Planning for tand using the work of others Flashcards
(12 cards)
Which of the following steps might an auditor take to evaluate the work of an IT auditor assigned to perform audit tests that will be used as a basis for the audit opinion?
Observe IT auditor’s testing Perfrom analytical procedures
A. Yes Yes
B. Yes No
C. No No
D. No Yes
A. Yes Yes
If an audit requires expertise in a field other than accounting or auditing, the auditor may decide to use a specialist (eg, IT auditor) to obtain sufficient appropriate audit evidence. The auditor’s responsibility for the audit opinion is not reduced by the use of a specialist. Therefore, the auditor must evaluate the specialist’s work. In this question, two ways that the auditor might evaluate the work of the IT auditor are as follows:
Observing the IT auditor’s testing
Performing analytical procedures
The auditor will work with the IT auditor to identify where computer-assisted audit techniques (CAATs) can be used to test controls or financial data. By observing how the IT auditor conducts these tests and performing analytical procedures, the auditor can gain an understanding of IT and determine whether the IT auditor’s work is consistent with other audit evidence.
Things to remember:
An auditor may use the work of a specialist (eg, IT auditor) when the audit requires expertise in a field other than accounting and auditing. The auditor is still responsible for the audit opinion and therefore must evaluate the specialist’s work. Methods of accomplishing this evaluation include observing the IT auditor’s tests and performing analytical procedures to determine whether the results are consistent with other audit evidence.
Which of the following situations may prevent an independent auditor from relying on assistance from internal auditors?
A. Determining what control procedures the entity has in regard to the custody of inventory.
B. Determining whether or not inventory is properly adjusted for obsolete items.
C. Determining the process to order, receive, warehouse, and disburse inventory.
D. Determining whether or not the entity’s inventory control procedures are functioning as intended.
B. Determining whether or not inventory is properly adjusted for obsolete items.
Internal audit is part of a company’s internal control and governance structure. Internal auditors are employees of the client company and provide management with independent, objective assurance and consulting activities designed to add value and improve operations.
Even when internal auditors are competent and objective, there are some situations in which the independent auditor may not rely on their assistance. The independent auditor is responsible for the audit opinion, and this opinion is based on areas of auditor judgment. When such judgment is required, the independent auditor should not rely on internal audit. For example, obsolete inventory is an estimate based on judgment. The independent auditor would need to apply professional judgment rather than relying on internal audit assistance to determine if this estimate is appropriate.
(Choices A and D) Internal audit can assist the independent auditor when determining if controls are in place and functioning as intended. However, the independent auditor should reperform some of the internal audit tests to ensure objectivity.
(Choice C) The independent auditor can rely on inventory process and control documentation (eg, data flow maps) created by internal audit, as long as internal audit is competent and objective.
Things to remember:
Competent and objective internal auditors may assist the independent auditor in some areas. However, the independent auditor assumes responsibility for the audit opinion and cannot delegate areas where professional judgment is required.
Which of the following procedures would the group auditor most likely perform after deciding to make reference to a component auditor who audited a subsidiary of the entity?
A. Review the working papers and the audit programs of the other CPA.
B. Visit the other CPA and discuss the results of the other CPA’s audit procedures.
C. Make inquiries about the professional reputation and independence of the other CPA.
D. Determine that the other CPA has a sufficient understanding of the subsidiary’s internal control.
C. Make inquiries about the professional reputation and independence of the other CPA.
Companies often have components (eg, subsidiaries) whose financial statements (F/S) are audited by other auditors. In such cases, the group auditor must decide whether to use the work of the other auditors or complete the group audit without it.
A group auditor will use the work of a component auditor only if, among other requirements, the component auditor satisfies ethical standards, including independence, and is competent to perform the audit. The group auditor might determine this by discussing with the component auditor any conflicts of interest and by making inquiries with state boards of accountancy to determine whether the component auditor is licensed and in good standing.
Using the work of a component auditor is not the same as assuming responsibility for that work. The group auditor has the option to assume responsibility or divide responsibility with the component auditor; however, in either scenario, the group auditor is using the component auditor’s work.
(Choices A, B, and D) The group auditor’s intention to reference the component auditor in the report means that the group auditor is not taking responsibility for the component auditor’s work. As such, the group auditor is not likely to review the component auditor’s working papers, visit the component auditor to discuss audit procedures, or determine whether the component auditor has a sufficient understanding of internal control.
Things to remember:
A group auditor will use the work of a component auditor only if, among other requirements, the component auditor is independent and competent to perform the audit.
