Using the Work of an Internal Audit Function Flashcards
Miller Retailing, Inc. maintains a staff of three full-time internal auditors who report directly to the controller. In planning to use the internal auditors to provide assistance in performing the audit, the independent auditor most likely will
Place limited reliance on the work performed by the internal auditors.
Decrease the extent of the tests of controls needed to support the assessed level of detection risk.
Increase the extent of the procedures needed to reduce control risk to an acceptable level.
Avoid using the work performed by the internal auditors.
Place limited reliance on the work performed by the internal auditors.
This answer is correct because when internal auditors only report to a relatively low level in the organization (here the controller and not, for example, the audit committee), the independent auditor will question the internal auditors’ ability to remain objective and this will result in limited reliance being placed upon their work.
When assessing internal auditors’ objectivity, an independent auditor should
Consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.
Review the internal auditors’ reports to determine that their conclusions are consistent with the work performed.
Verify that the internal auditors’ assessment of control risk is comparable to the independent auditor’s assessment.
Evaluate the quality of the internal auditors’ working paper documentation and their recent audit recommendations.
Consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.
This answer is correct because internal auditors may lose objectivity when auditing areas where they recently were assigned—they may in essence be performing a self-review of their own work.
In assessing the competence of a client’s internal auditor, an independent auditor most likely would consider the
Internal auditor’s compliance with professional internal auditing standards.
Client’s policies that limit the internal auditor’s access to management salary data.
Evidence supporting a further reduction in the assessed level of control risk.
Results of ratio analysis that may identify unusual transactions and events.
Internal auditor’s compliance with professional internal auditing standards.
This answer is correct because internal auditor compliance with professional internal auditing standards will reflect positively on evaluation of the competence of the internal auditor.
When assessing the internal auditor’s competence, the independent CPA should obtain information about the
Organizational level to which the internal auditors report.
Educational background and professional certification of the internal auditors.
Policies prohibiting the internal auditors from auditing areas where relatives are employed.
Internal auditors’ access to records and information that is considered sensitive.
Educational background and professional certification of the internal auditors.
The requirement is to identify the type of information used by a CPA to assess the competence of internal auditors. Answer (b) is correct because, along with various other factors, AU-C 610 indicates that the CPA should obtain evidence on the educational background and professional certification of the internal auditors when considering competence. Answers (a) and (c) are incorrect because analysis of organizational level to which the internal auditors report and policies on relatives are considered when assessing internal auditor objectivity. Answer (d) is incorrect because access to sensitive records will not provide a CPA with information on competence.
Which of the following statements is correct regarding an independent auditor’s reliance on a client’s internal audit staff?
An independent auditor should not reduce the amount of audit testing based on the work of internal auditors.
An independent auditor should assess the organizational status of the director of internal audit.
An internal auditor should provide direct assistance to the independent auditor during preparation of audit workpapers.
An independent auditor should use internal audit workpapers when available.
An independent auditor should assess the organizational status of the director of internal audit.
This answer is correct because an auditor assesses the organizational status of the director of internal audit as a method of addressing the function’s likely independence from management.
A government internal audit function is presumed to be free from organizational independence impairments for reporting internally when the head of the organization
Is not accountable to those charged with governance.
Performs auditing procedures that are consistent with generally accepted accounting principles.
Is a line-manager of the unit under audit.
Is removed from political pressures to conduct audits objectively, without fear of political reprisal.
Is removed from political pressures to conduct audits objectively, without fear of political reprisal.
This is correct because when the head of the organization is removed from political pressures, such independence may be obtained.
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 risk of material misstatement.
III. Substantive procedures performed in gathering direct evidence.
I and II only.
I and III only.
II and III only.
I, II, and III.
I, II, and III.
The work of internal auditors may affect the nature, timing and extent of the audit, including (1) procedures the auditor performs when obtaining an understanding of the entity’s internal control, (2) procedures the auditor performs when assessing risk, and (3) substantive procedures the auditor performs.
An independent auditor asked a client’s internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controller signed it and mailed it to the bank. What was the major flaw in this procedure?
The internal auditor did not sign the form.
The form was mailed by the controller.
The form was prepared by the internal auditor.
The account was closed, so the balance was zero.
The form was mailed by the controller.
This answer is correct because the auditors, not the controller, should maintain control over the mailing of the confirmations so as to assure that the confirmations are actually mailed to the financial institution.
For which of the following judgments may an independent auditor share responsibility with an entity’s internal auditor who is assessed to be both competent and objective?
