.

Preview of the Next Lesson

We will continue our journey through the reporting standards. In the next lesson, we will move to SA 720 and address the learning outcome: "Explain the auditor's responsibility to read and consider 'other information' included in documents containing audited financial statements." This deals with information like the Director's Report or Chairman's Statement in an annual report, and your responsibility to ensure it doesn't contradict the audited financials.