Using the Work of Others M5

Question 1

How to measure the objectivity or competency of an internal auditor?

Answer 1

Objectivity Measurements

• Objectivity is reflected by the organizational level to which the internal auditor reports.
• The independent auditor most likely would consider that the audit committee reviews employment decisions related to the director of internal auditing.
• Policies prohibiting internal auditors from auditing areas where they lack independence.
• Are internal auditors filtered to what they share with external auditors?

Competency Measurements

• Professional certifications of the internal audit staff.
• Consistency of the internal audit reports with the results of work performed.
• The appropriateness of internal audit conclusions.
• The number of continuing professional education courses attended by the internal auditor.
• The internal auditor’s prior work experience.
• Results of the tests of transactions.
• The internal auditor’s current audit plan, including the nature, timing, and extent of audit work.
• The internal auditor’s compliance with professional auditing standards.

Systematic and Disciplined Approach Measurements

• Workpapers of the internal auditor to verify evidence of supervision and review.
• The internal auditor’s current audit plan, including the nature, timing, and extent of audit work.

Question 2

Internal Auditor vs. External Auditor?

Answer 2

• “Internal auditors” are part of the system of internal control. Their audits would cover more areas in greater depth than those of the “independent auditors.” internal auditors are more concerned with analyzing and reporting on the actual operations of the entity of which they are a part of.
• Independent Auditors are more concerned with areas materially affecting the “financial statements taken as a whole.

Question 3

What should the Auditor consider when using the work of others?

Answer 3

• Although the appropriateness and reasonableness of methods or assumptions used and their application are the responsibility of the specialist, the auditor should obtain an understanding of them in order to determine whether the findings are suitable.
• An understanding should exist among the auditor, the client, and the specialist as to the nature of the work to be performed.
• The purpose of using the work of a specialist is to provide the auditor with specialized skill or knowledge the auditor may lack.
• Make no mention unless modified opinion due to the work of the specialist.

Question 4

What does GAAS consider a specialist?

Answer 4

• 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).

Question 5

What is a specialist for management?

Answer 5

• If the management specialist has a relationship with the client, the auditor should assess the risk that the specialist’s objectivity might be impaired.
• If the auditor specialist objectivity is impaired, the auditor should perform additional procedures with respect to the specialist’s assumptions, methods, or findings to determine that the findings are not unreasonable or should engage another specialist for that purpose.
• Although the appropriateness and reasonableness of methods or assumptions used and their application are the responsibility of the specialist, the auditor should obtain an understanding of the methods or assumptions used in order to determine whether the findings are suitable for corroborating the representations in the financial statements.
• The auditor may use, and in fact is encouraged to use, the work of a specialist in matters material to the fair presentation of the financial statements.

Question 6

What procedures require judgement that are not shared with Internal Auditors?

Answer 6

The auditor has the ultimate responsibility to express an opinion on the financial statements and make judgments about:

• assessments of risk
• the materiality of misstatements
• the sufficiency of tests performed
• the evaluation of significant accounting estimates
• other matters affecting the auditor’s report should always be those of the auditor.
• inherent and control risk.

Question 7

What can the Internal Auditor help the external auditor with?

Answer 7

Internal auditors may assist the auditor in:

1. Obtaining an understanding of internal control
2. In performing tests of controls
3. Test of Details ie. Substantive tests.

Question 8

What should an Independent Auditor do regarding the Internal Auditor in accepting direct assistance from the Internal Auditor?

Answer 8

The independent auditor should:
* supervise, review, evaluate, and test the work performed by the internal auditors.
* Rely on the work of the internal auditors related to testing of controls, especially related to assertions with a low degree of subjectivity or low risk of material misstatement.
* Not rely on assessment of control risk as this is an area with a high degree of subjectivity.

Question 9

In using the work of a specialist, an auditor referred to the specialist in the auditors report when?

Answer 9

• When expressing an unmodified opinion, the auditor generally will not refer to the work or findings of a specialist. The auditor may, however, make reference to a specialist in a departure from an unmodified opinion. The auditor may need the permission of the specialist before referencing the specialist in the report.
• Auditor must be satisfied regarding the specialist’s qualifications.
• An auditor should not divide responsibility for the audit with a specialist.
• The auditor must understand the form and content of the specialist’s findings in relation to the representations in the financial statements to be able to review the specialist’s work.

Question 10

What matters should be communicated by the component auditor to the group auditor?

Answer 10

When the group engagement partner decides not to assume responsibility for the component auditor’s work, the group engagement team should request the component auditor to communicate:

1. Whether the component auditor has complied with ethical requirements relevant to the group audit, including independence and professional competence.
2. Identification of the financial information of the component on which the component auditor is reporting.
3. The component auditor’s overall findings, conclusions, or opinion.