Chapter 4.1 Q Flashcards
Miller Retailing, Inc., maintains a staff of three full-time internal auditors. The independent auditor has found that they are competent and objective. Moreover, the work of the internal auditors is relevant to the audit, and it is efficient to consider how that work may affect the audit. The independent auditor most likely will
A. Not evaluate and test the work performed by the internal auditors.
B. Increase the extent of the procedures needed to reduce control risk to an acceptable level.
C. Nevertheless need to make direct tests of assertions about material financial statement amounts for which the risks of material misstatement are high.
D. Decrease the extent of the tests of controls needed to restrict audit risk to the acceptable level.
Answer (C) is correct.
The auditor has the sole reporting responsibility and makes all judgments about matters affecting the report. When amounts are material and the risks of material misstatement are high or the evaluation of the evidence is highly subjective, the consideration of the internal auditors’ work cannot alone reduce audit risk to an acceptable level. Thus, direct testing of those assertions by the auditor cannot be eliminated (AU-C 610).
In assessing the competence and objectivity of an entity’s internal auditor, an independent auditor would least likely consider information obtained from
A. External quality reviews of the internal auditor’s activities.
B. The results of analytical procedures.
C. Previous experience with the internal auditor.
D. Discussions with management personnel.
Answer (B) is correct.
Analytical procedures are evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data, using models that range from simple to complex. They are substantive procedures used by the auditor to gather evidence about the fairness of the financial statements.
Which of the following factors would the independent auditor most likely consider in assessing the objectivity of an internal auditor?
A. The internal auditor attends a number of comprehensive continuing professional education courses each year.
B. The audit committee reviews employment decisions related to the director of internal auditing.
C. The internal auditor has obtained the Certified Internal Auditor designation.
D. The internal auditor was previously an employee of the auditor’s public accounting firm.
Answer (B) is correct.
Objectivity is impartiality, intellectual honesty, and freedom from conflicts of interest. Factors that the independent auditor most likely considers in assessing the objectivity of an internal auditor include whether those charged with governance (e.g., the audit committee) oversee employment decisions related to internal auditing. Examples are hiring and compensation of the director of the internal audit function
The independent auditor should understand the internal audit function as it relates to internal control because
A. The work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor’s procedures.
B. The procedures performed by the internal audit staff may eliminate the independent auditor’s need for considering internal control.
C. The understanding of the internal audit function is an important substantive test to be performed by the independent auditor.
D. The audit programs, audit documentation, and reports of internal auditors may often be used as a substitute for the work of the independent auditor’s staff.
Answer (A) is correct.
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.
An internal auditor would least likely provide direct assistance to the auditor in
A. Performing substantive procedures.
B. Performing tests of controls.
C. Obtaining an understanding of internal control.
D. Evaluating accounting estimates.
Answer (D) is correct.
The auditor has the ultimate responsibility to express an opinion on the financial statements. Judgments about
(1) assessments of the risks of material misstatement, (2) materiality of misstatements,
(3) sufficiency of tests performed,
(4) evaluation of significant accounting estimates, and (5) other matters affecting the auditor’s report always should be those of the auditor.
The work of internal auditors may affect the independent auditor’s
I. Procedures performed in obtaining an understanding of internal control
II. Procedures performed in assessing the risks of material misstatement
III. Substantive procedures performed in gathering direct evidence
I, II, and III.
Answer (D) is correct.
The internal audit function is part of the client’s internal control. The auditor should obtain an understanding of this function when obtaining an understanding of internal control. The auditor also may use the internal auditors to provide direct assistance under certain conditions. A primary purpose of internal auditors is to review, assess, and monitor internal control. Thus, their work is relevant to the understanding of internal control and the assessment of risk. Moreover, some procedures performed by internal auditors, such as confirmations, may provide direct evidence about material misstatements.
Which of the following statements is correct regarding an independent auditor’s reliance on a client’s internal audit staff?
A. An independent auditor should not reduce the amount of audit testing based on the work of internal auditors.
B. An internal auditor should provide direct assistance to the independent auditor during preparation of audit workpapers.
C. An independent auditor should use internal audit workpapers when available.
D. An independent auditor should assess the organizational status of the director of internal audit.
Answer (D) is correct.
Given an expectation of using the work of the internal auditors, the external auditor’s objectives include determining
(1) whether to use their work and in what ways and
(2), if using their work, whether it is adequate for audit purposes.
