Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

AUD > 4 Strategic Planning Issues > Flashcards

4 Strategic Planning Issues Flashcards

1
Q

How does an external auditor use the work of an internal auditor?

A
  1. using the work of internal auditors to obtain audit evidence
  2. using internal auditors to provide direct assistance under the direction, supervision, and review of the external auditor
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

The external auditor may be able to use the work of the internal audit function to obtain audit evidence in a constructive and complementary manner depending on?

A
  1. the objectivity of the internal auditors
  2. the level of competence of the internal audit function
  3. whether the function applies a systematic and disciplined approach, including quality control
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

What is objectivity?

A

The ability to perform tasks without bias

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

How is objectivity promoted in the internal audit function?

A

Objectivity is promoted when the internal auditors:

  1. report to those charged with governance rather than management
  2. are free of any conflicting responsibilities
  3. work without constraints
  4. are members of professional organizations that obligate them to be objective
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is competence?

A

The attainment and maintenance of knowledge and skills of the function as a whole at the level required to enable assigned tasks to be performed diligently and with the appropriate level of quality.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

What are factors that may affect the external auditor’s determination about the competence of the internal audit function?

A
  1. The internal audit function is adequately and appropriately resourced relative to the size of the entity and the nature of its operations
  2. Appropriate policies for hiring, training, and assigning internal auditors to internal audit engagements exist
  3. The internal auditors are members of relevant professional bodies or have certifications that require them to comply with the relevant professional sandards, including continuing professional education requirements
  4. The internal auditors have the required knowledge and/or experience relating to the entity’s financial reporting and applicable financial reporting framework
  5. The internal audit function has the necessary skills (ex - industry-specific knowledge) to perform work related to the entity’s financial statements
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

What are factors that may affect the external auditor’s determination about the competence of the internal audit function?

A
  1. The internal audit function is adequately and appropriately resourced relative to the size of the entity and the nature of its operations
  2. Appropriate policies for hiring, training, and assigning internal auditors to internal audit engagements exist
  3. The internal auditors are members of relevant professional bodies or have certifications that require them to comply with the relevant professional sandards, including continuing professional education requirements
  4. The internal auditors have the required knowledge and/or experience relating to the entity’s financial reporting and applicable financial reporting framework
  5. The internal audit function has the necessary skills (ex - industry-specific knowledge) to perform work related to the entity’s financial statements
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

How do objectivity and competence relate to each other?

A

Objectivity and competence are a continuum from low to high, a high level of one attribute cannot compensate for a low level of the other.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

How should internal audit activities be perfomed?

A

Through the application of a systematic and disciplined approach to planning, performing, supervising, reviewing and documenting internal audit activities.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

What should an external auditor consider when evaluating whether a systematic and disciplined approach is applied to the internal audit function?

A
  1. The existence, adequacy, and use of documented internal audit procedures or guidance for such matters as:
    - risk assessments
    - work programs
    - documentation
    - reporting - the nature and extent of this documentation should be proportionate to the nature and size of the internal audit function relative to the complexity of the entity
  2. Whether the internal audit function has:
    - appropriate quality control policies and procedures relating to leadership, HR, and engagement performance
    - quality control requirements in standards set by relevant professional bodies
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

When should an external auditor not use the work of the internal audit function to obtain audit evidence?

A

If the external auditor determines that:

  1. The function’s organizational status and relevant policies and procedures do not adequately support the objectivity of internal auditors
  2. The function lacks sufficient competence
  3. The function does not apply a systematic and disciplined approach, inluding quality control
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What should the external auditor consider regarding the use of internal audit work before using it to obtain audit evidence?

A
  1. The nature
  2. The timing
  3. The extent of the work performed or planned by the function
  4. The work’s relevance to the overall audit strategy and audit plan
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

What significant judgments should an external auditor make in determining when to use the work of the internal audit function to obtain audit evidence?

