Term
| Auditing Standard No. 2 was issued pursuant to Section 404(b) of the Act. What is the subject matter of this standard? |
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Definition
| An audit of internal control over financial reporting performed in conjunction with an audit of financial statements. |
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Term
| What is COSO? In particular, what is its mission and who are its organizational sponsors? |
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Definition
| Formed to sponsor the National Commission on Fraudulent Financial Reporting, an independent private sector initiative which studied the causal factors that can lead to fraudulent financial reporting and developed recommendations for public companies and their independent auditors, for the SEC and other regulators, and for educational institutions. |
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Term
| What are the three standards of field work? State each one. |
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Definition
1. The work is to be adequately planned and assistants are to be properly supervised.
2. A sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed.
3. Sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements. |
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Term
| The category of “interpretive publications” includes what specific professional literature? |
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Definition
| AICPA Audit and Accounting Guides; AICPA Auditing Statements of Position |
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Term
| “The auditor’s responsibility is to plan and perform the audit to obtain assurance about whether the financial statements are free of misstatement.” What is the error(s) in this statement? |
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Definition
| The auditor's responsibility is to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement |
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Term
| What is the most important source of “other accounting literature”? |
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Definition
| FASB Concept Statements. However, the appropriateness of other accounting literature depends on its relevance to particular circumstances, the specificity of its guidance, and the general recognition of the issuer or author as an authority. |
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Term
| Under the general standards governing such engagements, practitioners may provide attestation services only when they believe what to be true with respect to the subject matter? |
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Definition
| Only if the subject matter is capable of evaluation against criteria that are suitable and available to users. |
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Term
| Every CPA firm should establish a system of quality control that encompasses what specific elements? |
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Definition
| 1. Independence, Integrity and Objectivity; 2. Personnel Management; 3. Acceptance and Continuance of clients, and engagements; 4. Engagement Performance; 5. Monitoring |
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Term
| What is the underlying principle upon which the profession’s peer review program is based? |
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Definition
| To provide assurance regarding a firms quality control compliance. |
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Term
| What are the two ways in which CPAs may communicate to client management the results of a compilation? |
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Definition
| Compilation Report, or Engagement Letter |
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Term
| How does the profession define “submission” of financial statements with respect to accounting and review services? |
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Definition
| Presenting to a client or third parties financial statements that the accountant has prepared either manually or through the use of computer software |
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Term
| How does the Code define “integrity”? |
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Definition
| An element of character fundamental to professional recognition. It is the quality from which the public trust derives and the benchmark against which a member must ultimately test all decisions |
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Term
| “The principle of due care requires only that professionals perform with competence, a quality attained after they have completed formal academic training.” What is the error(s) in this statement? |
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Definition
| In addition to formal academic training, professionals must commit to learning and professional improvements throughout the member’s professional life. |
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Term
| What do a member’s parents, siblings, and nondependent children have in common? |
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Definition
| they are considered close relatives |
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Term
| For independence purposes, can an individual in a covered member’s immediate family work for an audit client? Explain. |
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Definition
| Yes, if the family member did not hold a key position, and they do not participate in any retirement, savings, or compensation plans of the clients that is not provided to all employees. |
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Term
| For independence purposes, can an auditor’s close relative work for the audit client? Explain. |
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Definition
| Yes, if the close relative did not hold a key position |
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Term
| With respect to independence concerns, a CPA may perform nonattest services for attest clients provided those services do not involve what type of functions or decisions? |
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Definition
| Services or functions that do not impair indepence. In particular, services that perform management function, or make management decisions for the attest client. |
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Term
| Rule 102 of the Code (“Integrity and Objectivity”) requires members to maintain objectivity and integrity and remain free of conflicts of interest. In addition to these two affirmative duties, it also requires that members not commit what two specific act |
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Definition