A CPA auditing a jewelry store relied heavily on a specialist for the purpose of verifying the value of the client’s inventory. The auditor was able to obtain sufficient appropriate audit evidence, relying on the work of the specialist, and decided to issue an unmodified report. Which of the following is correct regarding the audit report?
A. The auditor may not refer to the specialist in the audit opinion.
B. Use of a specialist reduces the auditor’s responsibility for the audit opinion.
C. The auditor is required to refer to the specialist in the audit opinion.
D. The auditor must explain the specialist’s qualifications in an explanatory paragraph.
A. The auditor may not refer to the specialist in the audit opinion.
A specialist is an individual whose expertise assists an auditor in obtaining sufficientappropriateaudit evidence. The audit opinion is solely the responsibility of the auditor; however, the findings of the specialist constitute audit evidence to be evaluated for adequacy by the auditor.
The evaluation should address:
The specialist’s use of significant assumptions and methods
The specialist’s use of source data
The relevance and reasonableness of the specialist’s findings and their consistency with the audit evidence
The audit report may not refer to the specialist if the report contains an unmodified (ie, unqualified) opinion because this could imply that the auditor is attempting to share responsibility for the audit opinion (Choices B, C, and D).
The only time the auditor can refer to the specialist is when the audit opinion is modified (ie, qualified or adverse) and the modification relates directly to the specialist. For example, the modified opinion might be due to a disagreement between management and the specialist regarding the inventory value. If the report includes a reference to the specialist, the opinion should also state that the auditor’s responsibility is not lessened.
Things to remember:
A specialist is an individual whose expertise assists an auditor in obtaining sufficient appropriate audit evidence. The only time the auditor can refer to the specialist in the report is when the audit opinion is modified, and the modification relates directly to the specialist.
Which of the following statements is correct regarding the work of a specialist?
A. The auditor should understand the specialist’s field.
B. The auditor can rely on the specialist’s work without verification.
C. The client must agree to accept the findings of the specialist.
D. The specialist must be independent from the auditor.
A. The auditor should understand the specialist’s field.
A specialist is an individual whose expertise assists an auditor in obtaining sufficient appropriate audit evidence. For example, a land surveyor might be needed to help gauge the quantity of property owned by the client.
An auditor cannot simply rely on a specialist’s work (Choice B). Instead, the auditor should obtain a sufficient understanding of the specialist’s field. This understanding will allow the auditor to determine the nature, scope, and objectives of the work and evaluate its adequacy. Generally, the auditor can gain an understanding of the field through discussions with the specialist. In rare instances, the auditor may need to attend a formal or professional development course in that field.
The client does not need to agree to accept the findings of the specialist (Choice C). However, if the specialist’s findings result in an adjustment to the financial statements, the client and auditor must come to an agreement on an acceptable value.
The specialist does not need to be independent of the auditor (eg, a client’s specialist). However, the auditor must assess the specialist’s objectivity prior to using the findings in the audit report (Choice D).
Things to remember:
A specialist is an individual whose expertise assists an auditor in obtaining sufficient appropriate audit evidence. The auditor should first obtain an understanding of the specialist’s field by discussing it with the specialist or attending a formal course; this will allow the auditor to determine the nature, scope, and objectives of the specialist’s work and evaluate its adequacy.
The company being audited has an internal auditor that is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may
A. Allow the internal auditor to perform tests of internal controls.
B. Allow the internal auditor to audit a major subsidiary of the company.
C. Not assign any task to the internal auditor because of the internal auditor’s lack of independence.
D. Allow the internal auditor to perform analytical procedures, but not be involved with any tests of details.
A. Allow the internal auditor to perform tests of internal controls.
Internal audit is part of a company’s internal control and governance structure. Internal auditors are employees of the client company and provide management with independent, objective assurance and consulting activities designed to add value and improve operations.
The independent auditor (eg, CPA) may be able to rely on the work of competent and objective internal auditors. The independent auditor still has sole responsibility for the audit report, must supervise all audit work, and must reperform some of the internal audit work to assure competence and objectivity. The independent auditor will consider the client’s internal controls during the planning process. Internal audit reviews of internal controls can assist in this planning.
(Choice B) A major subsidiary has significant financial statement impact. Since the independent auditor has sole responsibility for the audit opinion, it would be inappropriate for the internal auditor to test something with significant financial impact.
(Choice C) The independent auditor may assign tasks to the internal auditor as long as those tasks are not associated with areas where independence is impaired. For example, an internal auditor recently transferred from accounts payable should not perform tests of accounts payable.
(Choice D) Internal auditors may perform tests of details as long as the independent auditor supervises the testing and reperforms some of the tests to ensure objectivity and accuracy.