A
  1. assessing the risks of material misstatement
  2. evaluating the sufficiency of tests performed
  3. evaluating the appropriateness of management’s use of the going concern assumption and whether substantial doubt exists about the entity’s ability to continue as a going concern
  4. evaluating the significant accounting estimates
  5. evaluating the adequacy of disclosures in the financial statements and other matters affecting the auditor’s report
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

What significant judgments should an external auditor make in determining when to use the work of the internal audit function to obtain audit evidence?

A
  1. assessing the risks of material misstatement
  2. evaluating the sufficiency of tests performed
  3. evaluating the appropriateness of management’s use of the going concern assumption and whether substantial doubt exists about the entity’s ability to continue as a going concern
  4. evaluating the significant accounting estimates
  5. evaluating the adequacy of disclosures in the financial statements and other matters affecting the auditor’s report
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

How is undue use of the internal audit function to obtain audit evidence prevented?

A

Less of the work should be used, which will require:

  1. more judgment to plan and perform audit procedures or evaluate the audit evidence
  2. higher assessed risk of material misstatement at the assertion level with special consideration given to significant risks
  3. the less the objectivity of the internal audit function
  4. the lower the competence of the internal audit function
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

What should the external audito evaluate regarding their involvement in the audit when using work from the internal audit function and internal auditors’ direct assistance?

A

Whether the use of the work and the direct assistance of internal auditors results in too little involvement of the external auditor in the audit.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

What should the external audito evaluate regarding their involvement in the audit when using work from the internal audit function and internal auditors’ direct assistance?

A

Whether the use of the work and the direct assistance of internal auditors results in too little involvement of the external auditor in the audit.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Should internal auditors be used to perform critical procedures?

A

No

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

What are examples of critical procedures that shouldn’t be performed by internal auditors?

A
  1. inquiries of entity personnel or those charged with governance related to identifying fraud risks and determining the procedures to respond to such risks
  2. determine the use of unpredictable audit procedures
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Should an external auditor reperform some of the body of the work of the internal audit function that the external auditor intends to use in obtaining audit evidence?

A

Yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

What should the external auditor do before the conclusion of the audit regarding the internal auditor’s work?

A

The external auditor should make an overall assessment of the usefulness of the internal auditor’s work to obtain evidence.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

When should an external not use the internal auditor to provide direct assistance?

A

If the internal auditor lacks the necessary objectivity or competence.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

What should the external obtain before using an internal auditor to provide direct assistance?

A

The external auditor should obtain written acknowledgement, in the audit engagement letter, from management or those charged with governance, as appropriate, that:

  1. Internal auditors can follow the external auditor’s instructions
  2. The entity will not intervene in the work
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

How should the external auditor determine the work that may be assigned to internal auditors?

A

The external auditor should:

  1. Evaluate threats to the internal auditor’s objectivity, the effectiveness of the safeguards applied to reduce or eliminate the threats, and the competence of the internal auditors who will be providing such assistance
  2. Consider the assessed risk of material misstatement
  3. Consider the judgment involved in performing relevant audit procedures and evaluating audit evidence
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Should the external auditor direct, supervise, and review the work performed by internal auditors on the engagement?

A

Yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

What procedures should internal auditors perform?

A

Less critical procedures such as preparing schedules and compiling documentation.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

The direction, supervision, and review by the external auditor of the audit procedures performed by the internal auditors should be adequate to provide what?

A

That sufficient appropriate audit evidence has been obtained to support the conclusions based on that work.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

Should the external auditor communicate how they plan to use the work of the internal audit function to obtain evidence and provide direct assistance?

A

Yes

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

If an external auditor uses the work of the internal audit function to obtain audit evidence what should be documented?

A
  1. The results of the evaluation of:
    - the function’s organizational status and relevant policies and procedures to adequately support the objectivity of the internal auditors
    - The competence of the function
    - The application by the function of a systematic and disciplined approach, including quality control
  2. The nature and extent of the work used (including the period covered by, and the results of such work)
  3. The audit procedures performed by the external auditor to evaluate the adequacy of the work used, including reperformance of some of the work of the internal audit function to obtain evidence.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

If an external auditor uses internal auditors to provide direct assistance what should be documented?