| Not knowingly misrepresent facts, or subordinate his judgement to others. |
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Term
| If a CPA believes that certain professional services can be performed objectively, how can an apparent conflict of interest be remedied? |
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Definition
| The relationship should be disclosed and consent should be obtained from client, employer, and other appropriate parties. |
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Term
| If a CPA believes that certain professional services can be performed objectively, how can an apparent conflict of interest be remedied? |
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Definition
| The relationship should be disclosed and consent should be obtained from client, employer, and other appropriate parties. |
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Term
| In what circumstances may an external auditor disclose confidential client information without client consent? |
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Definition
| Review under AICPA or state CPA society authorization: Review in conjunction with a prospective purchase, sale, or merger of all or part of member’s practice: Subpoena or Summons: Compliance with applicable laws and government regulations: Filing a compliant or responding to an inquiry by professional ethics divisions or trial board of the Institute, CPA society, or Board of Accountancy. |
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Term
| If a CPA provides financial statement-related services for a client, may the CPA also perform consulting services for the client in exchange for a contingent fee? Explain. |
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Definition
| No. A member shall not perform for a contingent fee any professional services for a contingent fee, if any member of the firm performs: an audit or review of the financial statements or a compilation of financial statements that a 3rd party might use which lacks an independence disclosure or an examination of prospective financial information. |
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Term
| With respect to the accountant’s civil liability under common law, most state courts now recognize the rights of “foreseen” third parties to bring suit against the auditor for what degree of negligence? |
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Definition
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Term
| Generally speaking, what role does “privity” play with respect to an auditor’s third party civil liability under common law? |
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Definition
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Term
| What are the two categories of fraud-based financial statement misstatements that SAS 99 identifies as audit-relevant? |
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Definition
| Misstatements Arising from Fraudulent Financial Reporting, and Misstatements Arising From Missappropriation of Assets. |
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Term
| To be effective, a management antifraud fraud program and the controls thereof should include what three broad, fundamental elements? |
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Definition
| (1) Create and maintain a culture of honesty and high ethics, (2) evaluate the risks of fraud and implement the processes, procedures, and controls needed to mitigate the risks and reduce the opportunities of fraud, and (3) develop an appropriate oversight process. |
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Term
| Refer to the preceding question. With respect to the first of these, an entity should develop an ethical framework that addresses not just the two types of fraud the profession has identified as audit-relevant but what additional category of wrongdoing as |
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Definition
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Term
| What two types of fraud must the auditor report directly to the audit committee or its equivalent? |
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Definition
| (1) Fraud involving senior management, (2) fraud that causes a material misstatement of the financial statements |
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Term
| What are the auditor’s two primary accounting concerns with respect to how a client has reported its related party transactions? |
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Definition
| The auditor should place emphasis on the adequacy of disclosure and that financial statements recognize the substance of transactions. |
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Term
| For both accounting and auditing purposes, how does the profession define “materiality”? |
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Definition
| The magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonble person relying on the information would have been changed or influenced by the omission or misstatement. |
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Term
| What is the nature of the interrelationship among the components of audit risk? |
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Definition
| Inherent risk and control risk differ from detection risk in that they exist independently of the audit of financial statements, whereas detection risk relates to the auditor’s procedures and can be changed at his or her discretion. Detection risk should bear an inverse relationship to inherent and control risk. The less the inherent and control risk the auditor believes exists, the greater the detection risk that can be accepted and vice versa. |
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Term
| An auditor has two clients, A and B, each believed to pose about the same degree of inherent risk. The auditor has concluded that client B has relatively weaker internal control. For which client, A or B, must the auditor achieve a lower acceptable level |
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Definition
| Client B, If the client has ineffective controls the risk of material misstatement due to fraud will increase greatly therefore decreasing the acceptable amount of detection risk and auditor may have. |
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Term
| What impact do unreasonable accounting estimates have on likely misstatements? |
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Definition
| If the auditor believes the estimated amount included in the financial statements is unreasonable, he or she should treat the difference between the estimate and the closest reasonable estimate as a likely misstatement |
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Term
