AU Section 315 – Communications Between Predecessor and Successor Auditors

Posted by Maria T. Hurd, CPA

AU Section 315 - 401k Audtior DelawareWhen an auditor is considering accepting an engagement to audit financial statements and/or after a new auditor has been engaged to audit financial statements that have been audited by another firm in previous years, the successor auditor must document communications with the predecessor auditor in accordance with AU Section 315 – Communications Between Predecessor and Successor Auditors.

The term predecessor auditor refers to an auditor who has either reported on the most recent audited financial statements, was engaged to perform but did not complete an audit of any subsequent financial statements, or has resigned, declined to be reappointed, or has been terminated.  The term successor auditor refers to an auditor who is considering accepting an engagement but has not communicated with the predecessor auditor and to an auditor who has accepted such an engagement.

Except as permitted by the Rules of the Code of Professional Conduct, an auditor is precluded from disclosing confidential information obtained in the course of an engagement unless the client specifically consents. Thus, the successor auditor should ask the prospective client to authorize the predecessor auditor to respond fully to the successor auditor’s inquiries. If a prospective client refuses to permit the predecessor auditor to respond or limits the response, the successor auditor should inquire as to the reasons and consider the implications of that refusal in deciding whether to accept the engagement.

Information Disclosure

The successor auditor may contact the predecessor in writing or by telephone to make inquiries that include:

-Information that might bear on the integrity of management;

-Disagreements with management as to accounting principles, auditing procedures, or other significant matters;

-Communications to audit committees or other with equivalent authority and responsibility regarding fraud, illegal acts by clients, or internal control related matters;

-The predecessor auditor’s understanding of the nature of the company’s relationships and transactions with related parties and significant unusual transactions;

-The predecessor’s understanding as to the reasons for the change in auditors.

The predecessor auditor is required to respond promptly and fully, on the basis of known facts, to the successor auditor’s reasonable inquiries.  If the predecessor auditor decides, due to unusual circumstances such as pending litigation, not to respond fully to the inquiries, the reason the response is limited should be clearly stated. If the successor auditor receives a limited response, its implications should be considered in deciding whether to accept the engagement.

Typically, the successor auditor reviews the predecessor auditor’s workpapers containing information of continuing audit significance. In the case of retirement plan audits, this could include testing of demographic information, 403(b) and 457(b) cumulative contributions used in the determination of catch-up contribution eligibility, documentation of internal control, audit planning, participant account balance testing, material weaknesses, significant deficiencies or other internal control recommendations made to those in charge of governance, etc. The review of the predecessor auditor’s workpapers is generally considered during planning to assist in identifying risk areas and determining the extent and nature of the tests that will be performed. However, the successor auditor cannot reference the predecessor auditor’s workpapers as a basis for the successor auditor’s opinion regarding the financial statements.

In fact, the nature, timing, and extent of audit work performed and the conclusions reached are solely the responsibility of the successor auditor. In reporting on the audit, the successor auditor should not make reference to the report or work of the predecessor auditor as the basis, in part, for the successor auditor’s own opinion.

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