Chapter 4.2 Q Flashcards
When a management’s specialist has assumed full responsibility for taking the client’s physical inventory, reliance on the specialist’s work is acceptable if
A. The auditor conducted the same audit tests and procedures as would have been applicable if the client employees took the physical inventory.
B. Circumstances made it impracticable or impossible for the auditor to test the work done by the specialist.
C. The auditor is satisfied with the competence of the specialist.
D. The auditor’s report contains a reference to the assumption of full responsibility by the specialist.
Answer (A) is correct.
The auditor is responsible for the observation of inventories. The auditor performs this procedure whether the client or an external specialist takes the physical inventory. The auditor should (1) examine the specialist’s program, (2) observe its procedures and controls, (3) make or observe some physical counts, (4) recompute calculations, and (5) test intervening transactions.
Which of the following statements concerning the auditor’s use of the work of an auditor’s external specialist is true?
A. If the auditor believes that the determinations made by the auditor’s specialist are unreasonable, only a qualified opinion may be expressed.
B. The auditor’s specialist need not have an understanding of the extent of the auditor’s use of the specialist’s work.
C. The auditor’s specialist should observe the same confidentiality requirements as the auditor.
D. The auditor’s specialist may be identified in the auditor’s report only when the auditor expresses an unmodified opinion.
Answer (C) is correct.
An agreement between the auditor and the auditor’s external specialist generally is documented in an engagement letter. A matter that should be included is the need for the confidentiality provisions of the relevant ethical requirements that apply to the auditor to also apply to the specialist. For example, a member of the AICPA may use a third-party service provider to render professional services to clients. The member should have a contract with the third-party service provider to maintain the confidentiality of the information (Ethics Ruling). Other requirements may be imposed by law or regulation.
Under which of the following circumstances would an auditor be considered to be using the work of a specialist?
A. The auditor makes inquiries of the client’s lawyer regarding pending litigation.
B. A tax expert employed by the auditor’s CPA firm reviews the client’s tax accruals.
C. The auditor engages a lawyer to interpret the provisions of a complex contract.
D. The client engages an outside computer service organization to prepare its payroll.
Answer (C) is correct.
An auditor’s specialist is an individual or organization possessing expertise in a field other than accounting or auditing. The work in that field is used to assist the auditor in obtaining sufficient appropriate audit evidence.
Answer (B) is incorrect. An auditor making an inquiry regarding pending litigation is a standard audit procedure.
In which of the following instances would it be appropriate for the auditor to refer to the work of an appraiser in the auditor’s report?
A. An unmodified opinion is expressed and no additional paragraph is added, but the auditor wishes to disclose the use of an auditor’s specialist.
B. A disclaimer of opinion is expressed owing to a scope limitation imposed on the auditor by the auditor’s external specialist.
C. An adverse opinion is expressed based on a difference of opinion between the client and the auditor’s external specialist about the value of certain assets.
D. A qualified opinion is expressed because of a matter unrelated to the work of the auditor’s external specialist.
Answer (C) is correct.
An auditor’s external specialist has expertise in a field other than accounting or auditing. Expertise in a field other than accounting or auditing may include valuation of nonfinancial assets, such as land and buildings, jewelry, or antiques. If, after considering the work of the auditor’s external specialist, the auditor concludes that managements’ assertions are materially misstated, a qualified or adverse opinion should be expressed. When the opinion is modified, the auditor may report the work of the external specialist when it is relevant to understanding the opinion modification (AU-C 620).
A management’s specialist most likely is useful to
A. Assist the auditor in collecting sufficient appropriate audit evidence.
B. Assist the client in preparing the financial statements.
C. Provide the auditor advice on technical accounting issues.
D. Add credibility to the financial statements.
Answer (B) is correct.
A management’s specialist is an individual or organization possessing expertise in a field other than accounting or auditing. The work in that field is used by the entity to assist in preparing the financial statements.
Which of the following statements is true about the use of the work of an auditor’s specialist?
A. The specialist need not agree to the auditor’s use of the specialist’s findings.
B. The auditor is required to perform substantive procedures to verify the specialist’s assumptions and findings.
C. The auditor should obtain an understanding of the methods and assumptions used by the specialist.
D. The auditor must keep client information confidential, but the specialist is not obligated to do so.
Answer (C) is correct.
