Preah Chan Holdings: restricted access to a component auditor's file
Preah Chan Holdings Co., Ltd (PCH) prepares consolidated financial statements under IFRS for the year ended 31 December 2025. Your firm is the group auditor. Group revenue is $96.0 million, group profit before tax $9.4 million and total assets $118 million. Group materiality is $720,000.
PCH Vietnam, a wholly owned subsidiary in Ho Chi Minh City, contributes revenue of $32.6 million (34%), total assets of $48.4 million (41%) and profit before tax of $6.1 million (65%). It is audited by Saigon Audit Ltd, a local firm that is not a member of your network and not subject to your firm's quality management system. Saigon Audit has issued an unmodified opinion, and has completed the component questionnaire you sent. It has, however, refused to allow you access to its working papers, citing local confidentiality rules; it will only answer written questions. Component materiality is $250,000.
PCH Vietnam's revenue includes $4.3 million of sales to a Cambodian affiliate at prices that differ materially from the prices charged to third parties. The group also holds 35% of a Lao plantation company, carried at $8.1 million under the equity method.
1. Determine which components are significant for group audit purposes and describe the direction, supervision and review work you are required to perform on the Vietnamese component.
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Scoping. Under ISA 600 (Revised), a component is significant if it is individually financially significant - commonly tested against a benchmark such as 15% of group revenue, profit before tax or total assets - or if it is likely to include significant risks of material misstatement.
PCH Vietnam is significant on every measure: 34% of revenue, 41% of assets and 65% of group profit before tax. It is financially significant and drives the group's profitability. It requires a full-scope audit of its financial information using component materiality of $250,000.
The Lao investment at $8.1 million is 6.9% of total assets and is not a component - it is equity-accounted. It is not scoped as a component, but the group auditor must still perform procedures on the equity-method workings, the share of profit, and indicators of impairment.
Required work on PCH Vietnam
- Evaluate the component auditor. Assess Saigon Audit's independence, competence and quality management system - professional body membership, licensing, regulatory inspection results, sector experience, and the firm's own quality control arrangements. Reference enquiries are stronger evidence than a self-completed questionnaire.
- Determine and communicate required work. Communicate to Saigon Audit the significant risks identified at group level, the group's accounting policies, the consolidation requirements and the component materiality of $250,000.
- Direct and supervise. Hold planning and clearance meetings with the component team, agree the audit approach for the related-party sales, and agree a timetable.
- Review documentation. For a financially significant component, the group auditor must review the component auditor's documentation of the work on significant risks and on the conclusions at component level. A completed questionnaire and written answers are not documentation review.
Related-party sales of $4.3 million. Confirm that intra-group profit is eliminated on consolidation and that the arm's-length prices are documented; check the transfer pricing position and any tax exposure at the component level.
2. If Saigon Audit maintains its refusal to allow access, evaluate the effect on the group audit opinion and set out the alternative procedures you would perform first.
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Step 1 - is the restriction genuine? Local confidentiality rules in practice almost always permit a component auditor to share working papers with the group auditor once the client has authorised it. Saigon Audit's position is a refusal, not a legal bar. My first action is therefore to ask PCH's audit committee to instruct the component auditor in writing to grant access, and to offer practical alternatives: a remote file review, extracts of the specific working papers on significant risks, or a joint inspection. If the client will not intervene, that is itself significant information for the audit committee.
Step 2 - alternative procedures
- Extend group-level analytical procedures over PCH Vietnam's revenue, margins, receivables and inventory; compare against prior year and budget and obtain explanations.
- Obtain the component's full financial statements, trial balance and audit report, and reconcile the trial balance to the consolidation package.
- Send the component auditor a detailed written questionnaire covering the significant risks, the detailed audit findings and the conclusions reached on each.
- Perform specific group-level procedures directly: inspect contracts and shipping documents for a sample of revenue, attend a remote closing meeting with local finance staff, and test the related-party pricing.
- Consider whether another firm should be appointed to perform specified procedures at the component - a decision for the client, not the auditor.
Step 3 - evaluate sufficiency. PCH Vietnam generates 65% of group profit. If, after all of the above, I still cannot obtain sufficient appropriate evidence over that component, the limitation is not confined to a minor balance.
Conclusion. The possible effects are material and pervasive to the consolidated financial statements. A qualified opinion would not adequately convey the issue because the gap covers the majority of group profit; the appropriate response is a disclaimer of opinion under ISA 705, with the reason described in the basis for the disclaimer. A piecemeal opinion is not permitted. Before issuing, communicate the matter to those charged with governance and document the alternatives considered; if access is granted before the report date, an unmodified opinion remains possible.