Successor Auditor
A successor auditor is an audit firm or individual auditor that is engaged to audit financial statements for a period subsequent to that of the former or “predecessor” auditor. The successor auditor takes over the audit responsibilities from the predecessor auditor.
Engaging with a successor auditor often requires certain protocols to be followed:
- Communication with Predecessor Auditor: Before accepting the audit engagement, professional standards generally require the successor auditor to communicate with the predecessor auditor, after obtaining the client’s consent. This communication can provide the successor auditor with insights into any potential issues with the client, such as disagreements over accounting principles or audit procedures.
- Review of Predecessor’s Working Papers: The successor auditor might review the working papers of the predecessor auditor to gain an understanding of the entity’s business and significant transactions, especially if there is a change in the middle of a fiscal year.
- Consistency in Application of Accounting Principles : The successor auditor should ensure that accounting principles are applied consistently from one period to the next. If there’s a change in accounting principles, it should be noted in the financial statements.
- Audit Report: If the successor auditor refers to the predecessor’s audit in their report (which isn’t common), they need to ensure that the nature of the reference (like the reason why the predecessor’s report is referred to) and the type of opinion given by the predecessor are clearly mentioned.
A change in auditors can be due to various reasons, including business decisions by the client, mandatory auditor rotation, disagreements between client and auditor, or other reasons. Regardless of the cause, the primary goal in this transition process is to ensure continuity, consistency, and clarity in the auditing of the financial statements.
Example of a Successor Auditor
Let’s consider a fictional example involving two audit firms: “Alpha Auditors” (predecessor auditor) and “Beta Accountants” (successor auditor), and their client “Techtronix Ltd.
Scenario:
Techtronix Ltd., a technology company, has had its financial statements audited by Alpha Auditors for the past seven years. Due to a strategic decision to engage with a firm that has more experience with tech start-ups, Techtronix decides to switch to Beta Accountants for the upcoming fiscal year.
Steps Taken:
- Engagement: Techtronix sends a formal letter to Beta Accountants, expressing its interest in hiring them as the new auditors. Beta Accountants, before accepting, request permission to communicate with Alpha Auditors to understand the previous audits better.
- Communication with Predecessor Auditor: After receiving consent from Techtronix, Beta Accountants reach out to Alpha Auditors. Alpha Auditors disclose that there were no disagreements with Techtronix and provide some insights into areas where special attention was needed due to complexity, like revenue recognition from software licenses.
- Review of Working Papers: With permission, Beta Accountants review certain working papers of Alpha Auditors to understand better the audit approach taken in specific areas, especially around the tech components.
- Audit Execution : Beta Accountants commence their audit and, while they leverage insights from Alpha Auditors’ working papers, they conduct an independent and thorough examination as required by the audit standards.
- Audit Report: Beta Accountants, upon completing their audit, issue an unqualified opinion on the financial statements of Techtronix for the fiscal year. In their report, they do not make reference to Alpha Auditors or the previous audits, as this is a new audit year, and they have taken full responsibility for their opinion.
Outcome:
Thanks to the smooth communication between all parties and adherence to professional standards, Techtronix experiences a seamless transition between the two audit firms, ensuring the credibility of its financial statements is maintained.
This example showcases the typical protocol that would be followed when a successor auditor is engaged, ensuring that the audit’s integrity and thoroughness are upheld.