AU-C 620, Using the Work of an Auditor’s Specialist, states that the auditor should evaluate the adequacy of the work of the auditor’s specialist. This process includes (1) obtaining an understanding of any significant assumptions and methods used by the specialist and (2) evaluating the relevance and reasonableness of those assumptions and methods in the circumstances and in relation to the auditor’s other findings and conclusions.
A corporate balance sheet indicates that one of the corporate assets is a patent. An auditor will most likely obtain evidence regarding the continuing validity and existence of this patent by obtaining a written representation from A. A regional state patent office. B. The patent owner. C. A patent attorney. D. The patent inventor.
Answer (C) is correct.
A patent is an intangible asset representing a governmental grant of rights to an invention for a specified time. The lack of physical substance makes verifying its existence and ownership difficult. To obtain evidence of the continuing validity and existence of a patent, the auditor should obtain a written representation from an auditor’s specialist. A patent attorney is an auditor’s external specialist who has expertise not normally possessed by auditors. The attorney can perform the necessary research and express an opinion on which the auditor may reasonably rely.
Which of the following statements is correct concerning an auditor’s use of the work of an actuary in assessing a client’s pension obligations?
A. The actuary must be an internal specialist with a continuing relationship with the auditing firm.
B. The auditor is required to understand the objectives and scope of the actuary’s work.
C. The reasonableness of the actuary’s assumptions is strictly the auditor’s responsibility.
D. The client is required to consent to the auditor’s use of the actuary’s work.
Answer (B) is correct.
The auditor should obtain an understanding of the expertise of the auditor’s specialist sufficient to (1) determine the nature, scope, and objectives of the work and (2) evaluate the adequacy of the work for the auditor’s purposes.
An auditor intends to use the work of an actuary. Under these circumstances, the auditor
A. Is not permitted to rely on the actuary’s work.
B. Is required to disclose the relationship in the auditor’s report.
C. Should communicate this matter to the audit committee.
D. Should assess the actuary’s competence and objectivity.
Answer (D) is correct.
When deciding whether to use an auditor’s specialist, the auditor should evaluate whether the auditor’s specialist has the needed competence, capabilities, and objectivity. For an external specialist, the evaluation should include inquiries about threats to objectivity (AU-C 620). Consideration should be given to the specialist’s professional certification, license, or other recognition of competence and the specialist’s reputation and standing.
In using the work of an auditor’s external specialist, an agreement should exist between the auditor and the specialist as to the nature of the specialist’s work. This agreement most likely should include
A. The conditions under which a division of responsibility may be necessary.
B. The auditor’s disclaimer as to whether the specialist’s findings corroborate the representations in the financial statements.
C. A statement that the specialist assumes no responsibility to update the specialist’s report for future events or circumstances.
D. The applicability of the same confidentiality requirements to the auditor and the specialist.
Answer (D) is correct.
The agreement should be documented and should cover (1) the nature, objectives, and scope of the work; (2) the roles of the auditor and specialist; (3) the nature, timing, and extent of communications between the auditor and specialist; and (4) the need for the specialist to observe confidentiality requirements. The agreement between the auditor and the auditor’s external specialist generally is documented in an engagement letter. A matter that should be included is the need for the confidentiality provisions of the relevant ethical requirements that apply to the auditor also to apply to the specialist. For example, a member of the AICPA may use a third-party service provider to render professional services to clients. The member should have a contract with the third-party service provider to maintain the confidentiality of the information (Ethics Ruling). Other requirements may be imposed by law or regulation.
Which of the following is not considered an auditor’s specialist? A. Actuary. B. Tax attorney. C. Internal auditor. D. Appraiser.
Answer (C) is correct.
For the purposes of AU-C 620, an auditor’s specialist is an individual or organization possessing expertise in a field other than accounting or auditing. The external auditor should consider the work of internal auditors but should not deem them to be specialists in the sense contemplated by AU-C 620.
An auditor who uses the work of an auditor’s external specialist may refer to the specialist in the auditor’s report if the
A. Specialist’s findings provide the auditor greater assurance of reliability about management’s representations.
B. The specialist’s findings fully corroborate management’s financial statement assertions.
C. Auditor’s use of the specialist’s findings is different from that of prior years.
D. Reference is needed for an understanding of a modification of the opinion.
Answer (D) is correct.
The auditor may refer to an auditor’s external specialist only if the opinion is modified. A modified opinion is a qualified opinion, adverse opinion, or a disclaimer of opinion. The reference is made because it is relevant to understanding the modification. An auditor’s report with such a reference should state that it does not reduce the auditor’s responsibility (AU-C 620).
