Chapter 4 -- Strategic Planning Issues Flashcards
Section 4.1: Using the Work of Internal Auditors
Why should understand the internal audit function as it relates to internal control?
The work that is completed by internal auditors will have an impact on the nature, timing and extent of the independent auditor’s procedures.
Section 4.1: Using the Work of Internal Auditors
What areas may an internal auditor provide assistance?
- Assist the auditor in obtaining the understanding of internal control
- Perform test of controls
- Perform substantive tests
Section 4.2: Using the Work of a Specialist
What is the purpose of management using a specialist (aka Management’s Specialist)?
- The purpose of using a specialist is to assist the client in preparing the financial statements.
- A management specialist is a person who has expertise in a field other than accounting or auditing.
Section 4.2: Using the Work of a Specialist
What should be included in the agreement between an external auditor and a specialist?
- Nature, objectives, and scope of the work
- The roles of the auditor and specialist
- Nature, timing, and extent of communications between the auditor and specialist
- Confidentiality
Section 4.3: Related Parties
What is the primary issue for an external auditor in regard to related party transactions?
The primary issue is to determine whether the transaction is recorded at the appropriate amount.
Section 4.3: Related Parties
What is the primary emphasis an auditor would place on a related party transaction?
- Whether the transaction is adequately disclosed and presented in the financial statements.
- Identify, assess and respond to material misstatement if the entity fails to appropriately account for related party transactions, relationships or balances.
Section 4.3: Related Parties
What procedures does an auditor perform to determine related parties?
- Requesting from management the names of all related parties
- Evaluating the entity’s procedures in regard to related party transactions
- Reviewing filings with the SEC and other regulatory agencies
- Determining the names of all pensions and other trusts established for employees and the names of their officers and trustees
- Reviewing shareholder listings of closely held entities
- Reviewing prior years’ audit documentation for related parties
- Reviewing material investment transactions during the period
Section 4.3: Related Parties
What are the documents should be reviewed in order to identify a related party transaction?
- Minutes of board meetings and other committees
- Filings with regulators
- Conflict of interest statements
- Transactions with major customers, lenders and borrowers
- Accounting records for large or unusual transactions or balances
- Invoices of law firms
- Confirmations of compensating balance transactions
Section 4.3: Related Parties
What should the auditor examine in regard to related party transactions?
- Obtain an understanding of the transaction
- Examine invoices, executed agreements, and other documents
- Was the transaction approved by governance?
- Test for reasonableness
- Inspect or confirm documentation about the value and transfer of the collateral
- Discuss transactions with attorneys and banks
Section 4.4: Accounting Estimates and Fair Value
What are the key factors in evaluating reasonableness of an estimate?
- Significant accounting estimates.
- Variations
- Deviations from historical patterns
- Is the information possibly subject to misstatement and bias?
Section 4.4: Accounting Estimates and Fair Value
What are some of the significant assumptions than an auditor considers in evaluating an entity’s accounting estimates?
- Economic conditions
- Management’s own modified assumptions based on their selection of market partcipant’s assumptions.
- Management’s plans
- Past experiences
- Prior-period adjustments
Section 4.4: Accounting Estimates and Fair Value
What are the different approaches an auditor would use to evaluate the reasonableness of an accounting estimate?
- Review and test management’s process.
- Develop an independent expectation to corroborate the reasonableness of management’s estimate.
- Review subsequent events or transactions.
Section 4.4: Accounting Estimates and Fair Value
What are the components of low estimation uncertainty?
- Accounting estimates that are not complex
- Accounting estimates that are frequently made and updated because they relate to routine transactions
- Accounting estimates derived from readily available data
- Fair value accounting estimates based on a method of measurement that is simple and applied easily
- Fair value accounting estimates based on a well-known or generally accepted model
Section 4.4: Accounting Estimates and Fair Value`
What are the components of high estimation uncertainty?
- Accounting estimates due to litigation
- Accounting estimates for instruments not publicly traded