A
  1. The evaluation of the existence and significance of threats to the objectivity of the internal auditors, any safeguards applied to reduce or eliminate the threats
  2. The competence of the internal auditors used to provide direct assistance
  3. The basis for the decision about the nature and extent of the work performed by the internal auditors
  4. The nature and extent of the external auditor’s review of the internal auditor’s work (including the testing, by the external auditor, of some of the work performed by the internal auditors)
  5. The working papers prepared by the internal auditors who provided direct assistance on the audit engagement.
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

What should the external auditor document regarding their responsibility for the audit opinion?

A

They should document their evaluation of whether they were sufficiently involved in the audit to take sole responsibility for the audit opinion expressed.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

What are the two types of specialists that can be used in an audit?

A

An auditor’s specialist and a management’s (company’s) specialist

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

What is an auditor’s specialist?

A

An individual or organization with expertise in a field other than accounting or auditing.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

How is the work of an auditor’s specialist used?

A

The work in that field is used to assist the auditor in obtaining appropriate audit evidence.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

Who may be an auditor’s specialist?

A
  1. An internal specialist (who is a partner or staff member, including temporary staff, of the auditor’s firm or a network firm)
  2. An external specialist
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

What is a management’s (company’s) specialist?

A

An individual or organization with expertise in a field other than accounting or auditing.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

How is the work of a management’s specialist used?

A

The work in that field is used by the entity to assist the entity in preparing the financial statements.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

What may be a management’s specialist?

A
  1. employed by the entity
  2. engaged by the entity
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

What are the considerations in using specialists in audit work?

A

For both types of specialists, they are objectivity and competence of the specialist in providing evidence.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

What are the considerations in using specialists in audit work?

A

For both types of specialists, they are objectivity and competence of the specialist in providing evidence.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

When should an auditor consider using the work of an auditor’s specialist?

A

If expertise other than accounting or auditing is necessary to obtain sufficient appropriate audit evidence.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

Is the responsibility for the audit opinion expressed reduced by the auditor’s use of the work of an auditor’s specialist?

A

No, the auditor has the sole responsibility for the audit opinion expressed and that responsibility is not reduced by the auditor’s use of the work of an auditor’s specialist.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

What are examples of potential auditor’s specialists expertise?

A
  1. valuation of complex financial instruments and nonfinancial assets and liabilities, such as land and buildings, plant and machinery, jewelry, works of art, and antiques
  2. actuarial calculations
  3. estimation of oil and other mineral reserves
  4. valuation of environmental liabilities and site cleanup costs
  5. interpretation of contracts, laws, and regulations
  6. physical characteristics relating to quantity on hand or condition
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

What are examples of potential auditor’s specialists expertise?

A
  1. valuation of complex financial instruments and nonfinancial assets and liabilities, such as land and buildings, plant and machinery, jewelry, works of art, and antiques
  2. actuarial calculations
  3. estimation of oil and other mineral reserves
  4. valuation of environmental liabilities and site cleanup costs
  5. interpretation of contracts, laws, and regulations
  6. physical characteristics relating to quantity on hand or condition
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

In the case of using an auditor’s external specialist what should the auditor inquire about?

A

The auditor should evaluate the objectivity and should include inquiry about interests and relationships that may threated objectivity.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

The auditor should obtain an understanding of the expertise of the auditor’s specialist sufficient to?

A
  1. determine the nature, scope, and objectives of the work
  2. evaluate the adequacy of that work for the auditor’s purposes
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

Should the auditor agree in writing with the auditor’s specialist regarding the arrangements for the services, including objectives, roles, communications, and confidentiality requirements?

A

Yes, if appropriate.

46
Q

When the auditor evaluates the adequacy of the work of the auditor’s specialist, what should be included?

A
  1. the relevance and reasonableness of the findings and conclusions
  2. the understanding of any significant assumptions and methods
  3. the use of source data significant to the work
46
Q

When the auditor evaluates the adequacy of the work of the auditor’s specialist, what should be included?

A
  1. the relevance and reasonableness of the findings and conclusions
  2. the understanding of any significant assumptions and methods
  3. the use of source data significant to the work
47
Q

What should the auditor consider if they determine that the work of the auditor’s specialist is not adequate?