Things to remember:
Independent auditors may seek assistance from competent and objective internal auditors. Internal audit control testing may provide the basis for independent audit planning.
When auditing group financial statements, the auditor decides to prepare a “shared responsibility” report with the component auditor; the auditor’s report should indicate which of the following?
The name of the component auditor the magnitude of the comp. audited by the comp auditor
A. Yes Yes
B. Yes No
C. No Yes
D. No No
C. No Yes
A component auditor is an auditor involved in part of a group audit engagement. For example, a company may have subsidiaries (ie, components) whose financial statements (F/S) are audited by other firms (ie, component auditors). In that case, the group auditor must decide whether to assume responsibility for the component auditor’s work.
If the group auditor does not assume responsibility, the group audit report will state that the component was audited by another auditor and indicate the magnitude of the component’s portion of the group F/S. The group auditor need not name the component auditor. Should group auditors choose to name component auditors, they should obtain the component auditors’ permission and the component auditors’ and group auditors’ reports should be presented together.
Note: If the group auditor does assume responsibility for the component auditor’s work, the group audit report will not mention the component audit or be otherwise altered.
Things to remember:
If a group auditor is not taking responsibility for a component auditor’s work, the group auditor will mention that a component auditor was used and indicate the magnitude of the portion of the financial statements the component auditor audited. The component auditor should not be mentioned by name unless the group auditor receives the component auditor’s permission and presents the component auditor’s report together with the group auditor’s report.
In using the work of a specialist, an auditor may refer to the specialist in the auditor’s report if, as a result of the specialist’s findings, the auditor
A. Desires to disclose the specialist’s findings, which imply that a more thorough audit was performed.
B. Makes suggestions to management that are likely to improve the entity’s internal control.
C. Corroborates another specialist’s findings that were consistent with management’s assertions.
D. Adds an explanatory paragraph to the auditor’s report to emphasize an unusually important subsequent event.
D. Adds an explanatory paragraph to the auditor’s report to emphasize an unusually important subsequent event.
Circumstances may arise in an audit that require the work of a specialist. The auditor may not refer to the specialist in the audit report if the report contains an unmodified (ie, unqualified) opinion. This may imply that the auditor is attempting to share responsibility for the opinion or that a more thorough audit was performed (Choice A).
The auditor can refer to the specialist (in an explanatory paragraph) only when the audit report is modified (ie, qualified, adverse, or disclaimer opinion) and only if the disclosure is relevant to the reader’s understanding of the specialist’s findings.
For example, a real estate developer might purchase property after the report date but before the release date (ie, a subsequent event) and discover ground contamination that requires the use of a specialist to quantify the potential legal issues. If the opinion refers to the specialist, the auditor should indicate that the reference does not reduce the auditor’s responsibility for the opinion.
(Choices B and C) Audit documentation, not the audit opinion, would include suggestions made to management about internal controls or corroborate another specialist’s findings.
Things to remember:
An auditor may not refer to the work of a specialist in an audit report that contains an unmodified (ie, unqualified) opinion, regardless of the circumstances. The auditor can refer to the specialist (in an explanatory paragraph) if the audit opinion is modified and only if the disclosure is relevant to the reader’s understanding of the specialist’s findings.
A financial statement audit client uses newly implemented custom software for several accounting systems. The auditor might consider using an information technology (IT) auditor to assist in which of the following?
Understanding the design of IC Testing the operating effectiveness of IC
A. Yes Yes
B. Yes No
C. No Yes
D. No No
A. Yes Yes
Many organizations rely on complex IT systems throughout the financial reporting process. As a consequence, those IT systems may affect all areas of such an organization’s audit. Because financial auditors may have a limited understanding of IT systems, they commonly rely on assistance from IT auditors in both planning and performing procedures. This is particularly appropriate when the IT system is especially complex, newly implemented, or custom designed for the client.
IT auditors may use their IT expertise to help the financial auditor obtain an understanding of the design of the client’s ITgeneral and application controls. If controls are well designed, and the financial auditor intends to rely on them, the IT auditor can help design and perform tests of their operating effectiveness using computer assisted auditing techniques (CAATs) (eg, parallel simulation).
The IT auditor may also assist in the performance of analytical procedures for substantive tests (eg, Benford’s law analysis) or tests of details (eg, recalculation on very large data sets).
Things to remember:
Financial statement auditors with a limited understanding of IT systems commonly rely on assistance from IT auditors in both planning and performing procedures. An IT auditor can help the financial auditor obtain an understanding of and test the client’s IT controls relevant to financial reporting. The IT auditor can also assist with designing and performing substantive tests.