To determine whether internal audit work can be used to obtain audit evidence, the external auditor should evaluate
(1) the competence of the internal audit function,
(2) the extent to which its organizational status and policies and procedures support its objectivity, and
(3) its application of a systematic and disciplined approach (including quality control). Factors affecting objectivity include whether the internal audit function’s organizational status supports its ability to be free from bias, conflict of interest, or undue influence. For example, the external auditor should determine whether the internal audit function reports to
(1) those charged with governance,
(2) an officer with appropriate authority, or
(3) management but with direct access to those charged with governance.
An auditor might consider the procedures performed by the internal auditors because
A. They are employees whose work must be reviewed during substantive testing.
B. Their work affects the cost-benefit trade-off.
C. They are employees whose work may affect the nature, timing, and extent of audit procedures.
D. Their degree of independence may be inferred from the nature of their work.
Answer (C) is correct.
The internal audit function is part of the monitoring component of internal control. Consequently, the auditor should obtain an understanding of the internal audit function sufficient to identify activities relevant to planning the audit. The external auditor may plan to use the work of the internal auditors to obtain audit evidence or to provide direct assistance. In this case, (s)he should assess their competence and objectivity. If that assessment is favorable, the auditor then considers how the internal auditors’ work may affect the audit. If it significantly affects the audit procedures, the auditor should evaluate and test that work.
Which of the following factors most likely would assist an auditor in assessing the objectivity of the internal auditor?
A. The organizational status of the director of internal audit.
B. The appropriateness of internal audit conclusions in the circumstances.
C. The professional certifications of the internal audit staff.
D. The consistency of the internal audit reports with the results of work performed.
Answer (A) is correct.
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 should be evaluated.
Objectivity is promoted when the internal auditors
(1) report to those charged with governance rather than management,
(2) are free of any conflicting responsibilities,
(3) work without constraints, and
(4) are members of professional organizations that obligate them to be objective. The external auditor should assess each of these factors in evaluating objectivity.
The company being audited has an internal auditor that is both competent and objective. The auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the auditor may
A. Allow the internal auditor to audit a major subsidiary of the company.
B. Allow the internal auditor to perform tests of internal controls.
C. Allow the internal auditor to perform analytical procedures but not be involved with any tests of details.
D. Not assign any task to the internal auditor because of the internal auditor’s lack of independence.
Answer (B) is correct.
The auditor may request direct assistance from the internal auditor when performing the audit. Thus, the auditor may appropriately request the internal auditor’s assistance in obtaining the understanding of internal control, performing tests of controls, or performing substantive procedures. The internal auditor may provide assistance in all phases of the audit if (1) the internal auditor’s competence and objectivity have been assessed, and (2) the auditor supervises, reviews, evaluates, and tests the work performed by the internal auditor to the extent appropriate.
In which of the following circumstances is an auditor most likely to rely on work done by internal auditors?
A. For financial statement amounts determined largely or entirely on the basis of estimates made by management.
B. For financial statement amounts judged by the auditor to require little or no subjectively evaluated audit evidence.
C. If financial statement amounts are material and the degree of subjectivity in evaluating the audit evidence is high.
D. If the internal auditors have concluded that the risk of material misstatement at the overall financial level is negligible.
Answer (B) is correct.
The auditor should make all significant judgments. Thus, (s)he should use less of the internal auditors’ work and perform more work directly in the following circumstances: (1) the more judgment is involved in planning and performing audit procedures or evaluating evidence, (2) the higher the assessed risk of material misstatement at the assertion level, (3) the less the internal auditors’ organizational status and relevant policies and procedures support their objectivity, and (4) the lower their competence. Accordingly, the auditor is most likely to rely on the work of the internal audit function when little or no judgment is required to evaluate audit evidence.
An internal auditor’s work would most likely affect the nature, timing, and extent of an independent auditor’s auditing procedures when the internal auditor’s work relates to assertions about the
A. Existence of fixed asset additions.
B. Valuation of related party transactions.
C. Valuation of intangible assets.
D. Existence of contingencies.
Answer (A) is correct.
Assertions may relate to material financial statement amounts for which the risks of material misstatement or the degree of subjectivity involved in the evaluation of the audit evidence is high. In these cases, reliance on the internal auditor is less effective. However, certain assertions may relate to less material financial statement amounts for which the risks of material misstatement or the degree of subjectivity involved is low. For example, the auditor may be able to rely on the internal auditor’s work regarding assertions about the existence of cash, prepaid assets, and fixed asset additions.
