M5-Using the Work of Others

Question 1

Objectivity is reflected by the organizational level to which the internal auditor reports as well as by policies prohibiting audits of areas where the internal auditor lacks independence. In assessing the objectivity of internal auditors, the independent CPA who is auditing the entity’s financial statements considers information obtained from previous experience, from discussions with management, from external quality reviews (if performed), and from professional internal auditing standards (such as those developed by the Institute of Internal Auditors). (true or false)

Answer 1

true

Question 2

In 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 F/S amounts, the risk of material misstatement o 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. As the degree of subjectivity increases, the need for the auditor to perform tests of the assertions increases. Testing the existence of fixed asset additions involves very little subjectivity, and thus work performed by the internal auditor may reduce the auditor’s testing in this area. (true or false)

Answer 2

true

Testing the:
-existence of contingencies
-valuation of intangible assets
-valuation of related party transactions
all involve much subjectivity, and should, therefore be performed by the auditor.

Question 3

Internal auditors may assist the auditor in obtaining an understanding of internal control and in performing tests of controls and substantive tests. (true or false)

Answer 3

true

Question 4

An auditor of a nonissuer may refer to the specialist in the auditor’s report if, as a result of the specialist findings, the auditor issues a modified opinion. In such circumstances, the auditor may need the permission of the auditor’s specialist before making such a reference. (true or false)

Answer 4

true

The auditor should not refer to the work or findings of the specialist unless the specialist’s work results in a modification of the auditor’s opinion.

Question 5

Because the auditor has the ultimate responsibility to express an opinion on the financial statements, judgments about assessments of risk, the materiality of misstatements, the sufficiency of tests performed, the evaluation of significant accounting estimates, and other matters affecting the auditor’s report should always be those of the auditor. (true or false)

Answer 5

true

Question 6

The independent auditor is solely responsible for reporting on the F/S. 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. (true or false)

Answer 6

true

Question 7

Objectivity is reflected by the organizational level to which the internal auditor reports, as well as by policies prohibiting audits of areas where the internal auditor lacks independence. (true or false)

Answer 7

true

Question 8

An auditor engaging a lawyer to interpret the provisions of a complex contract would be considered to be using the work of a specialist. GAAS defines a specialist as a person or firm with special skills in a field other than accounting or auditing (e.g., actuaries, appraisers, attorneys, or engineers.) (true or false)

Answer 8

true