STAR Limited has outsourced its payroll processing functions to a service organization – Little Solutions Private Limited. Little Solutions Private…

CA Final · Advanced Auditing, Assurance and Professional Ethics · RTP · May 2024
STAR Limited has outsourced its payroll processing functions to a service organization – Little Solutions Private Limited. Little Solutions Private Limited is responsible for accurate preparation of payrolls and timely remittance of statutory dues to the government authorities on behalf of the company. Little Solution Private Limited's controls related to timely remittance of payroll deductions to government authorities are relevant to the company as late remittances could result in interest and penalties resulting in liabilities for the company. The auditors of STAR Limited want to be sure about description, design and operating effectiveness of controls at Little Solutions throughout the year. In this regard, they require an assurance report from auditors of Little Solutions Private Limited. (a) Why the auditors of STAR Limited require an assurance report from the auditors of Little Solutions Private Limited? Which engagement and quality control standard casts such kind of responsibility upon the auditor? (b) Which type of report should be provided by the auditors of Little Solutions? Justify with reasons. (c) State matters on which opinion is to be provided by the auditors of Little Solutions.

Suggested Answer and Working Notes:

(a) When the user entity uses the services of a service organisation, objectives of auditor of user entity are: To obtain an understanding of the nature and significance of the services provided by the service organisation and their effect on the user entity's internal control relevant to the audit, sufficient to identify and assess the risks of material misstatement andTo design and perform audit procedures responsive to those risks. Therefore, it is in line with above requirements, that auditors of STAR Limited require an assurance report from auditors of Little Solutions Private Limited. SA 402 casts such responsibility on user auditors. (b) In accordance with requirements of SAE 3402, auditors of Little Solutions Private Limited should provide a type 2 report to auditors of STAR Limited. As auditors of STAR Limited want to be sure about description, design and operating effectiveness of controls at Little Solutions Pvt. Ltd. throughout the year and type 2 report deals with such matters, type 2 report should be provided by the auditors of the Little Solutions Pvt. Ltd. Type 2 report is a report on the description, design and operating effectiveness of controls at a service organization whereas type 1 report is a report on the description and design of controls at a service organization. (c) The opinion of auditors of Little Solutions Pvt. Ltd. would state whether, in all material respects, based on suitable criteria: The description fairly presents the service organization's system that had been designed and implemented throughout the specified period;The controls related to the control objectives stated in the service organization's description of its system were suitably designed throughout the specified period andThe controls tested, which were those necessary to provide reasonable assurance that the control objectives stated in the description were achieved, operated effectively throughout the specified period.

Topics: Standard on Auditing (SA)

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