Subsidiary entity to be audited by foreign auditor

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I appreciate this forum is mostly non-audit, and indeed I seem to be one of the few auditors on the board but I thought I'd try:

We have a client that has recently breached the audit limits and an audit is required for December 2023. It has a Japanese subsidiary, which represents 60% of the trade of the group.

The client has appointed a Japanese auditor and we have sent preliminary audit instructions to them, and then specific group audit instructions. We then tried to request a meeting (On Zoom) as is strongly recommended.

The Japanese auditors have replied that they do not speak English and all correspondence will need to be via email.

However, the audit file should be reviewed, and given it will be in Japanese (and no one at my firm has any knowledge of Japanese) it will need to be professionally translated (Google translate didn't work at all on the 2022 accounts when we tried).

The cost of this is likely to be prohibitive, especially as translation costs are usually by the word, and its likely each page will contain the group auditor name, client name etc etc.

Does anyone know of any way around this please, and does anyone know how large auditors deal with this issue (or does KPMG London simply say, "KPMG Toyko use the same standards - no need to review")?

Replies (15)

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By Roland195
09th May 2024 10:04

Translation might raise more questions that it answers - do you have to verify that the translator is qualified to translate from Japanese to English generally and in the context of Audit Documentation (with technical jargon etc) specifically? There is every chance you'll end up with a file of gibberish.

Assuming you sent the Audit Instructions in English, who translated this for the Japanese Auditors?

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Replying to Roland195:
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By thevaliant
09th May 2024 12:37

Honestly, I don't know. Replies are quite slow, so I suspect our emails are being professionally translated.

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By Bobbo
09th May 2024 10:24

Do you need to look at their audit file? / Do you have any right to?

Presumably amongst the instructions you have confirmation that the Japanese auditors will be auditing in accordance with ISAs and thus to the equivalent standard as you? Can Japanese auditors provide a pack containing an analytical review of the accounts you've audited (which if it needs translating should be charged to the client as an add-on - their fault for having a subsidiary in a non-English speaking country!) that you can review and verify?

I daresay, to use your example, KPMG Tokyo will almost certainly have some english speakers in the team.

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Replying to Bobbo:
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By thevaliant
09th May 2024 12:38

Do we need to? Yes. ISAs demand it.

Do we have a right to? In the UK, yes. I must admit I'm unsure if we have a right in Japanese law.

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By paul.benny
09th May 2024 12:22

This is a bit of a "I wouldn't start from here". The problem with any first year audit is you need to get comfort on the comparatives and the opening balances. That's enough of a challenge with a UK company/group but with a foreign subsid that isn't a client, even more difficult. And you're coming to it several months after year end when really you and Client should have realised beforehand that the group would be in scope for audit.

You should be able to get some technical support from ICAEW (if that's your professional body) on both the foreign subsid audit and the first year. Neither situation is rare. My guess is you will have to give qualified report at least as regards the comparatives.

You should also get some advice on engagement letters, reporting and liability with regard to the foreign auditors.

And to answer your question about KPMG et al. AFAIK, all the international firms are federations or networks and the group auditors agree materality, agree any procedures for risk areas as well as reviewing the audit files of foreign subsids

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Replying to paul.benny:
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By thevaliant
09th May 2024 12:36

Much appreciated for your thoughts, and others.

In answer to your point re: comparatives, yes, already thought about though I agree they were not thought about until late last year.

We are qualifying on opening stock, absolutely, which is material to the group (it's probably the biggest number on the balance sheet) as no one attended (didn't even think about it) at December 2022. I was only appointed as audit manager in August 2023 when the accounts manager noticed the limits for 2022 had been breached and therefore an audit was needed for 2023.

Client is still operating like they're very much 'S' in SME with understaffed accounting department, limited discussion with their own Japanese subsidiary and a general slowness to get information to us (they filed December 2022 late last year).

And I've noted it before in my comments. The audit partner is very much of the 'say yes to the client, worry about how to do it afterwards'. His first reaction to the Japanese subsidiary was 'If we can get comfort ourselves, why don't we do it?'. I pointed out the attendence at stock count would cost us the wrong side of £10k (three flights, hotels, overtime, and the stock is held at two different locations in Japan, half way across the country from each other) before he backed down and suggested a Japanese auditor might be better placed.

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Replying to thevaliant:
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By paul.benny
09th May 2024 12:51

You have my sympathy here - a difficult audit situation and a partner who seems not to get it.

My advice to you personally is don't take on the burden of responsibility for solving this yourself. The problem belongs to Client and Partner, not you. Make your recommendations (in writing) and take instructions (in writing). Document your concerns and keep copies of everything relevant.

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Replying to thevaliant:
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By Roland195
09th May 2024 13:47

If you are qualifying on opening stock anyway, would it matter very much to further qualify on the subsidiary issue?

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Replying to Roland195:
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By JB101
09th May 2024 14:32

Slippery slope!
Why not qualify on everything, do no work, charge full price for an audit and look smug?
(Rhetorical question alert!!!!!)

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Replying to JB101:
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By Roland195
09th May 2024 14:36

Well, now you mention it...

It seems absurd to undertake an audit knowing from day 1 you will be qualifying regardless on at least on basis - once it doesn't have a "clean" audit report, does anything else matter?

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Replying to Roland195:
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By Bobbo
09th May 2024 14:44

I guess the difference is that qualifying on opening stock is inevitable as OP's firm was not appointed auditor until after the previous year end so simply could not have attended the stocktake (and presumably cannot otherwise obtain sufficient appropriate evidence) but qualifying on this issue is time-limited and will only apply for this year and maybe next year.

Whereas qualifying on the basis of the entire subsidiary is 1) arguably unfair on the client as they have done the right thing and appointed a local auditor and 2) do you do this every year for the rest of time?

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Replying to Bobbo:
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By Roland195
09th May 2024 14:51

Bobbo wrote:

2) do you do this every year for the rest of time?

Ah but in the grand tradition of audit firms, that'll be someone else's problem by then.

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Replying to JB101:
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By thevaliant
09th May 2024 16:25

Don't give my audit partner any bright ideas please.......!

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By thevaliant
09th May 2024 16:23

Thanks all for answers. I do take the points made, and at least two other audit partners (not the client one) have expressed concern with me privately about our firm doing the audit (we're a small firm, we do audits and do punch above our weight but this may be a bridge too far); but clearly not enough to pass those concerns on to the audit partner.

We have managed to attend 2023 stock, and understand the Japanese auditors have done the same in their country. Hopefully it will just be a case of get their audit file and review in due course, translated; and it could easily be fine, except the qualification on opening stock.

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Replying to thevaliant:
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By Roland195
09th May 2024 16:46

I have obviously encountered the attitude of the Audit Partner albeit ancient history now but why do you suppose he his so keen to rush where angels fear to tread - Surely this relatively exotic file for a small firm is going to be the first one requested by the QAD?

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