| What impact do uncorrected likely misstatements in the prior year have on likely misstatements (i.e., of the current year)? |
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Definition
| If the auditor believes that there is an unacceptably high risk that the current period’s financial statements may be materially misstated when those prior period likely misstatements that affect the current period’s financial statements are considered along with likely misstatements arising in the current period, the auditor should include in aggregate likely misstatement the effect on the current period’s financial statements of those prior period likely misstatements. |
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Term
| “Even if the audit team were to examine evidence supporting every transaction recorded by the client, they still would be less than absolutely certain about the propriety of the financial statements.” Which assertion best explains the reasoning behind thi |
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Definition
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Term
| What are the two general categories of evidence available to the auditor? |
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Definition
| Underlying Accounting Data, and All Corroborating Information available |
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Term
| What are the two characteristics that make evidence competent for audit purposes? |
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Definition
| Must be Valid and Relevant |
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Term
| In auditing accounts receivable at year-end, the auditor might examine copies of sales invoices the client sent to its customers. Similarly, in auditing accounts payable at year-end, the auditor might examine purchase invoices the client received from its |
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Definition
| External invoices from suppliers: it provides greater assurance of reliability for the purposes of an independent audit than that secured solely within the entity |
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Term
| “Internal control is a system put into place to insure accurate data processing.” What is the error(s) in this statement? |
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Definition
| Internal Control is a process designed to provide reasonable assurance regarding the achievement of objectivies |
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Term
| An entity’s use of IT may affect which one(s) of the five components of internal control relevant to the achievement of its objectives? |
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Definition
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Term
| On every audit, the auditor must obtain for planning purposes a sufficient understanding of which specific component(s) of internal control? |
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Definition
| Each of the 5 components. |
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Term
| Refer to the preceding question. The auditor fulfills this requirement by performing procedures designed to gain insight into what two specific aspects of internal control? |
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Definition
| Design of the controls, and determining whether they have been placed in operation. |
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Term
| What are the documentation requirements with respect to the understanding of an entity’s internal control that the auditor is required to obtain on every GAAS audit? |
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Definition
| The auditor should document the understanding of the entity's internal control components obtained to plan the audit. |
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Term
| What is one of the three reasons why an auditor may decide to assess control risk at the maximum level? |
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Definition
| The auditor believes controls are unlikely to pertain to an assertion |
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Term
| Refer to the preceding question. This decision is appropriate only if the auditor is satisfied that what is true? |
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Definition
| Performing only substantive tests would be effective in restricting detection risk to an acceptable level. |
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Term
| What is the required response when the auditor concludes that significant amounts of information supporting critical financial statement assertions exist only in electronic form? |
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Definition
| The auditor should perform tests of controls to gather evidential matter to use in assessing control risk. |
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Term
| In addition to identifying audit-relevant controls but before making a final assessment of control risk, what essential step must auditors perform when they intend to assess that risk at less than the maximum? |
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Definition
| He Should obtain sufficient evidential matter to support that assessed level |
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Term
| What is the auditor’s purpose in performing substantive tests? |
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Definition
| Detect material misstatement in financial statement assertions, and to restrict detection risk to an acceptable level. |
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Term
| Auditing procedures designed to detect material misstatements in financial statement assertions are referred to as what type of tests? |
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Definition
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Term
| What is the term used to refer to significant internal control deficiencies that could adversely affect the client’s financial reporting process? |
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Definition
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Term
| 479. What is the primary concern with respect to auditor appointments made near or after an entity’s fiscal year-end? |
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Definition
| Whether circumstances of the engagement are likely to allow for an adequate audit and expression of an unqualified opinion |
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Term
| Refer to the preceding question. What discussion should take place with the entity and when should it occur? |
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Definition
| If the circumstances surrounding the audit will not allow time for an adequate audit, and expression of an unqualified opinion, The auditor should discuss with the client the possible need for a qualified opinion or disclaimer of an opinion. |