A
  1. performing additional work
  2. requiring additional work by the specialist
  3. engaging another specialist
48
Q

What should the auditor do if they are unable to collect sufficient appropriate evidence?

A

They may be required to give a modified opinion.

49
Q

Should the auditor refer to the work or findings of the auditor’s specialist when expressing an unmodified opinion?

A

No

50
Q

When can an auditor refer to the work of an auditor’s external specialist?

A

If the reference is relevant to understanding a modified opinion, whether it’s qualified or adverse. - The report should also state that the reference does not reduce the auditor’s responsibility.

51
Q

If a client engages an external individual or organization with special expertise to provide information, what should the auditor consider?

A

Whether the individual or organization is a management’s specialist or external source.

51
Q

If a client engages an external individual or organization with special expertise to provide information, what should the auditor consider?

A

Whether the individual or organization is a management’s specialist or external source.

52
Q

How can an external individual or organization be used?

A

They may publish information for a broad range of users or be commissioned by a client to provide tailored information.

53
Q

What is an example of an external source?

A

A real estate appraisal firm that provides market estimates used by general buyers and sellers, as well as by the audit client is an external source.

54
Q

What is an example of a management’s specialist?

A

An appraisal firm that provides specific estimates for an audit client.

54
Q

What is an example of a management’s specialist?

A

An appraisal firm that provides specific estimates for an audit client.

55
Q

Why is it important to make the distinction between an external source and a management’s specialist?

A

The evidence from an external source may be more reliable than that from a management’s specialist.

56
Q

What should the auditor do if using information as audit evidence prepared using the work of a management’s specialist?

A
  1. evaluate the competence, capabilities, and objectivity of that specialist
  2. obtain an understanding of the work of that specialist
  3. evaluate the appropriateness of the work as audit evidence for relevant assertion
57
Q

What are the matters relevant to evaluating competence, capabilities, and objectivity?

A

Whether the work is subject to technical standards or professional requirements

58
Q

Does an auditor refer to a management’s specialist in an auditor’s report?

A

No

59
Q

Is fraud more easily committed through related parties?

A

Yes

60
Q

When is risk of fraud increased due to related parties?

A
  1. The related party has a dominant influence over the entity
  2. The related party transactions are unusual or outside the normal course of business.
61
Q

What are examples of transactions that are unusual or outside the normal course of business?

A
  1. Equity transactions, such as corporate restructurings or acquisitions
  2. Transactions with offshore entities
  3. Leasing if no consideration is exchanged
  4. Sales with large discounts or returns
  5. Transactions w/circular arrangements - Ex. a sale with a commitment to repurchase
  6. Transactions under contracts whose terms are changed
62
Q

What should the auditor do if management makes an assertion that the terms of a related party transaction were equivalent to those in an arm’s length transaction?

A

The auditor should obtain sufficient appropriate evidence about the assertion.

63
Q

Who is responsible for providing support about an assertion of an arm’s length transaction (related parties)?

A

management

64
Q

Who is responsible for providing support about an assertion of an arm’s length transaction (related parties)?

A

management

65
Q

What should the auditor do if a material assertion is not supported or the auditor cannot collect sufficient appropriate evidence?

A

The assertion should be removed, or the auditor’s report should be modified.

66
Q

Are related parties independent of each other?

A

No

67
Q

Due to lack of independence in related parties, how are users of financial statements able to understand the nature and actual or potential effects on the financial statements?

A

Financial reporting frameworks establish specific accounting and disclosure requirements for related party relationships, transactions, and balances to enable users of the financial statements to understand their nature and actual or potential effects on the financial statements.

68
Q

What should an auditor understand regarding the substance of a related party transaction?

A

The auditor should understand that the substance of a transaction could differ significantly from its form. Financial statements should recognize substance, not legal form.

69
Q

In related party transactions, given the inherent limitations of an audit, the auditor’s ability to detect material misstatements can be reduced because?

