ACC 645 Module 3 Milestone One Example

Group Audit Planning Memo: Canadian Component

[Student Name]

Southern New Hampshire University

ACC 645: Advanced Auditing

Milestone One

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Group Audit Planning Memo: Canadian Component

Introduction

In June 2025 the company bought a Toronto payroll processor serving about 1,400 Canadian employers for $96 million. For the second half of the year, the component contributes about $38 million of the company's $640 million revenue and $118 million of its $1.31 billion of consolidated assets, excluding client funds. Its existing auditor, a Toronto firm, will continue to audit the component's statutory financial statements and will perform work for the group audit. This memo plans that arrangement under the PCAOB's amended standards on audits involving other auditors (Public Company Accounting Oversight Board, 2022).

Supervise or Divide

The lead auditor can either supervise the other auditor, taking responsibility for its work as part of the audit, or divide responsibility under AS 1206, making reference to the other auditor in the report. We will supervise. Dividing responsibility is uncommon in U.S. public company audits, signals to investors that the lead auditor did not take responsibility for part of the statements and would require the other auditor's report to be filed with the SEC. Supervising allows us to direct the work toward the group's risks and integrate it with our audit of the acquisition. It also means we must plan, instruct and review the Toronto firm's work as if it were our own staff.

Substantial Role

A firm plays a substantial role if it audits components representing 20 percent or more of consolidated assets or revenues or performs material services the lead auditor uses. The Canadian component is about 6 percent of revenue and 9 percent of assets, so the Toronto firm does not play a substantial role and need not be registered with the PCAOB for this engagement. It is nonetheless subject to SEC and PCAOB independence requirements for work used in our audit, which we will confirm in writing.

Materiality

Materiality for the group and the component

Component materiality is set well below group materiality because misstatements in the component could combine with those elsewhere. We set it at about 30 percent of group materiality, reflecting the component's size and the higher risk of a newly acquired business whose controls we have not tested before.

Component Risks

Three risks are specific to the component. First, client trust funds: the component holds about CAD 180 million collected from employers before payroll is paid and taxes remitted. Those funds and the related obligations must be complete, segregated and reconciled, and interest earned on them is a revenue stream. Second, source deduction remittances: Canadian employers' income tax, pension and employment insurance withholdings must be remitted to the Canada Revenue Agency on strict schedules, with penalties for late payment that the component, as processor, may bear by contract. Third, integration: the component is migrating customers to the company's platform, and migration errors could misstate both revenue and client obligations. Downey and Bedard (2019) found that coordination and communication between group and component teams are a common source of problems in multinational audits, which argues for addressing these risks explicitly in the instructions.

Division of Work

The Toronto firm will audit the component's revenue, client fund balances and obligations, payroll tax remittance controls, payables and payroll expense, using component materiality. The group team will audit the acquisition itself: the purchase price allocation, the valuation of customer relationships and goodwill, and goodwill impairment testing, because those judgments are made centrally and are material at the group level. The group team will also test the consolidation, translation from Canadian dollars and intercompany eliminations.

Instructions and Communication

Written instructions, issued in September, will set out the scope of work, component materiality, the risks above and the procedures we expect, independence requirements, the timetable and the reporting package: a summary of misstatements, deficiencies found, significant judgments and a signed representation. We will hold calls at planning, after interim testing and before the reporting deadline of January 30. The senior manager will visit Toronto in January to review the working papers for client trust funds and remittances, and we will obtain copies of the documentation we need to support the group opinion, as the amended standards require.

Evaluating the Other Auditor

Before relying on the Toronto firm, we will evaluate its competence, including experience with payroll processors and knowledge of U.S. GAAP and PCAOB requirements, and obtain written confirmation of independence. We will also consider its most recent quality inspection by the Canadian Public Accountability Board. If its knowledge of U.S. GAAP proves limited, we will send a member of our team to work alongside it on the trust fund testing (Arens et al., 2020).

Evaluating the Component's Results

When the reporting package arrives, the group team will compare the component's misstatements with component materiality and add them to the group summary, translated at the year-end rate for balance sheet items and the average rate for income items. Misstatements below the $50,000 reporting threshold will not be sent, but the Toronto firm must report any it judges qualitatively important, such as late remittances that could bring penalties. The group engagement partner will also consider whether the component's findings change the group risk assessment, for example if migration errors suggest the company's own platform has weaker controls over new customer setup than we assessed. If the Toronto firm identifies a control deficiency in the trust fund reconciliations, the group team will evaluate it for the integrated opinion, since the component's controls are within the scope of management's assessment unless the company uses the SEC's one-year exclusion for acquired businesses, which it has chosen to do for internal control reporting in 2025.

Conclusion

We will supervise the Toronto firm, set component materiality at $1.0 million, focus its work on client funds, remittances and integration, and keep acquisition accounting with the group team. Milestone Two will address the allegation received in October about backdated contracts.

References

Arens, A. A., Elder, R. J., Beasley, M. S., & Hogan, C. E. (2020). Auditing and assurance services (17th ed.). Pearson.

Downey, D. H., & Bedard, J. C. (2019). Coordination and communication challenges in global group audits. Auditing: A Journal of Practice & Theory, 38(1), 123-147. https://doi.org/10.2308/ajpt-52016

Public Company Accounting Oversight Board. (2022). Planning and supervision of audits involving other auditors and dividing responsibility for the audit with another accounting firm (PCAOB Release No. 2022-002). Author.