Chapter 3 Flashcards
Would the work of management specialist who has a relationship with the client be acceptable?
The work of a management specialist who has a relationship with a client may be acceptable under certain circumstances. If the management specialist has a relationship with the client, the auditor should assess the risk that the specialist’s objectivity might be impaired. If the auditor believes that the relationship might impair the management specialist’s objectivity, the auditor should perform additional procedures with respect to the specialist’s assumptions, methods, or findings to determine that the findings are not unreasonable or should engage another specialist for that purpose.
What is the auditor’s preliminary judgment about materiality based on?
The auditor’s preliminary judgment about materiality is generally based on either annualized interim financial statements or annual financial statements from a prior period.
What does the auditor consider when making judgments about the extent of the effect of the internal auditor’s work on the auditor’s procedures?
The auditor considers the materiality of financial statement amounts, the risk of material misstatement of the assertions related to these financial statement amounts, and the degree of subjectivity involved in the evaluation of the audit evidence gathered in support of the assertions.
What is the relationship between the degree of subjectivity involved in the evaluation of the audit evidence and the amount of testing assertions?
As the degree of subjectivity increases, the need for the auditor to perform tests of the assertions increases.
When would an auditor make reference to the work of a specialist in the auditor’s report?
Reference to and identification of the specialist may be made in the auditor’s report if the auditor believes such reference will facilitate an understanding of the reason for the explanatory paragraph or the departure from the unmodified opinion. The auditor may need to get permission from the auditor’s specialist before making reference to the specialist in the report.
When are management representation letters obtained by the auditor?
Representation letters are obtained by the auditor at the end of the audit. The representation letter should not be dated earlier than the date of the auditor’s report.
When assessing materiality, the auditor should you use what level of misstatement that could be considered material to one of the financial statements?
The auditor ordinarily considers materiality for planning purposes in terms of the smallest aggregate level of misstatements that could be considered material to any one of the financial statements.
Can an independent auditor share any responsibility involving judgments with the internal auditor?
The independent auditor is solely responsible for reporting on the financial statements. Thus, while he or she may use the work of the entity’s internal auditor (both work already performed and work performed as part of the audit), independent auditors may not share any responsibility involving judgments, including the assessment of inherent and control risk. This is true because the internal auditor, even if assessed to be both competent and objective, is not independent.
What are the types of financial statement assertions?
Rights and obligations;
Valuation and allocation; and
Understandability and classification
When should an auditor NOT refer to the work of a specialist?
If the auditor is expressing an unmodified opinion, no reference should be made to the work of the specialist.
If the specialist’s findings indicate that the financial statements depart from GAAP, which type of opinion should be issued?
A qualified or adverse opinion would be expressed.
If there is an unresolved disagreement between the specialist’s findings and the financial statements or between the specialist and the auditor, which type of opinion should be issued?
A qualified opinion, or a disclaimer of opinion due to a scope limitation.
When would an auditor refer to the work of a specialist?
If, as a result of the findings of a specialist, the auditor issues a modified opinion, the auditor may refer to the specialist in the report and should indicate that the reference to the specialist does not reduce the auditor’s responsibility for the audit opinion.
When would an external auditor be able to use the work of an internal auditor in obtaining audit evidence?
Competence of the internal audit function, objectivity of the internal auditors, and whether the internal audit function applies a systematic and disciplined approach.
Define competence.
Competence is reflected by education, professional certification, experience, performance evaluations, the audit plan, audit procedures, and the quality of internal audit documentation.