A
  1. Management may not be aware of all related party relationships and transactions.
  2. Such relationships may provide a greater opportunity for collusion, concealment, or manipulation by management.
69
Q

In related party transactions, given the inherent limitations of an audit, the auditor’s ability to detect material misstatements can be reduced because?

A
  1. Management may not be aware of all related party relationships and transactions.
  2. Such relationships may provide a greater opportunity for collusion, concealment, or manipulation by management.
69
Q

In related party transactions, given the inherent limitations of an audit, the auditor’s ability to detect material misstatements can be reduced because?

A
  1. Management may not be aware of all related party relationships and transactions.
  2. Such relationships may provide a greater opportunity for collusion, concealment, or manipulation by management.
70
Q

What should an auditor do in performing risk assessment procedures to identify RMMs associated with related party relationships and transactions?

A
  1. Inquire about the identity, relationships, transactions, nature and business purpose of transactions, and whether any transactions not authorized in accordance w/policy for which exceptions were allowed and the reasons for those exceptions.
  2. Obtain an understanding of any controls established to account for or disclose related party relationships and transactions, authorize and approve significant unusual transactions and arrangements with related parties or outside the normal course of business
  3. Be alert for related party relationships and transactions with inspecting records or documents, such as bank confirmations or minutes of meetings of shareholders or those charged with governance
71
Q

What kind of transactions, due to their nature may indicate the existence of related parties?

A
  1. Borrowing or lending on an interest-free basis or at a rate of interest significantly above or below market rates prevailing at the time of the transaction
  2. Selling real estate at a price that differs significantly from its appraised value
  3. Exchanging property for similar property in a nonmonetary transaction
  4. Making loans with no scheduled terms for when or how the funds will be repaid.
72
Q

How should an auditor treat significant or unusual related party transactions?

A

As significant risks

73
Q

Should transactions with related parties be assumed to be outside the normal course of business?

A

Not without contrary evidence.

74
Q

Should transactions with related parties be assumed to be outside the normal course of business?

A

Not without contrary evidence.

75
Q

Related party transactions, without contrary evidence, should not be assumed to be outside the normal course of business. What may have contributed to the motivation of the transactions?

A
  1. Lack of sufficient working capital or credit to continue the business
  2. An overly optimistic earnings forecast
  3. Dependence on one or a few products, customers, or transactions for success
  4. A declining industry with many business failures
  5. Excess capacity
  6. Significant litigation, especially between shareholders and management
  7. Significant obsolescence because the entity is in a high-technology industry
76
Q

What types of related party relationships may be clearly evident?

A

parent-subsidiary or investor-investee

77
Q

What specific audit procedures may help determine the existence of related parties?

A
  1. Evaluating the entity’s procedures for identifying and properly accounting for related party transactions
  2. Requesting from management the names of all related-parties and inquiring whether transactions occurred with them.
  3. Reviewing filings with the SEC and other businesses in which officers and directors occupy directorship or management positions
  4. Determining the names of all pensions and other trusts established for employees and the names of their officers and trustees
  5. Reviewing shareholder listings of closely held entities to identify principal shareholders
  6. Reviewing prior years’ audit documentation for the names of known related parties.
  7. Inquiring of predecessor or other auditors of related entities about their knowledge of existing relationships and the extent of management involvement in material transactions.
  8. Reviewing material investment transactions during the period to determine whether they have created related parties.
77
Q

What specific audit procedures may help determine the existence of related parties?

A
  1. Evaluating the entity’s procedures for identifying and properly accounting for related party transactions
  2. Requesting from management the names of all related-parties and inquiring whether transactions occurred with them.
  3. Reviewing filings with the SEC and other businesses in which officers and directors occupy directorship or management positions
  4. Determining the names of all pensions and other trusts established for employees and the names of their officers and trustees
  5. Reviewing shareholder listings of closely held entities to identify principal shareholders
  6. Reviewing prior years’ audit documentation for the names of known related parties.
  7. Inquiring of predecessor or other auditors of related entities about their knowledge of existing relationships and the extent of management involvement in material transactions.
  8. Reviewing material investment transactions during the period to determine whether they have created related parties.
78
Q

What procedures may identify material transactions with known related parties or indicate the existence of previously unknown related parties?