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Term
| The auditor should establish an understanding with the client regarding the services to be performed for each engagement. What is the purpose of this discussion? |
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Definition
| An understanding reduces the risk that either the auditor or the client may misinterpret the needs or expectations of the other party. |
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Term
| Refer to the preceding question. What are the four elements that this understanding should include? |
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Definition
| Objectives of the engagement, Management's Responsibility, Auditor's Responsibility, and Limitations of the Engagement |
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Term
| The understanding with the client must be documented. In this regard, what is the preferable form for communicating the understanding? |
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Definition
| Written Communication with the Client |
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Term
| 485. In addition to the required elements, an understanding with the client also may include other matters. What are some examples of these other matters? |
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Definition
| .The conduct of the engagement, Specialists or Internal Auditors, A Predecessor Auditor, Fees and Billing, Idemnification Arrgangements |
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Term
| 478. What is one of the advantages to the auditor of early appointment? |
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Definition
| It allows the auditor to plan the work so that it may be done effectively. It is also helpful in planning the observation of taking inventory, confirmation of cash, receivables, and other balances, and the count of cash and securitites. |
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Term
| 484. In reaching an understanding with the client, the auditor must make clear that at the end of the engagement, management will be required to make what explicit affirmation? |
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Definition
| At the conclusion of the engagement, management will provide the auditor with a letter that confirms certain representations made during the audit |
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Term
| 486. What is the primary objective of a “successor” auditor when making the inquiries that are required under GAAS before a change in auditors can occur? |
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Definition
| Communication may provide information that will assist that successor auditor in determing whether to accept the engagement. |
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Term
| 487. Whose responsibility is it to initiate the required communications before the change in auditor occurs? |
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Definition
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Term
| 488. Refer to the preceding question. What is the primary purpose of making this inquiry? |
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Definition
| to determine whether or not to accept the engagement |
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Term
| 489. Refer to the preceding question. What are the four major concerns to be addressed in this inquiry? |
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Definition
| Information about the integrity of management; Disagreements with management as to accounting principles, accounting procedures, and other significant matters; Communications with the Audit Committee regarding fraud, illegal acts, and internal control matters; The predecessor auditor's understanding as to the reasons for the change of auditors. |
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Term
| 490. Refer to the preceding question. What impact does Rule 301 under the Code have on the communications between the predecessor and successor auditors? |
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Definition
| The successor auditor should receive permission from the client to make inquiry of the predecessor auditor prior to final acceptance of the engagement. The predecessor auditor is precluded from disclosing any confidential information obtained in the course of the engagement unless the client specifically consents. |
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Term
| 491. Under GAAS, a successor auditor is encouraged to seek permission from the client to review the predecessor’s working papers. What two audit purposes does this review serve? |
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Definition
| Analyzing the impact of the opening balances on the current year financial statements, and consistency of accounting principles in prior year. |
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Term
| 492. Refer to the preceding question. Is the successor’s review of the predecessor’s working papers considered to be sufficient evidence with respect to these two areas of audit concern? Explain. |
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Definition
| It is a matter of professional judgement. |
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Term
| 494. What is a “reaudit”? |
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Definition
| When an auditor is asked to perform an audit on financial statements that have been previously audited and reported on. |
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Term
| 495. What is the successor auditor’s responsibility when information is discovered that if made known to the predecessor auditor, might lead the predecessor to revise the auditor’s report on the prior year’s financial statements? |
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Definition
| The successor auditor should request that the client inform the predeccessor auditor of the situation and arrange for the three parties to meet to discuss the information and attempt to resolve the matter. |
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Term
| 495. What is the successor auditor’s responsibility when information is discovered that if made known to the predecessor auditor, might lead the predecessor to revise the auditor’s report on the prior year’s financial statements? |
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Definition
| The successor auditor should request that the client inform the predeccessor auditor of the situation and arrange for the three parties to meet to discuss the information and attempt to resolve the matter. |
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Term
