AS 1205: Using Another Auditor’s Work in an Audit
Explore how AS 1205 guides an auditor's judgment in assuming or dividing responsibility for another firm's work within a single audit report.
Audits of large, multinational public companies often involve multiple accounting firms. For fiscal years ending on or after December 15, 2024, the Public Company Accounting Oversight Board (PCAOB) has a new framework that strengthens the requirements for the lead auditor. The new standard, AS 1206, Dividing Responsibility for the Audit With Another Accounting Firm, replaces previous guidance. This framework increases the lead auditor’s involvement in and evaluation of the work of other auditors through a risk-based approach to supervision.
The Lead Auditor’s Role and Responsibilities
The engagement partner for the lead auditor must determine if their firm’s participation is sufficient to serve in that role. This judgment goes beyond a simple quantitative analysis of assets or revenues and involves a holistic assessment of the firm’s ability to direct and supervise the entire audit. The lead auditor must have a comprehensive knowledge of the overall entity, its environment, and its system of internal control over financial reporting.
This role requires the lead auditor to perform procedures to evaluate the other auditor’s professional standing. This includes assessing their knowledge, skill, and ability, and obtaining written affirmations that they are independent and properly licensed. These steps help ensure the lead auditor can prevent or detect deficiencies in the other firm’s work.
Required Procedures for Using Another Auditor’s Work
The framework emphasizes coordination between the lead auditor and any other auditors involved. The lead auditor must inform the other auditor in writing about matters such as the scope of their work and any identified risks of material misstatement relevant to the location or business unit they are auditing. This communication is intended to prevent misunderstandings about the work to be performed.
When using another firm’s work, the lead auditor must supervise them by directing the other auditor to provide specific documentation for review. The lead auditor must also perform procedures on the consolidation or combination of the financial statements of the business units audited by the other firm. These steps help ensure the other auditor’s work is adequate.
Reporting When Responsibility is Divided
When a lead auditor decides to divide responsibility for the audit with another accounting firm, AS 1206 provides a clear path for reporting. This approach clarifies the allocation of work between the firms in the audit report.
When making reference to the other auditor, known as the “referred-to auditor,” the lead auditor must modify the audit report. The report must state that the opinion is based in part on the other auditor’s report. The report must also disclose the magnitude of the financial statements audited by the other firm, expressed as a percentage of total assets or revenues. This division of responsibility is only permitted if the referred-to auditor performed their audit in accordance with PCAOB standards and is familiar with SEC reporting requirements.
If another firm participates but the lead auditor does not divide responsibility, the lead auditor supervises their work and makes no reference to them in the audit report. In this scenario, the lead auditor assumes full responsibility for the work performed by the other auditor.