A
  1. Provide personnel performing all segments of the audit with the names of known related parties
  2. Review the minutes of meetings of the board and committees and summaries of actions for which minutes have not yet been prepared
  3. Review filings with the SEC and other regulatory agencies
  4. Review conflict-of-interest statements obtained by the entity from its management
  5. Review business transacted with major customers, suppliers, borrowers, and lenders for indications of undisclosed relationships
  6. Consider whether unrecognized transactions are occurring, such as receiving or providing accounting, management, or other services at no charge or having a major shareholder absorb entity expenses.
  7. Review accounting records for large, unusual, or nonrecurring transactions or balances, especially those near the end of the period
  8. Review confirmations of compensating balance arrangements for indications that balances are or were maintained for or by related parties.
  9. Review invoices from law firms.
79
Q

What should the auditor do after identifying related party transactions?

A

The auditor should become satisfied about their purpose, nature, extent, and effect by examining related party transactions.

79
Q

What should the auditor do after identifying related party transactions?

A

The auditor should become satisfied about their purpose, nature, extent, and effect.

80
Q

What should the auditor consider when examining related party transactions?

A
  1. Obtain an understanding of the business purpose of the transaction
  2. Examine invoices, executed copies of agreements, contracts, and other documents
  3. Determine whether the transaction has been approved by those charged with governance
  4. Test for reasonableness the compilation of amounts to be disclosed or considered for disclosure
  5. Arrange for the audits of interentity balances to be performed as of concurrent dates, even if the fiscal years differ, and for the examination of specified, important, and representative related party transactions by the auditors for each of the parties, with appropriate exchange of relevant information
  6. Inspect or confirm and obtain satisfaction concerning the transferability and value of collateral
81
Q

What should an auditor do to fully understand a particular transaction?

A

The auditor may:
1. Confirm the transaction amount and terms, including guarantees and other significant data, with the other parties
2. Inspect evidence in possession of the other parties
3. Confirm or discuss significant information with intermediaries, such as banks, guarantors, agents, or attorneys
4. Refer to financial publications, trade journals, and credit agencies
5. With respect to material uncollected balances, guarantees, and other obligations, obtain information about the financial capability of the other parties from audited financial statements, unaudited financial statements, income tax returns, and reports issued by credit agencies.

82
Q

What is estimation uncertainty?

A

The susceptibility of an estimate to lack of precision in measurement.

82
Q

What is estimation uncertainty?

A

The nature and reliability of information available to management for making estimates vary widely and some financial amounts cannot be measured precisely, they can only be estimated.

83
Q

What are examples of estimation uncertainty?

A
  1. allowance for credit losses
  2. inventory obsolescence
  3. warranty obligations
  4. depreciation
  5. outcomes of long-term contracts
  6. costs of litigation
84
Q

What are examples of fair value estimates?

A
  1. complex financial instruments not traded in an active and open market
  2. share-based payments
  3. property or equipment held for disposal
  4. certain assets or liabilities acquired in a business combination, including goodwill and tangible assets
85
Q

What does the degree of estimation uncertainty for an accounting estimate affect?

A
  1. Its RMM
  2. may affect its susceptibility to unintentional or intentional management bias.
86
Q

What does the degree of estimation uncertainty for an accounting estimate affect?

A
  1. Its RMM
  2. may affect its susceptibility to unintentional or intentional management bias.
87
Q

What are examples of accounting estimates that involve relatively low estimation uncertainty and result in lower RMMs?

A
  1. accounting estimates that are not complex
  2. accounting estimates that are frequently made and updated because they relate to routine transactions
  3. accounting estimates derived from readily available data, such as published interest rate data or exchange-traded prices of securities (observable inputs in the context of fair value estimation)
  4. fair value accounting estimates based on a method of measurement that is simple and applied easily
  5. fair value accounting estimates based on a well-known or generally accepted model, provided that the assumptions or inputs to the model are observable
88
Q

What are examples of some accounting estimates that involve relatively high estimation uncertainty with higher RMMs, particularly when they are based on significant assumptions?