Evaluation of significant accounting estimates
Materiality of misstatements
A. Yes Yes
B. Yes No
C. No Yes
D. No No
D.
This answer is correct because the auditor is required to make all significant judgments in the audit, including evaluating significant accounting estimates and determining the materiality of misstatements; other significant judgments include assessing the risks of material misstatement, evaluating the sufficiency of tests performed, evaluating the going concern assumption, and evaluating the adequacy of disclosures.
An internal auditor’s work would most likely affect the nature, timing, and extent of an independent CPA’s auditing procedures when the internal auditor’s work relates to assertions about the
Existence of contingencies.
Valuation of intangible assets.
Existence of fixed asset additions.
Valuation of related-party transactions.
Existence of fixed asset additions.
The requirement is to identify the circumstance in which an internal auditor’s work would most likely affect the nature, timing, and extent of a CPA’s auditing procedures. When considering the effect of the internal auditors’ work, the CPA considers (1) the materiality of financial statement amounts, (2) the risk of material misstatement of the assertions, and (3) the degree of subjectivity involved in the evaluation of the audit evidence. Answer (c) is correct because the existence of fixed asset additions involves little subjectivity. Answers (a) and (b) are incorrect because the existence of contingencies and the valuation of intangible assets are subjective and the risk of misstatement may be high. Answer (d) is incorrect because the valuation of related-party transactions may be very subjective due to the lack of an “arm’s-length” transaction.
If the independent auditors decide that the work performed by the internal auditor may have a bearing on their own procedures, they should consider the internal auditor’s
Competence and objectivity.
Efficiency and experience.
Independence and review skills.
Training and supervisory skills.
Competence and objectivity.
This answer is correct because the AICPA’s Professional Standards require independent auditors to consider internal auditor’s competence, objectivity, and work performance.
The independent auditor should acquire an understanding of the internal audit function as it relates to the independent auditor’s consideration of internal control because
The audit plans, working papers, and reports of internal auditors can often be used as a substitute for the work of the independent auditor’s staff.
The procedures performed by the internal audit staff may eliminate the independent auditor’s need for an extensive consideration of internal control.
The work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor’s procedures.
The understanding of the internal audit function is an important substantive test to be performed by the independent auditor.
The work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor’s procedures.
This answer is correct because the work of the internal auditor may affect the nature, timing, and extent of substantive tests performed by the independent auditor.
In assessing the objectivity of internal auditors, an independent auditor should
Evaluate the quality control program in effect for the internal auditors.
Examine documentary evidence of the work performed by the internal auditors.
Test a sample of the transactions and balances that the internal auditors examined.
Determine the organizational level to which the internal auditors report.
Determine the organizational level to which the internal auditors report.
The requirement is to determine how a CPA should assess the objectivity of an internal auditor. Answer (d) is correct because when assessing the objectivity of an internal auditor the CPA should consider organizational status and policies for maintaining objectivity. Answers (a), (b), and (c) are all incorrect because evaluating the quality control program, and examining and testing an internal auditor’s work all relate more directly to assessing internal auditor competence rather than to objectivity. See AU-C 610 for these and other factors considered when assessing internal auditor competence.
In assessing the competence of an internal auditor, an independent CPA most likely would obtain information about the
Quality of the internal auditor’s working paper documentation.
Organization’s commitment to integrity and ethical values.
Influence of management on the scope of the internal auditor’s duties.
Organizational level to which the internal auditor reports.
Quality of the internal auditor’s working paper documentation.
The requirement is to identify the most likely information a CPA would obtain in assessing the competence of an internal auditor. Answer (a) is correct because in assessing competence, an internal auditor will consider the quality of working paper documentation as well as a variety of other factors outlined in AU-C 610. Answer (b) is incorrect because an organization’s commitment to integrity and ethical values, while important, does not bear as directly upon internal auditor competence. Answers (c) and (d) are incorrect because the influence of management and the organizational level to which the internal auditor reports are factors used to assess internal auditor objectivity. AU-C 610 provides overall guidance on the use of internal auditors.
In connection with the examination of financial statements by an independent auditor, the client suggests that members of the internal audit staff be utilized to minimize audit costs. Which of the following tasks could most appropriately be delegated to the internal audit staff?
Selection of accounts receivable for confirmation, based upon the internal auditor’s judgment as to how many accounts and which accounts will provide sufficient coverage.
Preparation of schedules for negative accounts receivable responses.
Evaluation of the internal control for accounts receivable and sales.
Determination of the adequacy of the allowance for doubtful accounts.
Preparation of schedules for negative accounts receivable responses.
