Reliance on a Component Auditor
Halden Group plc has a 31 December year end and group materiality of $2.4m. You are the group audit engagement partner. The group has three components: Halden UK (72% of group revenue, audited by your firm), Nordia AB in Sweden (19%, audited by a local firm, Nordia Revisionsbyra), and Baltic Trading in Estonia (9%, no statutory audit required; management-prepared figures only). Nordia Revisionsbyra has issued an unmodified opinion on Nordia AB, but its working papers show it applied component materiality of $900,000 (37.5% of group materiality) and did not test the group's key judgement - a $6m goodwill balance supported by a discounted cash flow model using a 7% growth rate. Group revenue has declined 11% year on year. The Nordia partner is unresponsive to your questionnaire and has declined a video conference, citing 'client confidentiality'.
1. Decide whether you can take the Nordia component work as sufficient appropriate audit evidence, and justify your conclusion.
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Framework: ISA 600 (revised) - the group auditor must be involved in the work of component auditors to the extent necessary, and must evaluate whether sufficient appropriate evidence has been obtained. Reliance is not automatic just because an unmodified opinion exists; the opinion covers the component's own financial statements, not the group's needs.
Red flags:
- Component materiality $900k vs group $2.4m - 37.5% is high; typically component materiality is set well below group materiality to leave headroom for undetected misstatements across components. This leaves little margin.
- Key group judgement untested - the $6m goodwill DCF is a significant risk (impairment) and sits at group level in terms of judgement. The component auditor has not addressed it.
- Revenue decline 11% - increases impairment risk; the 7% growth assumption looks optimistic and inconsistent with the group trend.
- Non-cooperation - refusal to engage and 'confidentiality' as a reason is unacceptable; under ISA 600 the group auditor has a right of access to component working papers.
Conclusion: The evidence is not sufficient. You cannot rely on the Nordia work for the goodwill judgement, and the materiality basis undermines confidence in the rest.
Options: (1) escalate to the Nordia firm's leadership and to those charged with governance of Halden Group; (2) perform additional group-level procedures on the goodwill model yourself (challenge growth rate, discount rate, sensitivity); (3) if cooperation remains impossible, consider a scope limitation and its effect on the opinion.
2. What procedures would you perform on Baltic Trading, and how does its treatment differ from Nordia?
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Baltic is not audited and represents 9% of group revenue - below the level at which a full component audit would typically be required, but not immaterial.
Procedures (ISA 600 - analytical / specified procedures at group level):
- Obtain and review management accounts and reconciliations to the group reporting pack.
- Perform analytical review on revenue, margins and balances against prior year and budget, investigating the 11% group revenue decline's effect on this component.
- Test the ** consolidation adjustments** affecting Baltic (intercompany eliminations, currency translation, uniform accounting policies).
- Consider whether the 9% is material individually or in aggregate with the Nordia uncertainty; if the combined risk is material, escalate to a full audit of specified balances.
Difference from Nordia: For Nordia you have a component auditor and the question is whether to rely (ISA 600 evaluation, communication, access to papers). For Baltic there is no auditor to rely on, so you must obtain evidence directly through group-level procedures. You cannot 'rely' on unaudited management figures; you must perform procedures sufficient to conclude the group financial statements are free from material misstatement. Document both conclusions separately.