Orion Ltd.

Orion Ltd. is the parent of a group. Vega Ltd. is a component whose financial statements are audited by a component auditor.

Vega Ltd. is significant to the group because of the nature of its operations, although its total assets constitute only 7% of the group’s total assets.

The component auditor reports the following to the group engagement team:

an accounting policy difference relating to revenue recognition;
a material misstatement of ₹42 lakh identified during the audit, which management of Vega Ltd. has refused to correct; and
an unresolved limitation relating to one class of inventories.

The group engagement team performs additional procedures and determines that:

the revenue recognition policy difference has already been appropriately adjusted in the consolidation process;
the ₹42 lakh misstatement is not material to the group financial statements;
the inventory limitation does not prevent the group engagement team from obtaining sufficient appropriate audit evidence regarding the group financial statements.

The component auditor has nevertheless included the uncorrected ₹42 lakh misstatement and the inventory limitation in the communication to the group engagement team.

The group engagement partner makes the following statements:

Statement 1: Since the component auditor has reported an uncorrected misstatement, the group auditor must automatically modify the opinion on the consolidated financial statements.

Statement 2: Since Vega Ltd. is significant to the group because of the nature of its operations, the group auditor must treat every matter reported by the component auditor as material to the group.

Statement 3: The group auditor should evaluate the effect of the component auditor’s findings on the group financial statements and determine whether additional procedures are necessary.

Statement 4: Once the group auditor concludes that the component auditor’s work is adequate for the group audit, the group auditor is relieved of responsibility for evaluating the effect of the component auditor’s findings on the consolidated financial statements.

Which ONE of the following is correct?

A. Statements 1 and 2 only.

B. Statements 2 and 3 only.

C. Statement 3 only.

D. Statements 1, 3 and 4 only.