An auditor who uses the work of a specialist may refer to the specialist in the auditor’s report if the
A. Auditor believes that the specialist’s findings are reasonable in the circumstances.
B. Specialist’s findings support the related assertions in the financial statements.
C. Auditor modifies the report because of the difference between the client’s and the specialist’s valuations of an asset.
D. Specialist’s findings provide the auditor with greater assurance of reliability about management’s representations.
C. Auditor modifies the report because of the difference between the client’s and the specialist’s valuations of an asset.
A specialist uses nonaccounting expertise to assist an auditor in obtaining sufficient appropriate audit evidence. For example, an auditor may employ a specialist to evaluate the estimated asset retirement obligation for a coal mine. The audit opinion remains solely the responsibility of the auditor; however, the specialist’s findings constitute audit evidence to be evaluated by the auditor for adequacy.
The audit report may not refer to the specialist if the report contains an unmodified opinion because this reference could imply that the auditor is sharing responsibility for the audit opinion with the specialist.
The only time the auditor may refer to the specialist is when the audit opinion is modified (ie, qualified or adverse) and the modification relates directly to the specialist’s findings (Choices B and D). For example, the modified opinion might be due to a disagreement between management and the specialist regarding the market value of unique inventory items. If the report includes a reference to the specialist, the opinion should also state that the auditor’s responsibility is not lessened.
(Choice A) No matter how reasonable and reliable the specialist’s findings, the auditor may not refer to the specialist unless the above conditions are met.
Things to remember:
A specialist assists an auditor in obtaining sufficient appropriate audit evidence. The only time the auditor may refer to the specialist in the report is when the audit opinion is modified and the modification relates directly to the specialist’s findings.
In assessing the competence of a client’s internal auditor, an independent auditor most likely would consider the
A. Internal auditor’s compliance with professional internal auditing standards.
B. Client’s policies that limit the internal auditor’s access to management salary data.
C. Evidence supporting a further reduction in the assessed level of control risk.
D. Results of ratio analysis that may identify unusual transactions and events.
A. Internal auditor’s compliance with professional internal auditing standards.
Internal audit is part of a company’s internal control and governance structure. Internal auditors are client company employees who provide management with independent, objective assurance and consulting activities designed to add value and improve operations.
Depending on internal audit competence and objectivity, the independent auditor (eg, CPA) may be able to rely on internal auditors’ auditors’ work. The Institute of Internal Auditors’ (IIA’s)International Standards for the Professional Practice of Internal Auditing provides authoritative guidance for the internal audit profession. This guidance addresses how the internal audit function should operate and how internal audits should be performed. Compliance with this guidance would be an appropriate reference to determine internal auditor competence.
(Choice B) Policies limiting the internal auditor’s access to any information would indicate an impairment of objectivity, rather than indicating competence.
(Choice C) Evidence supporting reduced control risk relates to the company overall, not just to internal audit. It does not indicate internal auditor objectivity or competence.
(Choice D) Ratio analysis is an audit procedure that might help the independent auditor identify possible risks, but it does not indicate internal audit competence.
Things to remember:
The Institute of Internal Auditors’ (IIA’s) International Standards for the Professional Practice of Internal Audit provides authoritative guidance for the internal audit profession. Compliance with this guidance is an appropriate indication of internal auditor competence.
Which of the following factors would an independent auditor most likely consider in assessing the objectivity of an internal auditor?
A. The internal auditor has obtained the Certified Internal Auditor designation.
B. The audit committee reviews employment decisions related to the director of internal auditing.
C. The internal auditor was previously an employee of the auditor’s public accounting firm.
D. The internal auditor attends a number of comprehensive continuing professional education courses each year.
B. The audit committee reviews employment decisions related to the director of internal auditing.
An entity’s internal auditor (IA) can be used for obtaining evidence or providing direct assistance during an audit if an IA works under the direct supervision and review of the external auditor (EA). However, the EA must evaluate the IA’s objectivity and competence.
The EA considers an organization’s structure and relevant policies/procedures to determine whether they support the objectivity of internal auditors. Having an audit committee review the employment decisions (eg, raises, promotions) of the director of the IA allows for objectivity; the director does not audit/monitor the audit committee. In contrast, an IA reporting to management would create a conflict since an IA audits management (ie, an IA is auditing the boss’s work).
(Choices A, C, and D) Certifications, experience (eg, working in a CPA firm), and the number of professional education courses taken provide information about an internal auditor’s competency and experience. However, none of these provide relevant information about objectivity.
Things to remember:
External auditors must consider internal auditors’ competency and objectivity before allowing them to assist in an audit or using their work as evidence. The entity’s organizational structure and relevant policies/procedures must promote the objectivity of the internal audit function.