| 496. On every GAAS audit, analytical procedures should be used in which specific phase(s)? |
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Definition
| Planning and Overall Review |
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Term
| 497. What exactly are analytical procedures? |
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Definition
| Evaluations of financial information made by an auditor of plausible and expected relationships among both financial and nonfinancial data. |
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Term
| 498. What is the basic premise underlying the auditor’s use of analytical procedures? |
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Definition
| That plausible relationships among data may reasonably be expected to exist and continue except as particular conditions cause changes. |
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Term
| 499. Analytical procedures involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor. What are some examples of potential sources of information for developing these expectations? |
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Definition
| Financial Information from comparable prior periods, anticipated results (budgets, and forecasts), financial relationships, Industry norms |
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Term
| 500. What is the twofold focus of analytical procedures performed in the planning stage? |
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Definition
| Increase the auditor's understanding of the client, and identifying areas that may represent specific risks relevant to the audit |
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Term
| 501. The expected effectiveness and efficiency of an analytical procedure used as a substantive test depends upon a number of factors. What are some of these factors? |
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Definition
| The nature of assertion, (b) the plausibility and predictibility of the relationship, [c] the availability and reliability of the data used to develop the expectation and (d) the precision of the expectation |
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Term
| 502. In performing analytics as a substantive test, the auditor considers the predictability of the financial statement relationship in question. In this regard, what three general guidelines should the auditor bear in mind? |
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Definition
Relationships in a stable enviroment are usually more predictable that relationship in a dynamic or unstable enviroment, relationships involving income statement accounts tend to be more predictible than relationship involving only balance sheet accounts since income statement accounts represent transaction amounts as of a point in time, and relationships involving transactions subject to management discretion are sometimes less predictible.
. |
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Term
| 503. In planning—and before performing—analytical procedures as a substantive test, what specific issue should the auditor consider with respect to their possible outcome? |
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Definition
| The amount of difference from the expectation that can be accepted without further investigation. |
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Term
| 504. Can management responses to auditor inquiries serve as audit evidence when investigating a significant unexpected difference resulting from an analytical procedure performed as a substantive test? Explain. |
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Definition
| Management responses should ordinarily be corroborated with other evidential matter when investigating a significant unexpected difference. |
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Term
| 505. What are the threefold audit documentation requirements with respect to an analytical procedure performed as the principal substantive test of a significant financial statement assertion? |
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Definition
| The expectation and factors considered in its development; Results of the comparison of the expectation to the recorded amount, or ratios; and auditing procedures performed in response to unexpected differences arising from analytical procedures. |
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Term
| 506. What is the twofold objective of analytical procedures used by the auditor in the overall review stage? |
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Definition
| To assist the auditor in assessing the validity of the conclusions reached; assist in the evaluation of the overall financial statement presentation |
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Term
| 507. In planning the audit, what are some of the matters that the auditor should consider? |
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Definition
| The nature of the client's business and industry; The client's accounting policies and procedures; Planned assessed level of control risk; The type of reports to be issued; Preliminary estimate of materiality amounts |
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Term
| 508. In planning the audit, what are some of the procedures that the auditor should perform? |
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Definition
| Review of his or her own records on the entity; discussions with others in the firm; discussions with the client's personnel. |
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Term
| 509. Under GAAS, what specific written document(s) should result from the auditor’s planning process? |
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Definition
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Term
| 510. How does knowledge of a client’s business enhance the auditor’s effectiveness? |
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Definition
| Helps: identify areas that may need special consideration; assess conditions underwhich accounting data is produced, processed, reviewed, and accumulated; Evaluate the reasonableness of management representations; and assess the appropriateness of accounting principles applied; and adequacy of disclosures. |
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Term
| 511. What are some of the sources for obtaining knowledge of a client's business? |
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Definition
| Experience with the entity or its industry, inquiry of personnel of the entity, working papers from prior years |
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Term
| 512. What are some of the IT-related client characteristics that the auditor should consider during the planning stage? |
