Basis for Granting Access

The auditor of a controlling entity has a duty to form an opinion on various matters as may be required by laws or regulations, such as the Corporations Act 2001 (or other relevant statutory requirements) regarding the consolidated financial report of the entity. There may also be circumstances when the auditor of a controlling entity may be engaged to perform a non-statutory audit of the consolidated financial report of the entity. The auditor of the controlling entity may wish to access the audit working papers of the auditor of a controlled entity in order to assist them in the audit of the controlling entity. Under Auditing Standard ASA 600 Using the Work of Another Auditor, the auditor of the controlling entity is required to perform procedures to obtain sufficient appropriate audit evidence, that the work of the auditor of the controlled entity is adequate for the purposes of the auditor of the controlling entity, in the context of the specific engagement.^[6]

Relevant Factors to Consider

For an audit or review conducted under the Corporations Act 2001 of a financial report that includes consolidated financial statements, the auditor of a controlled entity must allow the auditor of the controlling entity access to the controlled entity’s books and must give the auditor of the controlling entity any information, explanation or assistance required, for the purposes of the audit or review.^[7] The meaning attaching to these statutory requirements is not precise, as there is no judicial or statutory authority about what is meant by the words “information, explanation or assistance”. The Act does not specify that the external auditor of the controlling entity has a statutory right to inspect the audit working papers of the external auditor of the controlled entity. Nonetheless, the auditor of a controlled entity ordinarily endeavours to be open and frank with the auditor of the controlling entity and seeks to ensure compliance with any reasonable request by the auditor of the controlling entity to discharge their responsibilities under the Corporations Act 2001. In determining the extent of obligations when the auditor of the controlled entity gives the controlling entity’s auditor access to their audit working papers, the requirements of Auditing Standard ASA 600 are to be complied with.

The auditor of a controlled entity may grant the auditor of the controlling entity access to its audit working papers. For example, access is normally given for audit or review engagements (under the Act or otherwise), but only if:

1. the controlled entity agrees to the terms of access as set out in Example Letter C in Appendix 1, including a release and indemnity in favour of the auditor of the controlled entity from liability which might arise through access being given to the auditor of the controlling entity; and
2. the auditor of the controlling entity agrees to the terms of access as set out in Example Letter A in Appendix 1.

When access to audit working papers is granted, for audit or review engagements under the Act, the controlling entity cannot release or indemnify the auditor of the controlled entity under the Act’s relevant provisions.^[8] The auditor of the controlling entity will also often not agree to release or indemnify the auditor of the controlled entity by virtue of reliance by the controlling entity’s auditor on the auditor of the controlled entity’s performance of its obligations required by the Act.^[9] Where the auditor of the controlled entity gives assistance or information to the auditor of the controlling entity more than is required by the Act^[8], the auditor of the controlled entity could seek a release and an indemnity from the auditor of the controlling entity (and arguably from the controlling entity itself). Any release or indemnity referred to in this paragraph must extend to liability that arises through access to audit working papers, other files maintained by the auditor and their audit staff.

Notwithstanding some uncertainty about the working paper access obligations of an auditor of a controlled entity under the Act^[10], Example Letter A in Appendix 1 identifies the basis upon which the auditor of a controlled entity may make audit working papers available to the auditor of the controlling entity. Example Letter A is completed and exchanged between both auditors, before access is granted by the auditor of a controlled entity to their audit working papers.

Circumstances in Which an Auditor of a Controlled Entity can Provide Access to their Audit Working Papers

Ordinarily, the auditor of the controlled entity will not allow the auditor of the controlling entity access to its audit working papers until the auditor of the controlled entity has completed its audit or review.

For the purposes of this Guidance Statement, the audit of a controlled entity is complete when:

1. the directors’ declaration about the financial statements^[11] or similar representation by the entity’s governing body, attached to the financial report, is signed; and
2. the auditor’s report on the financial report is signed and dated.

Some practical issues that may be encountered by an auditor of a controlled entity regarding access to their audit working papers by the auditor of the controlling entity include:

1. Where the controlled entity is a subsidiary of an overseas controlling entity and the management of the controlling entity has forwarded a group consolidation package, access may not be granted to the controlling entity’s auditor until the controlled entity’s audit has been completed in accordance with paragraph 38 (a) and (b) above. Prior to this, the controlled entity’s auditor may consider if it is prepared to provide a written response on the stage of completion of the audit, the basis of the review of the consolidation package and the opinion on the appropriateness of the package for group consolidation purposes.
2. If the controlled entity’s financial report has been finalised, and submitted for group consolidation purposes, but the requirements in paragraph 38 (a) and (b) above are not yet complete, then access to the auditor’s audit working papers is inappropriate, and is unlikely to be granted. Until the directors have provided the auditor the signed directors’ declaration, the auditor of the controlled entity will not be able to confirm that the directors have agreed with, and adopted the representations of management. Once this occurs, the auditor of the controlled entity may be requested to advise the auditor of the controlling entity, in writing, of any differences between the previously reported upon group consolidation package and the statutory financial report.

The following guidance is also relevant with regard to access to audit working papers by the auditor of the controlling entity:

1. At the completion of the audit of a controlled entity, the auditor of the controlled entity may grant the auditor of the controlling entity access to their audit working papers, when the auditor of the controlling entity has provided to the auditor of the controlled entity a letter of understanding in the form of Example Letter A in Appendix 1.
2. Access to the controlled entity’s auditor’s audit working papers and audit staff is likely to be denied to all parties and, similarly, access ought not be requested until the completion of the audit of the controlled entity or until adoption of the controlled entity’s financial report. Nonetheless, the respective auditors may negotiate access to audit working papers at an earlier time. When access to incomplete audit working papers is permitted, it is prudent to acknowledge that the audit work or accompanying audit working papers may not reflect significant events or matters which are material to the audit or review at the date when access is agreed. The acknowledgement ought to also contain the extent to which the controlled entity’s auditor has any obligation or responsibility to update the audit working papers or inform the reviewing auditor of information obtained subsequent to the date access is provided to the incomplete audit working papers.
3. Until completion of the audit of the controlled entity, or until completion of a group’s consolidation reporting package, requests by the auditor of the controlling entity to the auditor of the controlled entity for progress reports, advice on or information on the audit of the controlled entity are best made in writing, detailing specific matters on which a response is sought, and allowing the auditor of the controlled entity to respond in writing.

Access to Audit Working Papers of the Joint Venture Auditor

When an audit client is one of the parties in a joint venture, the audit client’s auditor may seek access to the audit working papers belonging to the auditor of the joint venture. In this context, issues similar to those related to access to audit working papers of the auditor of a controlled entity by the controlling entity’s auditor (discussed above) will need to be considered. Normally, audit arrangements are outlined in the joint venture agreement, wherein one auditor is appointed to audit the joint venture. However, as the investment in the joint venture may be material to one or more of the joint venturers (whose financial report may be audited by another auditor), it may be necessary for that auditor to gain access to the audit working papers of the joint venture’s auditor. Unless specifically provided for in the auditor’s contract of appointment with the joint venture, the auditors of the joint venture parties may not be legally entitled to such access. However, to assist the auditor of a joint venture party, access may be granted at the discretion of all the relevant parties to the joint venture and the joint venture’s auditor by completing and exchanging Example Letter A in Appendix 1.