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Audit > Chapter 18 > Flashcards

Chapter 18 Flashcards

1
Q

Comparison B/w Internal Auditor and External Auditor.

A
  1. Relationship / Independence.
  2. Appointment.
  3. Qualification.
  4. Scope/Objective/Activities/Role.
  5. Scope/Objective/Activities/Role Determined by.
  6. Reporting requirements.
  7. Format of Report.
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2
Q

Scope/Objective/Activities/Benefits of Internal Audit Function.

A
  1. Monitoring of Internal Controls.
  2. Examination of Financial and operating information.
  3. Review of compliance with laws and regulations.
  4. Review of operating activities.
  5. Special investigation.
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3
Q

Define Monitoring of Internal Controls.

A

Establishment of Internal controls is the responsibility of MGT. Internal auditor perform test of controls to monitor internal controls and recommend improvements through report to directors.

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4
Q

Define Examination of Financial and reporting information

A

Internal auditor perform inquiry and test of details to examine transactions and balances.

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5
Q

Define Review of compliance with laws and regulations

A

Internal Auditor review whether entity is complying with applicable laws and regulations and internal requirements . e.g: environmental laws, money laundering regulations.

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6
Q

Define Review of Operating activities.

A

Internal auditor review that operations are conducting economically, efficiently and effectively. This can include review of non-financial controls. This is also called Operational Audit, Value for money audit, 3E audit.

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7
Q

Define Special Investigation.

A

Investigation into particular areas such as suspected fraud within the entity.

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8
Q

How an external auditor can get help from internal auditors.

A
  1. Using internal auditor to provide direct assistance.

2. Using the work of internal auditor.

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9
Q

Explain Using the work of Internal Audit Function.

A

Auditor shall evaluate following Factors in this regard:

  1. Evaluate whether to use the work of internal audit function
  2. Determine whether and which work of internal audit function can be used.
  3. Evaluate adequacy of work of internal audit function.
  4. Discussion with internal audit function.
  5. Communication with TCWG.
  6. Documentation.
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10
Q

What factors are required to be considered while evaluating whether to use the work of Internal Audit Function.

A
  1. Whether Organizational status support Objectivity of the internal auditor.
  2. Level of competence of Internal Auditor.
  3. Whether internal audit function applies Systematic And Disciplined Approach.
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11
Q

Explain Whether Organizational status support Objectivity of the internal auditor.

A
  1. Chief Internal auditor should be reportable to TCWG not to MGT.
  2. Scope of Internal auditor should be decided by audit committee not by MGT.
  3. Internal auditor should be free from conflicting responsibilities.
  4. Internal auditor should be rotated periodically to avoid familiarity threat.
  5. Employment decisions like hiring, firing, promotions should be made by TCWG not by MGT.
  6. There should not be any restriction/limitation placed on internal auditor.
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11
Q

Explain Whether Organizational status support Objectivity of the internal auditor.

A
  1. Chief Internal auditor should be reportable to TCWG not to MGT.
  2. Scope of Internal auditor should be decided by audit committee not by MGT.
  3. Internal auditor should be free from conflicting responsibilities.
  4. Internal auditor should be rotated periodically to avoid familiarity threat.
  5. Employment decisions like hiring, firing, promotions should be made by TCWG not by MGT.
  6. There should not be any restriction/limitation placed on internal auditor.
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12
Q

How the Competence of Internal auditor shall be evaluated.

A
  1. Level of education, professional qualification and experiance.
  2. Whether Internal auditor possess required knowledge and skills.
  3. Whether there are established practices for technical training and hiring of Internal auditor.
  4. Whether Internal auditor is adequately resourced.
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13
Q

How the auditor can evaluate whether the Internal auditor applies Systematic and disciplined approach.

A
  1. Whether Internal audit function is properly planned, supervised, performed, documented and reviewed.
  2. Whether Internal auditor has appropriate quality control procedures to ensure the good quality audit program and working papers.
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14
Q

Determine whether and which work of internal auditor can be used.