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Definition
| The extent to which the computer is used in each significant accounting application, the complexity of the entity’s computer operations, the organizational structure of the computer processing activities, and the availability of data |
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Term
| 513. One of the critical aspects of supervision is keeping informed. In this regard and with respect to the audit staff assigned to the engagement, what specifically do GAAS require of the auditor with final responsibility? |
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Definition
| To be aware of the procedures to be followed when difference of opinion concerning accounting situations and auditing issues exist among firm personnel involved in the audit. |
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Term
| 514. Mean, the engagement partner, disagrees with the conclusions of Green, the new staff auditor. If after much discussion, Green remains unconvinced of Mean’s point of view, what is the appropriate action that Green should take? |
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Definition
| Green should document his disagreement with the conclusions reached if, after appropriate consultation, he believes it necessary to disassociate himself from the resolution of the matter |
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Term
| 515. What is the advantage of performing audit tests at an interim date? |
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Definition
Audit testing at the interim dates may permit early consideration of significant matters affecting the year-end financial statements
In addition, much of the audit planning, including obtaining an understanding of internal control, assessing control risk and the application of substantive tests to transactions can be conducted prior to the balance sheet date. |
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Term
| What is the disadvantage of performing audit tests at an interim date? More specifically, what is the nature of the increased risk that the auditor faces by performing substantive tests prior to the balance sheet date? |
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Definition
| increases the risk that misstatement that may exist at the balance sheet date will not be detected by the auditor. |
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Term
| 517. Before performing substantive tests prior to the balance sheet date, what is the crucial assessment that the auditor must make? |
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Definition
| The auditor must assess the difficulty in controlling the incremental audit risk. |
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Term
| 517. Before performing substantive tests prior to the balance sheet date, what is the crucial assessment that the auditor must make? |
|
Definition
| The auditor must assess the difficulty in controlling the incremental audit risk. |
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Term
| Before performing substantive tests prior to the balance sheet date, the auditor must assess the difficulty in controlling the incremental audit risk. In making this assessment, what three major concerns should the auditor address? |
|
Definition
| Significant unusual transactions or entries; other causes of significant fluctuations, or expected fluctuations did not occur; and changes in the composition of the account balances. |
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Term
| If substantive tests are performed prior to year-end,the auditor must be able to extend any conclusions reached to the balance sheet date in order to achieve key audit objectives. To accomplish this goal what analytical procedures should the auditor perfo |
|
Definition
| Comparison of information concerning the balance at the balance-sheet date with the comparable information at the interim date to identify amounts that appear unusual and investigation of any such amounts, and any other tests which will provide a reasonable basis for extending to the balance-sheet date the audit conclusions relative to the assertions tested directly or indirectly at the interim date. |
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Term
| 520. With respect to coordinating the timing of auditing procedures to be performed, what are some of the areas of critical audit concern? |
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Definition
a) coordinating the auditing procedures applied to related party transactions and balances
b) coordinating the testing of interrelated accounts and accounting cutoffs
c) maintaining temporary audit control over assets that are readily negotiable and simultaneously testing such assets and cash on hand and in banks, bank loans, and other related items |
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Term
| 521. What are some examples of specialists whose work might be used on a GAAS audit? |
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Definition
| Actuaries, appraisers, engineers, environmental consultants, and geologists. (but not limited to these only) |
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Term
| 522. What are some examples of an audit situation that might require the use of a specialist’s work as evidence in performing substantive tests? |
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Definition
| Valuation of real estate, art, pharmaceutical products, equipment etc., Determination of physical characteristics relating to quantity on hand or condition, Determination of amounts derived by using specialized techniques or methods, and Interpretations of technical requirements, regulations, or agreements. |
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Term
| Give some examples of financial assertions at issue that require specialist's work as evidence |
|
Definition
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Term
| 524. What are the three characteristics that the auditor should consider when evaluating the qualifications of a specialist? |
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Definition
| Credentials, Reputation, and Experience |
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Term
| 525. What are some of the key aspects of the specialist’s work that the auditor seek to understand? |
|
Definition
| Objectives and scope of specialists work, specialists relationship to the client, methods or assumptions used, and comparison of the methods or assumptions used with those used in the preceding period, the appropriateness of usinf the specialists work for the intended purpose. |
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Term
| 526. When evaluating the relationship of a specialist to the client, what is the auditor’s primary concern? |