A
  1. accounting estimates relating to the outcome of litigation
  2. fair value accounting estimates for financial instruments not publicly traded
89
Q

What is the objective of the auditor obtaining sufficient appropriate evidence about accounting estimates, including fair value accounting estimates?

A

To determine if they are reasonable and related disclosures are adequate.

89
Q

What is the objective of the auditor obtaining sufficient appropriate evidence about accounting estimates, including fair value accounting estimates?

A

To determine if they are reasonable and related disclosures are adequate.

90
Q

The auditor performs risk assessment procedures to provide a basis for identifying and assessing the RMMS for accounting estimates, what should the auditor obtain an understanding of?

A
  1. the relevant requirements of the applicable financial reporting framework
  2. how management identifies factors that create a need for estimates
  3. how management makes estimates and the data on which they are based
91
Q

What are examples of what data and information management uses to make estimates?

A
  1. methods
  2. models
  3. controls
  4. use of specialists
  5. underlying assumptions
  6. whether and how the effects of estimation uncertainty are assessed.
92
Q

Why does the auditor review prior-period estimates?

A
  1. To understand the reasons for the differences between estimates and outcomes
  2. To identify intentional or unintentional management bias.
93
Q

What is intentional management bias?

A

Intentional bias to mislead financial statement users is fraud

94
Q

What should the auditor determine when assessing the responses to the RMMs?

A
  1. Whether management has appropriately applied the applicable financial reporting framework
  2. whether the methods for making the accounting estimates are appropriate and have been applied consistently
95
Q

What procedures should the auditor perform to assess the responses to the RMMs?

A

The auditor should perform one or more of the following procedures

  1. Determining whether specialized skills or knowledge are required
  2. Testing how management made the accounting estimate and the data on which it is based, including evaluation of the method of measurement and the assumptions used
  3. Testing the operating effectiveness of controls over how management made the estimate, together with performing substantive procedures
  4. Developing a point estimate or range to evaluate management’s point estimate.
96
Q

What procedures should the auditor perform to assess the responses to the RMMs?

A

The auditor should perform one or more of the following procedures

  1. Determining whether specialized skills or knowledge are required
  2. Testing how management made the accounting estimate and the data on which it is based, including evaluation of the method of measurement and the assumptions used
  3. Testing the operating effectiveness of controls over how management made the estimate, together with performing substantive procedures
  4. Developing a point estimate or range to evaluate management’s point estimate.
96
Q

What procedures should the auditor perform to assess the responses to the RMMs?

A

The auditor should perform one or more of the following procedures

  1. Determining whether specialized skills or knowledge are required
  2. Testing how management made the accounting estimate and the data on which it is based, including evaluation of the method of measurement and the assumptions used
  3. Testing the operating effectiveness of controls over how management made the estimate, together with performing substantive procedures
  4. Developing a point estimate or range to evaluate management’s point estimate.
97
Q

How should the auditor respond to significant RMMs?

A
  1. By evaluating how management has considered alternative assumptions or outcomes and why it has rejected them
  2. By evaluating whether the significant assumptions used by management are reasonable
98
Q

what should the auditor obtain in writing relating to the estimation process?

A

the auditor should obtain written representations relating to the estimation process.

99
Q

When audit evidence supports a point estimate, is the difference between the auditor’s estimate and management’s estimate a misstatement?

A

Yes

100
Q

When the auditor develops a range, if the management estimate is outside the range is the estimate a misstatement?

A

Yes

101
Q

How is it determined if individual or collective misstatements are material?

A

It is a matter of judgement

102
Q

What should the auditor assess in evaluating reasonableness and determining misstatements?

A
  1. appropriateness of disclosures
  2. the assumptions
  3. method of estimation
  4. sources of estimation uncertainty
103
Q

what should the auditor consider in evaluating reasonableness and determining misstatements?

A

the possibility of management bias

104
Q

What should the auditor documentation include?

A
  1. The basis for the auditor’s conclusions about reasonableness for those estimates that result in significant risks
  2. Indicators of possible management bias

AUD (11 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions