4.17 - RELATED PARTY TRANSACTIONS, SPECIALISTS, INTERNAL AUDITORS, ESTIMATES, AND SUBSEQUENT EVENTS Flashcards
4.17 - RELATED PARTY TRANSACTIONS, SPECIALISTS, INTERNAL AUDITORS, ESTIMATES, AND SUBSEQUENT EVENTS
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) Evidence supporting a further reduction in the assessed level of control risk.
C) Client’s policies that limit the internal auditor’s access to management salary data.
D) Results of ratio analysis that may identify unusual transactions and events.
A) Internal auditor’s compliance with professional internal auditing standards.
An internal auditor’s competence can be evaluated on the basis of how professionally they perform their duties, which would include compliance with applicable standards.
Access to management salary data relates to the level to which the internal auditors report and, therefore, their objectivity, but not their competence.
A reduction in the assessed level of control risk indicates that controls can be relied upon but does not provide any information about the competence or objectivity of the internal auditors.
Results of ratio analysis may indicate areas representing risk of material misstatement of the financial
statements, but provide no information about the internal auditors.
4.17 - RELATED PARTY TRANSACTIONS, SPECIALISTS, INTERNAL AUDITORS, ESTIMATES, AND SUBSEQUENT EVENTS
A) Which of the following procedures would an auditor ordinarily perform first
in evaluating management’s accounting estimates for reasonableness?
A) Obtain an understanding of how management developed its estimates.
B) Test the calculations used by management in developing the estimates.
C) Develop independent expectations of management’s estimates.
D) Consider the appropriateness of the key factors or assumptions used in preparing the estimates
A) Obtain an understanding of how management developed its estimates.
The first step in evaluating estimates is to obtain an understanding of how estimates are developed by management, which is done when the auditor performs risk assessment procedures in obtaining an understanding of the entity and its
environment.
If the auditor believes the approach is sound and will result in reasonable estimates, the auditor will consider the factors used in preparing the estimates and test management’s calculations.
If the auditor does not believe management’s approach is reliable, the auditor may, as an alternative procedure, develop independent estimates and compare them to management’s estimates.
4.17 - RELATED PARTY TRANSACTIONS, SPECIALISTS, INTERNAL AUDITORS, ESTIMATES, AND SUBSEQUENT EVENTS
Which of the following steps should an auditor perform first to determine the existence of related parties?
A) Review proxy and other materials led
with the SEC.
B) Request a list of related parties from management.
C) Examine invoices, contracts, and purchasing orders.
D) Review the company’s business structure.
B) Request a list of related parties from management.
The first step in identifying related parties is to make an inquiry as to their existence.
Unless the names of entities made it obvious, examining invoices and contracts would not provide evidence regarding related parties.
The company’s business structure may not reveal related parties, depending on whether they are considered part of the entity within the entity.
Proxy statements and other materials filed with the SEC may disclose related party information but would not be the auditor’s first source.
4.17 - RELATED PARTY TRANSACTIONS, SPECIALISTS, INTERNAL AUDITORS, ESTIMATES, AND SUBSEQUENT EVENTS
In performing which of the following may an auditor not rely on assistance from internal auditors?
A) Determining whether or not equipment reported on the balance sheet actually exists.
B) Determining whether or not inventory is properly reported at the lower of cost or market.
C) Determining what control procedures the entity has in regard to the custody of inventory.
D) Determining whether or not the entity’s control procedures in regard to the custody of inventory are functioning as intended.
B) Determining whether or not inventory is properly reported at the lower of cost or market.
An auditor may rely on the assistance of the internal auditor for tasks that do not require judgment.
It is a common function of the internal auditor to determine if controls are in place and whether or not they are functioning as intended and the external auditor may decide to rely on the work of the internal auditors if they are considered competent and report to a level within the organization that is sufficiently high to enable the internal auditors to perform objectively.
The external auditor may use the internal auditor to perform such audit functions as determining if assets exist, which does not require judgment.
Determining if something is properly reported, however, does require judgment and would not be an appropriate task for the internal auditor.
