SOP Ltd., a listed company, has three subsidiaries whose financial statements are consolidated for the year ended 31 March 2026. The subsidiaries…

As per SA 600, "Using the Work of Another Auditor", where the principal auditor uses the work of another auditor in respect of the financial information of a component included in the financial statements of the entity, the principal auditor should comply with the requirements of SA 600. With regard to determination of materiality during the audit of consolidated financial statements (CFS), the auditor should consider the following: The auditor is required to compute the materiality for the group as a whole. This materiality should be used to assess the appropriateness of the consolidation adjustments (i.e. permanent consolidation adjustments and current period consolidation adjustments) that are made by the management in the preparation of CFS. The parent auditor can also use the materiality computed on the group level to determine whether the component's financial statements are material to the group to determine whether they should scope in additional components and consider using the work of other auditors as applicable. The principal auditor also computes the materiality for each component and communicates to the component auditor, if he believes is required for a true and fair view on CFS. The principal auditor also obtains certain confirmations from component auditors like independence, code of ethics, certain information required for consolidation and disclosure requirements etc. However, while considering the observations (for instance modification and/or emphasis of matter in accordance with SA 705/706) of the component auditor in his report on the standalone financial statements, the principles of SA 600 need to be considered. ICAI issued an announcement that states that while considering the observations of the component auditor in his report on the standalone financial statements, the parent auditor should comply with the requirements of SA 600, "Using the Work of Another Auditor". Therefore, the concept of materiality would be considered while considering the observations of the component auditor. In the present case, CA R should determine and apply appropriate group-level and component-level materiality and communicate the relevant materiality to the component auditor where required. Since the subsidiary is significant to the group and its component auditor has expressed a qualification, CA R should evaluate the nature and circumstances of the qualification and determine its effect on the consolidated financial statements using the applicable group materiality. He should not consider the qualification merely on the basis of its effect on the subsidiary's standalone financial statements.