Joint audit
Encyclopedia
A joint audit is an audit
on a legal entity
(the auditee) by two or more auditors to produce a single audit report, thereby sharing responsibility for the audit. A typical joint audit has audit planning performed jointly and fieldwork allocated to the auditors. The auditors are typically not individuals, but auditing firms. This work allocation may be rotated after a set number of years to mitigate the risk of over-familiarity. Work performed by each auditor is reviewed by the other, in most cases by exchanging audit summary reports. The critical issues at group level, including group consolidation, are reviewed jointly and there is joint reporting to the legal entity's management, its audit committee
, a government entity, or the general public.
A joint audit is different from a dual audit, where a dual audit is performed by two independent auditors issuing their own separate reports, which are then used by another auditor that ultimately reports on the entity as a whole.
, joint audit became a legal requirement in 1966, while in South Africa
, a joint audit is mandatory for firms operating in the financial services
sector.
In the United States
, a joint audits are performed by the Internal Revenue Service
(IRS) by using various specialists and agents simultaneously in a single tax audit. The state of Maryland
has a joint audit committee, composed of members of the State House of Representatives and State Senate, responsible for reviewing the legislative audit.
of audit approaches and affords audit committees the opportunity to pick and choose the best local firms from within two global audit networks. Audit committees and investors have additional assurance that the audit opinion with which they are presented is complete. A joint audit allows rotation of audit firms, and retains knowledge and understanding of group operations in a way that minimizes the disruption caused when a single audit firm is changed. The rotation of audit firms is equally likely to mitigate the risk of over familiarity. Two firms can also stand stronger together against aggressive accounting treatments. In this way, joint audit effectively becomes a guardian for audit quality. The benchmarking that takes place between the two firms raises the level of service quality.
firms can still be used on a joint audit, there is an opportunity for companies to be more willing to engage other firms in the process. The Big Four then becomes the best seven or eight, as more firms are given the opportunity to demonstrate their capabilities, while clients can retain a Big Four signature where they feel it is needed. A recent report produced by consultants London Economics for the European Commission
highlighted that France and Denmark (two countries with joint audits) are the two least concentrated audit markets in Europe.
Some critics believe that it is difficult for two firms, who outside of the joint audit are competitors, to easily co-operate with each other during the audit. The degree of co-operation, and its effectiveness, is essentially down to the spirit in which the two audit firms approach the joint audit. If they approach the audit with a willingness to work together to provide a company’s shareholders with what they truly value – namely confidence in the financial position of the company in which they are investing – communication will not be a problem. If they favour competition over collaboration, the outcome is poor.
Joint audit delivers increased reporting on audit time and rates applied across the group. A recent comparative analysis of audit fees between Germany and France shows that companies with joint audit pay significantly less for their audit than companies without joint audit.
Joint audit increases time spent by the senior staff on the audit team, and the senior management
of the group or organization.
Audit
The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, and energy conservation.- Accounting...
on a legal entity
Legal personality
Legal personality is the characteristic of a non-human entity regarded by law to have the status of a person....
(the auditee) by two or more auditors to produce a single audit report, thereby sharing responsibility for the audit. A typical joint audit has audit planning performed jointly and fieldwork allocated to the auditors. The auditors are typically not individuals, but auditing firms. This work allocation may be rotated after a set number of years to mitigate the risk of over-familiarity. Work performed by each auditor is reviewed by the other, in most cases by exchanging audit summary reports. The critical issues at group level, including group consolidation, are reviewed jointly and there is joint reporting to the legal entity's management, its audit committee
Audit committee
In a U.S. publicly-traded company, an audit committee is an operating committee of the Board of Directors charged with oversight of financial reporting and disclosure. Committee members are drawn from members of the company's board of directors, with a Chairperson selected from among the committee...
, a government entity, or the general public.
