SA 402 – Audit Considerations Relating to an Entity Using Service Organizations

Question 1

G Ltd. is a mobile phone operating company. Barring the marketing function it had outsourced the entire operations like maintenance of mobile infrastructure, customer billing, payroll, accounting functions, etc.

Assist the auditor of G Ltd as to how he can obtain an understanding of how G Ltd. uses the services of the outsourced agency in its operations.

Answer 1

Understanding How User Entity Uses the Services of Service Organization:

–> As per SA 402 on “Audit Considerations Relating to an Entity Using a Service Organization”,

when obtaining an understanding of the user entity in accordance with SA 315 “Identifying and Assessing the ROMM through Understanding the Entity and its Environment”, the user auditor shall obtain an understanding of how a user entity uses the services of a service organization in the user entity’s operations, including:

1. The nature of the services provided by the service organization and the significance of those services to the user entity, including the effect thereof on the user entity’s internal control;
2. The nature and materiality of the transactions processed or accounts or financial reporting processes affected by the service organization;
3. The degree of interaction between the activities of the service organization and those of the user entity; and
4. The nature of the relationship between the user entity and the service organization, including the relevant contractual terms for the activities undertaken by the service organization.