Group audit reliance, component materiality and post-year-end events

The group auditor remains responsible for the group opinion and cannot simply accept the component report. First evaluate the component auditor's independence, competence, resources and quality management, including whether the firm is subject to credible external oversight; lack of KICPAA registration is a risk factor, not automatically a bar. Second, because the component is significant by size (38% of revenue, 42% of assets), the group auditor should obtain an understanding of the component's audit work, review key working papers, and perform additional procedures on significant risks and group-wide matters. Third, $800,000 is unacceptable: component materiality must be lower than group materiality of $420,000 to leave an adequate margin for aggregation risk. The $260,000 set by the group auditor is more appropriate, but it should be reconsidered for specific balances and transactions. If the component auditor's work cannot be relied on, the group auditor must perform further work or modify the opinion for a scope limitation.

The $600,000 receivable is material relative to group materiality. The liquidation occurring after the year-end is a non-adjusting event unless it provides evidence of conditions that existed at year-end. The auditor should investigate whether the customer's financial deterioration pre-dated 31 December, for example through ageing, correspondence and post-year-end cash receipts. If so, adjust the receivable and loss allowance; if not, disclose the event and its financial effect. The covenant breach existed at year-end, so the waiver is evidence about that condition. A waiver obtained before the financial statements are approved can cure the breach for classification purposes only if it gives the group an unconditional right to defer settlement for at least twelve months after the reporting date. Here the waiver expires on 31 December 2026 and further breaches trigger immediate repayment, so the loan remains current unless the group has a substantive right to refinance. Reclassify the loan as current and reassess going concern.

The net current liability position of $350,000, the covenant breach, the short waiver and the customer liquidation together cast significant doubt on going concern. The auditor should obtain cash-flow forecasts covering at least twelve months, test their assumptions, and seek evidence of committed facilities, shareholder support or other mitigants. If the going-concern assumption remains appropriate but a material uncertainty exists, issue an unmodified opinion with a separate material uncertainty section placed after the opinion paragraph. If the uncertainty is not adequately disclosed, qualify the opinion. If the going-concern basis is not appropriate, issue an adverse opinion. The auditor should also consider whether the component auditor's report dated 10 February missed these matters and whether additional group-level procedures are needed.