The Audit of Letterbox Companies

Anne Kirstine Schrøder & Søren Alexander

Student thesis: Master thesis


The evolution of corporate structures has led to the emergence of hybrids that challenge the conventional perception of a group structure. One of these hybrids is identified as a letterbox company where, in its purest form, almost all activities are offshored to a different jurisdiction, and no more than a letterbox remains at the place of registration. In turn, such a corporate setup calls for a different audit setup, where the audit opinion is signed by an auditor at the place of registration, which is different from where the group’s operations, accounting records and financial management are located, and where the vast majority of the audit is performed. The letterbox audit setup has not been without problems to the audit profession, and criticism has been raised in both the UK and Switzerland in quality inspections over auditors’ handling of these cases. IAASB has recognized the need to address the topic of letterbox audits, especially with the goal of clarifying whether ISA 600 applies to these cases. We have made a vast literature review on the topic of audit quality and the role of geographic proximity to obtain an understanding of the challenges that geographically dispersed audits impose on audit quality. On the basis of our literature review, we analyzed how letterbox audits are regulated within the current framework of ISAs, with a point of departure in ISA 600 and the regulation of group audits.We realized that a great variety exists within letterbox company setups and that a group audit in some cases would be an overkill, where in other cases it might be a suitable given the current framework of standards. However the most fundamental question when using an ISA 600 on letterbox audits remains: How can an auditor sign an audit opinion based primarily on the work of another auditor? Moreover, we examined the limitations imposed by data processing laws on sharing audit documentation across borders and we found that there is a strict practice in allowing processing of personal data, and that it is highly affected by whether or not bi- or multilateral agreements that protect personal data have been made. Our overall conclusion is that letterbox audits do challenge the current regulatory and legislative framework, and that an ongoing dialogue between auditors, regulators and audit clients is the key to finding a solution that provides for audit quality.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2014
Number of pages113