Group audit: restricted access to a significant component auditor
Harlow Industrial Group is a listed manufacturer with 14 components. Your firm is the group auditor for the year ended 31 December 2025. Group materiality is $12.0m and performance materiality is 65% ($7.8m). Three components are significant: Nordica AB (Sweden, 31% of group revenue, component materiality $4.5m), Petrovia SA (18% of revenue and 22% of assets, component materiality $3.0m) and a US component (25% of revenue). Petrovia is audited by a local firm outside your network. Local law prohibits sharing working papers with foreign auditors and requires client consent before any communication. Harlow's management has declined consent, describing the matter as commercially sensitive. The Petrovia auditor will issue a report on the local statutory financial information but will not perform specified procedures for you, will not discuss findings, and will not provide access to documentation. Petrovia holds group inventory, a defined benefit obligation and a large deferred tax asset. The group audit report is due in six weeks, and the group engagement partner has not visited Petrovia.
1. Evaluate whether the group engagement team can obtain sufficient appropriate audit evidence for Petrovia, and describe the procedures you would perform before concluding.
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The group engagement partner remains responsible for the group opinion and cannot delegate that responsibility to the Petrovia firm. Under ISA 600 (Revised) the group team must understand the component auditor, direct and supervise its work, communicate with it, and have access to its documentation in order to evaluate whether the work is adequate for group purposes.
Two restrictions are in play and must be separated. The statutory prohibition on sharing working papers is a legal restriction; management's refusal to consent to communication is a client-imposed restriction. Both limit evidence, but the second is more damaging because it also prevents you from testing the completeness and accuracy of what the component auditor reports.
Alternatives to consider before concluding: (i) send your own team to perform the work, if local law permits you to practise; (ii) engage a different local firm to perform specified procedures on inventory, the defined benefit obligation and the deferred tax asset; (iii) ask the existing auditor to perform specified procedures and report the results, which has been refused, so document the refusal; (iv) combine the statutory audit report with group-level analytical procedures and central testing.
A statutory report prepared under local GAAP is not, by itself, sufficient for group purposes, and it cannot be evaluated without access to the underlying documentation. Because Petrovia is 18% of revenue, 22% of assets and holds estimates and inventory, it is a significant component and cannot simply be scoped out. Without access the team cannot evaluate the component auditor's competence, objectivity or work, so sufficient appropriate evidence has not been obtained. Escalate to those charged with governance before the report date.
2. Assume access remains restricted. Analyse the effect on the group audit opinion, including whether the matter is pervasive, and identify the communications required.
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If access remains restricted, the matter is a limitation on the scope of the audit. The opinion depends on whether the possible effects are material and pervasive.
Materiality: Petrovia is 18% of revenue and 22% of assets, well above group materiality. The affected accounts, inventory, the defined benefit obligation and the deferred tax asset, are estimates where misstatement could be substantial and could touch several line items.
Pervasiveness: if the team can obtain evidence on everything else and the Petrovia balances are confined to identifiable accounts, a qualified opinion (except for) may be appropriate. If the Petrovia balances are so interlinked with reported results that the financial statements as a whole could be misleading, for example because inventory and the retirement obligation drive reported profit, a disclaimer of opinion is more likely.
Also consider the cause. A management-imposed restriction is more serious than a legal one because it may indicate management is concealing something. Communicate with those charged with governance, request that consent be given, and consider whether withdrawal is appropriate.
If the restriction persists and the firm cannot obtain evidence, issue a qualified opinion or a disclaimer with a clear basis paragraph describing the restriction and quantifying the affected balances where possible. Report the matter to the regulator if local law requires it. Under ISA 705 the wording must state that the auditor was unable to obtain sufficient appropriate audit evidence, and it must not be presented as a disagreement with management.
3. Would your analysis differ if Petrovia represented only 4% of group revenue and 3% of assets? Explain the scoping judgement.
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If Petrovia were only 4% of revenue and 3% of assets, the analysis changes at the scoping stage. ISA 600 (Revised) requires the group team to identify significant components based on size and risk. A component below the scoping threshold is not automatically excluded: it is still significant if it is likely to include a significant risk of material misstatement, for example because of fraud, related-party transactions, complex estimates or a history of errors.
Assuming there are no such risks, the group team could scope the component out of detailed testing and cover it through group-level analytical procedures, provided total coverage of the group by tested components is adequate and the residual risk is low. The access restriction would then not prevent an opinion, because no reliance on the component auditor's detailed work would be needed.
The key point is that scoping is a judgement about risk and coverage, not only about percentage of revenue. With 4% of revenue and 3% of assets the component is small and the restriction would likely be manageable; with 18% of revenue, 22% of assets, estimates and inventory it is not. The group team should document the scoping rationale, record the basis for concluding the component is not significant, and revisit the conclusion if the component's risk profile changes before the report date.