A
  1. External Auditor shall not use the work of Internal auditor if there are serious concerns about Objectivity / Competence of Internal audit function.
  2. External Auditor shall use less work of Internal auditor if:
    i. more risk and judgments are involved in the area.
    ii. auditor has same concerns about Objectivity / Competence of
    Internal audit function.
  3. External auditor can use the work of internal auditor in following areas.
    i. Documentation of Accounting and internal control system.
    ii. Risk assessment.
    iii. Testing of Operation effectiveness of Internal Controls.
    iv. Substantive procedures involving limited judgments.
    v. Observation of Inventory Count.
    vi. Testing of Compliance with Laws and Regulations.
    vii. Tracing transactions throughout information system.
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15
Q

Evaluating adequacy of the work of Internal audit function.

A

Auditor shall evaluate following factors in this regard:

  1. Work was properly planned, supervised, performed, documented and reviewed.
  2. Sufficient and appropriate audit evidence was obtained to enable Internal auditor to draw conclusions.
  3. Conclusions reached are appropriate and reports prepared by Internal audit function are consistent with work performed.
  4. Any exceptions or unusual matters are properly resolved.

Auditor shall perform following procedure to evaluate them:

  1. Reperformance
  2. Inquiry
  3. Observation
  4. Inspection
16
Q

Explain discussion with Internal audit function.

A

External Auditor shall discuss following matters with Internal auditor in advance:

  1. Nature of work performed
  2. Timing of work performed.
  3. Extent of audit coverage
  4. Materiality and performance materiality
  5. Method of sample selection and Sample size.
  6. Documentation of work performed
  7. Review and reporting procedures.
17
Q

Explain Communication with TCWG while using the work of Internal audit function.

A

External auditor shall communicate the planned use of the work of Internal audit function to TCWG for their understanding of the proposed audit approach.

18
Q

Documentation of the Using the work of Internal audit function.

A

External auditor shall document the following:

  1. The evaluation of:
    i. Level of Competence of Internal audit function.
    ii. Whether Organizational status support objectivity of Internal audit function.
    iii. Whether Internal audit function applies systematic and disciplined approach.
  2. Nature and extent of work used and basis for that decision.
  3. The audit procedures performed by external auditor to evaluate the adequacy of the work of Internal audit function.
19
Q

Define Direct assistance of Internal audit function.

A

Direct assistance is the use of Internal audit function to perform audit procedures under the direction supervision and review of external auditor.

20
Q

Define Direct assistance of Internal audit function.

A

Direct assistance is the use of Internal audit function to perform audit procedures under the direction supervision and review of external auditor.

21
Q

What audit procedures are required to be performed if External auditor use the Internal audit function to provide direct assistance.

A
  1. Evaluate whether to obtain direct assistance or not.
  2. Determine whether and in which areas to obtain direct assistance
  3. Auditor’s responsibilities if he use Internal audit function to provide direct assistance.
  4. Communication with TCWG.
  5. Documentation.
22
Q

Explain whether to obtain direct assistance.

A

External Auditor shall not obtain direct assistance if:

  1. If direct assistance is prohibited by law or regulation.
  2. If auditor has serious concerns about objectivity and competence of Internal audit function.
23
Q

Determine whether and in which areas to obtain Direct Assistance.

A

External auditor shall consider following factors in determining nature and work that can be assigned:

  1. Risk and judgment involved in the area.
  2. Objectivity and competence of Internal audit function
  3. Level if involvement of External auditor in audit after obtaining direct assistance.

Direct Assistances shall not be used in following areas;
1. Areas involving higher risk and significant judgements.
2. Evaluation and addressing fraud risks.
3. Determination of announced audit procedures.
4. Assigning responsibilities to handle external confirmation request.
In any other area, direct assistance can be used.

24
Q

Auditor responsibilities if he uses Internal audit function to provide direct assistance.

