Comet Logistics Ltd. outsources its entire payroll processing function to an external service organisation, ProPay Solutions, which maintains…

As per SA 402, Audit Considerations Relating to an Entity Using a Service Organisation, where an entity uses the services of a service organisation that are relevant to financial reporting, the user auditor is required to obtain an understanding of the nature and significance of the services provided and their effect on the entity's internal control relevant to the audit. In the given case, ProPay Solutions performs payroll processing activities, including maintaining payroll records, computing salaries and processing statutory deductions. Accordingly, the auditor of Comet Logistics Ltd. needs to consider the controls at ProPay Solutions relevant to payroll processing. The auditor may consider the following reports issued by the service organisation's auditor: Type 1 Report: It provides information regarding the description and design of controls at ProPay Solutions and whether such controls are suitably designed as at a specified date. However, it does not provide evidence regarding the operating effectiveness of those controls. Therefore, a Type 1 report alone is not sufficient where the auditor intends to rely upon the operating effectiveness of payroll controls. Type 2 Report: It contains the description and design of controls and also provides the service auditor's opinion on the operating effectiveness of those controls over a specified period. Hence, where the auditor of Comet Logistics Ltd. intends to rely on the operating effectiveness of controls at ProPay Solutions, a suitable Type 2 report would provide relevant audit evidence. The auditor should also evaluate the competence and independence of the service auditor, the adequacy of the period covered by the Type 2 report and whether any significant changes in the controls have occurred subsequent to the period covered by the report. Since the auditor of Comet Logistics Ltd. is required to consider both the design and operating effectiveness of payroll controls at ProPay Solutions, a Type 2 report is appropriate. A Type 1 report may assist in understanding and evaluating the design of controls but, by itself, does not provide evidence of their operating effectiveness.