A joint audit is different from a dual audit, where a dual audit is performed by two independent auditors issuing their own separate reports, which are then used by another auditor that ultimately reports on the entity as a whole.
Uses
Joint audits are used internationally, including in India, Denmark, Germany, Switzerland and the UK. In FranceFrance
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
, joint audit became a legal requirement in 1966, while in South Africa
South Africa
The Republic of South Africa is a country in southern Africa. Located at the southern tip of Africa, it is divided into nine provinces, with of coastline on the Atlantic and Indian oceans...
, a joint audit is mandatory for firms operating in the financial services
Financial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
sector.
In the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, a joint audits are performed by the Internal Revenue Service
Internal Revenue Service
The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
(IRS) by using various specialists and agents simultaneously in a single tax audit. The state of Maryland
Maryland
Maryland is a U.S. state located in the Mid Atlantic region of the United States, bordering Virginia, West Virginia, and the District of Columbia to its south and west; Pennsylvania to its north; and Delaware to its east...
has a joint audit committee, composed of members of the State House of Representatives and State Senate, responsible for reviewing the legislative audit.
Auditor competence and independence
Joint audit addresses two underlying principles of audit quality: auditors’ competence and independence. It enables a benchmarkingBenchmarking
Benchmarking is the process of comparing one's business processes and performance metrics to industry bests and/or best practices from other industries. Dimensions typically measured are quality, time and cost...
of audit approaches and affords audit committees the opportunity to pick and choose the best local firms from within two global audit networks. Audit committees and investors have additional assurance that the audit opinion with which they are presented is complete. A joint audit allows rotation of audit firms, and retains knowledge and understanding of group operations in a way that minimizes the disruption caused when a single audit firm is changed. The rotation of audit firms is equally likely to mitigate the risk of over familiarity. Two firms can also stand stronger together against aggressive accounting treatments. In this way, joint audit effectively becomes a guardian for audit quality. The benchmarking that takes place between the two firms raises the level of service quality.
Market competition
A joint audit has a further benefit in that it can encourage more competitive between audit firms. Despite the fact that two Big FourBig Four auditors
The Big Four are the four largest international professional services networks in accountancy and professional services, which handle the vast majority of audits for publicly traded companies as well as many private companies, creating an oligopoly in auditing large companies...
firms can still be used on a joint audit, there is an opportunity for companies to be more willing to engage other firms in the process. The Big Four then becomes the best seven or eight, as more firms are given the opportunity to demonstrate their capabilities, while clients can retain a Big Four signature where they feel it is needed. A recent report produced by consultants London Economics for the European Commission
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
highlighted that France and Denmark (two countries with joint audits) are the two least concentrated audit markets in Europe.
Some critics believe that it is difficult for two firms, who outside of the joint audit are competitors, to easily co-operate with each other during the audit. The degree of co-operation, and its effectiveness, is essentially down to the spirit in which the two audit firms approach the joint audit. If they approach the audit with a willingness to work together to provide a company’s shareholders with what they truly value – namely confidence in the financial position of the company in which they are investing – communication will not be a problem. If they favour competition over collaboration, the outcome is poor.
Costs
Increased costs is the most commonly-cited objection to joint audits. Joint audit adds approximately 10% to audit time, mostly at the highest levels of the audit team (managers and partners). In the longer term, it could bring about a reduction in audit costs as a result of (1) increased market competition, and (2) benchmarking of prices and efficiencies between the two joint auditors by the Audit Committee of the audited organization.Joint audit delivers increased reporting on audit time and rates applied across the group. A recent comparative analysis of audit fees between Germany and France shows that companies with joint audit pay significantly less for their audit than companies without joint audit.
Joint audit increases time spent by the senior staff on the audit team, and the senior management
Senior management
Senior management, executive management, or management team is generally a team of individuals at the highest level of organizational management who have the day-to-day responsibilities of managing a company or corporation, they hold specific executive powers conferred onto them with and by...
of the group or organization.