A
  1. Obtain Agreement;
    Before obtaining direct assistance external auditor shall obtain written agreement from:
    i. Authorized representative of the entity that internal auditors are allowed to follow the directions of external auditor, and the entity will not intervene in the work.
    ii. Internal Auditors that they will keep specific information confidential and will inform external auditor of any threat to their objectivity.
  2. Direction, Supervision and Review:
    External auditor shall direct, supervise and review the work done by Internal audit function to ensure that sufficient and appropriate evidence has been obtained to support the cionclusions.
25
Q

Explain Communication with TCWG under direct assistance.

A

External auditor shall communicate TCWG about nature and extent of planned use of Internal audit function to provide direct assistance.

26
Q

Documentation if direct Assistance is obtained.

A
  1. Evaluation of competence and objectivity of internal auditor used to provide direct assistance.
  2. Basis for decision regarding nature and extent of work performed by Internal audit function.
  3. Who reviewed the work performed, and the date and extent of such review.
  4. Written agreement obtained from authorized representative and from Internal auditor.
  5. Working papers prepared by internal auditors in providing direct assistance.
27
Q

Define an expert.

A

expert is an individual or an organization possessing expertise and experience in the field other than accounting and auditing.

28
Q

Areas where expert can be used.

A
  1. Valuation of Assets.
  2. Legal opinions.
  3. Actuarial calculations
  4. Engineering data
  5. Analysis of complex and unusual tax compliance issues.
  6. Interpretation of contacts, laws and regulations.
  7. IT expertise.
29
Q

Assessing the need for Auditor’s expert.

A
  1. Nature and significance of the matter
  2. Risk of material misstatement.
  3. Availability of alternative sources of evidence.
30
Q

Who has responsibility to express opinion in report.

A

Auditor has sole responsibility to express opinion in auditor’s report. Use of expert affect the audit procedures but doesn’t affect auditor’s responsibility.

31
Q

Whether can an auditor refer the use of expert in audit report.

A
  1. It is required by law or regulation.
  2. Such reference is relevant to explain the nature of modification to auditor’s opinion.
  3. It is a key audit matter.
32
Q

Auditor’s Responsibilities if he uses the work of Expert.

A
  1. Evaluate the competence, capabilities and objectivity of expert.
  2. Obtain understanding of the field of that expert.
  3. Agree terms of engagement with that expert.
  4. Evaluate appropriateness/adequacy of Expert’s Work.
  5. If expert work is not adequate for auditor’s purpose.
33
Q

Explain Obtain understanding of the field of that expert.

A
  1. Determine the nature, scope and objectives of that expert work for auditor’s purpose.
  2. Evaluate the adequacy of that expert for auditor’s purpose.
34
Q

Explain Agreeing Terms of engagement with expert.

A

Auditor shall agree following matters:

  1. Nature, scope and objectives of the expert work.
  2. Respective responsibilities of the auditor and expert.
  3. Form the expert report
  4. Confidentiality requirements.
35
Q

How auditor can evaluate the adequacy of the work of expert.

A

Auditor shall evaluate following factors:

  1. Accuracy completeness and relevance of significant source data.
  2. Relevance, reasonableness of significant assumptions and methods
  3. Reasonableness of expert findings and conclusions, consistency of these conclusions with other evidence.
36
Q

What If expert work is not adequate for auditor’s purpose.

A
  1. Agree additional work with expert.
  2. Perform additional audit procedures appropriate to circumstances
  3. If still work is not adequate, it will be a scope limitation and auditor shall express modified opinion in F/S.
37
Q

Evaluate Competence, Capabilities and Objectivity of that expert.

A

Auditor shall consider:

  1. Expert’s professional qualifications. e.g : Whether he is a a member of any professsional body.
  2. Expert’s experience and reputation in the area in which auditor is seeking advice.
  3. Independence of expert from client.

Audit (15 decks)

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