Undocumented/Untested Material Subsidiary 1685

  • My question relates to the issuer (public company) deciding to forgoe testing of material subsidiary.
    PCAOB, AS2, states that the auditor should communicate, in writing, to management and the audit committee that the audit of internal control over financial reporting cannot be satisfactorily completed and that he or she is required to disclaim an opinion. Therefore, an auditor could not render either an adverse opinion on management’s assessment or an unqualified opinion on internal control over financial reporting because, in this situation, the auditor would be precluded from expressing any opinion.
    Now, my question is this:
    What does this mean for the issuer, in the real world? What is the ultimate effect of a disclaim of opinion? Further reading of AS2 also brings up paragraphs 45, 46, and 138, relating to inadequate reporting and the subsequent deficiencies and scope limitations.
    So what is it? If a company willfully chooses not document, test, or attest to the internal controls over a material subsidiary/business unit, what happens? Is it a dislaim of opinion (to what end), a scope limitation, and/or a significant deficiency? And what is the overall effect to the issuer/company?
    Thanks in advance.
    Exitus acta probat

  • This sounds like a disagreement between auditor and the company being audited. Does the company agree that they have performed an incomplete assessment of internal controls, or do they feel that they have covered their material risks? It appears as though the auditor does not agree with the approach that the company had taken and may have to make a call as to whether or not they want to retain this client (and the perceived associated risk).

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