4.1 Flashcards
When assessing the internal auditors’ competence, the auditor should obtain information about the
Educational background and professional certification of the internal auditors.
If the external auditor plans to use the work of the internal auditors to obtain audit evidence or to provide direct assistance, the competence and objectivity of the internal auditors should be assessed. The factors in assessing the competence of internal auditors include (1) educational level and experience; (2) professional certification and continuing education; (3) audit policies, programs, and procedures; (4) practices regarding assignment of internal auditors; (5) supervision and review; (6) quality of working paper documentation, reports, and recommendations; and (7) performance evaluation.
An auditor would be most likely to consider modifying an otherwise unmodified opinion if the client’s financial statements include a note on related party transactions
Representing without substantiation that certain related party transactions were consummated on terms equivalent to those obtainable in transactions with unrelated parties.
It is most often not possible to determine whether a particular transaction would have occurred if the parties had not been related or what the terms and manner of settlement would have been. Accordingly, assertions about such matters are difficult to substantiate. The auditor may (1) believe that the assertion is unsubstantiated or (2) not be able to obtain sufficient appropriate evidence. In these cases, the auditor considers the implications for the audit, including whether to modify the opinion (AU-C 550 and AS 2410). (S)he should consider including in the report a comment to that effect and expressing a qualified or adverse opinion.
Which of the following events most likely indicates the existence of related parties?
Making a loan without scheduled terms for repayment of the funds.
The following suggest possible related party transactions: (1) exchanging property for similar property in a nonmonetary transaction, (2) borrowing or lending at rates significantly above or below market rates, (3) selling realty at a price materially different from its appraised value, and (4) making loans with no scheduled repayment terms.
The independent auditor should understand the internal audit function as it relates to internal control because
The work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor’s procedures.
The auditor should obtain an understanding of the internal audit function when obtaining an understanding of the client’s internal control. The understanding should be sufficient to identify internal audit activities relevant to audit planning. Thus, an internal audit function is one of many factors to be considered in determining the nature, timing, and extent of audit procedures.
Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions?
Reviewing confirmations of loans receivable and payable.
An auditor should be alert during the audit for related party information. Thus, the auditor should inspect records and documents, especially (1) bank and legal confirmations, (2) minutes of meetings of shareholders and directors, and (3) any other records or documents considered necessary. Other records and documents may include third-party confirmations.
In assessing the competence of a client’s internal auditor, an auditor most likely would consider the
Internal auditor’s compliance with professional internal auditing standards.
The external auditor customarily inquires about the application of professional standards by the internal auditors. The external auditor should assess the competence and objectivity of the internal auditors. Compliance with the internal auditing standards developed by The Institute of Internal Auditors or by the Government Accountability Office is one measure of the competence and objectivity of internal auditors.
Which of the following statements concerning the auditor’s use of the work of an auditor’s external specialist is true?
The auditor’s specialist should observe the same confidentiality requirements as the auditor.
An agreement between the auditor and the auditor’s external specialist generally is documented in an engagement letter. A matter that should be included is the need for the confidentiality provisions of the relevant ethical requirements that apply to the auditor to also apply to the specialist. For example, 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). Other requirements may be imposed by law or regulation.
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.
A patent is an intangible asset representing a governmental grant of rights to an invention for a specified time. The lack of physical substance makes verifying its existence and ownership difficult. To obtain evidence of the continuing validity and existence of a patent, the auditor should obtain a written representation from an auditor’s specialist. A patent attorney is an auditor’s external specialist who has expertise not normally possessed by auditors. The attorney can perform the necessary research and express an opinion on which the auditor may reasonably rely.
Which of the following statements is correct regarding accounting estimates?
The auditor’s objective is to evaluate whether accounting estimates are reasonable in the circumstances.
The auditor is responsible for evaluating the reasonableness of accounting estimates and the adequacy of disclosure.
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).
When auditing related party transactions, an auditor places primary emphasis on
Assessing the risks of material misstatement of related party transactions.
The auditor has a responsibility to perform audit procedures to identify, assess, and respond to the risks of material misstatement arising from the entity’s failure to appropriately account for or disclose related party relationships, transactions, or balances.
In evaluating an entity’s accounting estimates, one of the auditor’s objectives is to determine whether the estimates are
Reasonable in the circumstances.
The auditor is responsible for evaluating the reasonableness of accounting estimates made by management in the context of the applicable reporting framework.
Which of the following statements is correct concerning an auditor’s use of the work of an actuary in assessing a client’s pension obligations?
The auditor is required to understand the objectives and scope of the actuary’s work.
The auditor should obtain an understanding of the expertise of the auditor’s specialist sufficient to (1) determine the nature, scope, and objectives of the work and (2) evaluate the adequacy of the work for the auditor’s purposes.
Auditors should obtain and evaluate sufficient appropriate evidence to support significant accounting estimates. Differences between the estimates best supported by the evidence and those in the financial statements
May be individually reasonable but collectively indicate possible bias.
If the amount in the financial statements is not reasonable, it should be treated as fraud or error and accumulated with other identified misstatements. If the differences between the best estimates and those in the financial statements are individually reasonable but collectively indicate possible bias (for example, when the effect of each difference is to increase income), the auditor should reconsider the estimates as a whole.
In connection with the audit of financial statements by an auditor, the client suggests that members of the internal audit staff be used to minimize audit costs. For which of the following tasks may the auditor most appropriately request direct assistance from the internal audit staff?
Preparation of schedules for negative accounts receivable responses.
Internal auditors may provide direct assistance in performing both substantive procedures and tests of controls provided that the auditor assesses their competence and objectivity; supervises, reviews, evaluates, and tests their work; and makes all judgments regarding matters that affect the report on the financial statements. Preparing schedules for negative accounts receivable responses is a clerical activity related to a substantive procedure that an internal auditor may perform under the supervision of the auditor.
