The auditor may request direct assistance from the internal auditor when performing the audit. Thus, the auditor may appropriately request the internal auditor’s assistance in obtaining the understanding of internal control, performing tests of controls, or performing substantive procedures. The internal auditor may provide assistance in all phases of the audit if:
(1) the internal auditor’s competence and objectivity have been assessed, and
(2) the auditor supervises, reviews, evaluates, and tests the work performed by the internal auditor to the extent appropriate.
Assessing competence involves obtaining information about
(1) education and experience;
(2) professional certification and CPE;
(3) audit policies, programs, and procedures;
(4) practices regarding assignment of internal auditors;
(5) supervision and review of their activities;
(6) quality of audit documentation, reports, and recommendations; and
(7) evaluation of internal auditors’ performance.
Assessing objectivity includes obtaining information about
(1) organizational status (the level to which the internal auditors report, access to those charged with governance, and whether these individuals oversee employment decisions related to the internal auditors) and
(2) policies to maintain internal auditors’ objectivity concerning the areas audited
An independent auditor may share responsibility with an entity’s internal auditor in assessing inherent risk and assessing control risk? True or false
FALSE: an internal auditor, regardless of his or her competence and objectivity, should never make judgments about the audit work being conducted. All judgments, including assessments of the risks of material misstatement (inherent and control risk), should be made by the auditor.
Which approach to planning, performing, supervising, reviewing, and documenting internal audit activities distinguishes it from other monitoring controls that may be performed within the entity?
The application of a systematic and disciplined approach to planning, performing, supervising, reviewing, and documenting internal audit activities distinguishes it from other monitoring controls that may be performed within the entity.
The auditor may appropriately request the internal auditor’s assistance in:
obtaining the understanding of internal control,
performing tests of controls,
or performing substantive procedures
An auditor intends to use the work of an actuary. Under these circumstances, the auditor
Should assess the actuary’s competence and objectivity. When deciding whether to use an auditor’s specialist, the auditor should evaluate whether the auditor’s specialist has the needed competence, capabilities, and objectivity. For an external specialist, the evaluation should include inquiries about threats to objectivity. Consideration should be given to the specialist’s professional certification, license, or other recognition of competence and the specialist’s reputation and standing.
True or False? The auditor’s specialist should observe the same confidentiality requirements as the auditor.
True: a member of the AICPA may use a third-party service provider to render professional services to clients. The member should have a contract with the third-party service provider to maintain the confidentiality of the information (Ethics Ruling).
What is an auditor’s specialist?
an auditor’s specialist is an individual or organization possessing expertise in a field other than accounting or auditing. The external auditor should consider the work of internal auditors but should not deem them to be specialists in the sense contemplated by AU-C 620.
Should the auditor obtain an understanding of the methods and assumptions used by the specialist?
Yes, the auditor should evaluate the adequacy of the work of the auditor’s specialist. This process includes (1) obtaining an understanding of any significant assumptions and methods used by the specialist and (2) evaluating the relevance and reasonableness of those assumptions and methods in the circumstances and in relation to the auditor’s other findings and conclusions.
A management’s specialist most likely is useful to
Assist the client in preparing the financial statements. A management’s specialist is an individual or organization possessing expertise in a field other than accounting or auditing. The work in that field is used by the entity to assist in preparing the financial statements.
In using the work of an auditor’s external specialist, an auditor may refer to the specialist in the auditor’s report if, as a result of the specialist’s findings, the auditor
Modifies the opinion because of a material misstatement with effects that are not pervasive. The auditor may refer to an auditor’s external specialist only if the opinion is modified. A modified opinion is a qualified opinion, adverse opinion, or a disclaimer of opinion. The reference is made because it is relevant to understanding the modification. An auditor’s report with such a reference should state that it does not reduce the auditor’s responsibility (AU-C 620).
A corporate balance sheet indicates that one of the corporate assets is a patent. An auditor will most likely obtain evidence regarding the continuing validity and existence of this patent by obtaining a written representation from
A patent attorney.
Some examples of related party transactions:
Making loans with no scheduled terms for repayment.
Borrowing or lending interest-free or at a rate significantly different from prevailing market rates at the time of the transaction.
Selling real estate at a price significantly different from the appraised value.
After identifying a significant related party transaction outside the entity’s normal course of business, an auditor should
Evaluate the business purpose of the transaction.
In significant related party transactions, the auditor should inspect any contracts or agreements to evaluate whether:
(1) the business purpose (or lack of a business purpose) implies that the transaction’s intent was fraudulent,
(2) the terms are consistent with management’s explanations, and
(3) the accounting and disclosure are appropriate. The auditor also should obtain evidence of appropriate authorization and approval.
In auditing related party transactions, an auditor ordinarily places primary emphasis on
The adequacy of the disclosure of the related party transactions. Accounting principles ordinarily do not require transactions with related parties to be accounted for differently from those with unrelated parties. Primary emphasis should be on the adequacy of disclosure.
After identifying significant related party transactions outside the normal course of business, an auditor should obtain evidence that they have been:
appropriately authorized and approved by management, those charged with governance, or (in a proper case) the shareholders. Appropriate authorization and approval reduce but do not eliminate the risks of material misstatement due to fraud or error (AU-C 550).
When obtaining an understanding of the entity’s related party relationships and transactions, the auditor should inquire of management regarding:
(1) the identity of the entity’s related parties, including changes from the prior period;
(2) the relationships of the entity with those parties; and (3) the types and purposes of transactions with them.
For a reporting entity that has participated in related party transactions that are material, disclosure in the GAAP-based financial statements should include
The nature of the relationship and the terms and manner of settlement.
Disclosure in GAAP-based financial statements of a reporting entity that has participated in material related party transactions should include
(1) the nature of the relationship;
(2) a description of the transactions;
(3) the dollar value of the transactions;
(4) the amounts due from or to related parties; and
(5) if not otherwise apparent, the terms and manner of settlement.
In evaluating the reasonableness of an accounting estimate, the auditor should obtain an understanding of how it was developed. The auditor then may use one of several approaches, or a combination, to evaluate reasonableness. What are the approaches?
One approach is to review and test management’s process.
A second approach is to develop an independent expectation to corroborate the reasonableness of management’s estimate.
A third approach is to review subsequent events or transactions.
In evaluating the reasonableness of an estimate, the auditor normally concentrates on key factors and assumptions that are:
(1) significant to the accounting estimate,
(2) sensitive to variations,
(3) deviations from historical patterns, and
(4) subjective and susceptible to misstatement and bias.
In evaluating an entity’s accounting estimates, one of the auditor’s objectives is to determine whether the estimates are
The auditor is responsible for evaluating the reasonableness of accounting estimates made by management in the context of the applicable reporting framework.
The auditor’s evaluation of the reasonableness of accounting estimates
Estimates are based on both subjective and objective factors. Thus, control over estimates may be difficult to establish. Given the potential bias in the subjective factors, the auditor should adopt an attitude of professional skepticism toward both the subjective and objective factors.
When the auditor discovers that a procedure considered necessary at the time of the audit was omitted, (s)he should:
assess the importance of the omitted procedure to his or her ability to support the previously expressed opinion regarding the financial statements (AU-C 585).