|
Definition
| Circumstances that may impair objectivity |
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Term
| 527. If the auditor has concerns about a specialist’s relationship with a client, what steps should the auditor take? |
|
Definition
| He should assess the risk that the specialist’s objectivity might be impaired. And he should also perform additional procedures with respect to some or all of the specialist’s assumptions, methods, or findings to determine that the findings are not unreasonable or should engage another specialist. |
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Term
| 528. When using the work of a specialist, the auditor must first obtain an understanding of the specialist’s methods and and assumptions. In addition, the auditor should perform what specific procedure? |
|
Definition
| Make appropriate tests of data provided to the specialist, taking into account the auditor’s assessment of control risk, and evaluate whether the specialist’s findings support the related assertions in the financial statements. |
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Term
| 529. If the auditor is unable to resolve a material difference between the specialist’s findings and a related assertion in the client’s financial statements, how will the auditor’s report be affected? |
|
Definition
| The report would conclude that he/she should qualify the opinion or disclaim an opinion because the inability to obtain sufficient competent evidential matter as to an assertion of material significance in the financial statements constitutes a scope limitation. |
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Term
| 530. Assuming that the relevant assertions in the client’s financial statements are supported by the specialist’s findings, how will the auditor’s report be affected? |
|
Definition
| Auditor may reasonably conclude that Sufficient Competent Evidential Matter was obtained |
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Term
| 531. When a client has an internal audit function, is the external auditor’s primary concern focused on the internal auditor’s independence or objectivity? Explain. |
|
Definition
| More concerned with the internal auditors objectivity, because they are responsible for providing analyses, evaluations, assurances, recommendations, and other information to the entity’s management and board of directors or to others with equivalent authority and responsibility. |
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Term
| 533. When obtaining an understanding of internal control, what is the external auditor’s responsibility with respect to the client’s internal audit activities? |
|
Definition
| The auditor should obtain an understanding of the internal audit function sufficient to identify those internal audit activities that are relevant to planning the audit. |
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Term
| What specific features of the client's internal audit function should be addressed in developing an understanding of internal control sufficient to planning the audit? |
|
Definition
| Organizational status with the entity. Application of professional standards. Audit plan, including the nature, timing, and extent of audit work. And access to records and whether there are limitations on the scope of their activities and application of professional standards |
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Term
| 535. What are some examples of internal audit activities that the external auditor would probably not regard as relevant to a GAAS audit? |
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Definition
| evaluation of management decision making processes |
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Term
| Internal auditors’ activities may be relevant to the external auditor if they provide evidence about controls related to the client’s financial reporting objective. What is the other way in which their activities may be relevant to the external auditor? |
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Definition
| Relevant activities are activieies that provide evidence about the design and effectiveness of controls that pertain to the entity's ability to initiate, record, process, and report financail data consistent with the assertions embodied in the financial statements or that provide direct evidence about potiental misstatement of such data. |
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Term
| 535. What are some examples of internal audit activities that the external auditor would probably not regard as relevant to a GAAS audit? |
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Definition
| evaluation of management decision making processes |
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Term
| From the perspective of an external auditor, internal auditor's activities are known as what specific type of test |
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Definition
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Term
| Internal auditors’ activities may be relevant to the external auditor if they provide evidence about controls related to the client’s financial reporting objective. What is the other way in which their activities may be relevant to the external au |
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Definition
| Revevant activities are activieies that provide evidence about the design and effectiveness of controls that pertain to the entity's ability to initiate, record, process, and report financail data consistent with the assertions embodied in the financial statements or that provide direct evidence about potiental misstatement of such data. |
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Term
| 538. If an auditor decides that a client’s internal audit function may be relevant to the engagement, what two characteristics of the internal auditors should the external auditor assess? |
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Definition
| Competence and objectivity of the internal auditors |
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Term
| 539. What are some of the factors the external auditor should consider when assessing the competence of internal auditors? |
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Definition
| Educational level and professional experience of internal auditors; Professional certification and continuing education; Audit policies, programs, and procedures; Practices regarding assignment of internal auditors, supervision and review of internal auditors activities, quality of working paper documentation, reports and recommendations, and evaluations of internal auditors performance. |
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Term
| 540. When the auditor evaluates the organizational status of the internal audit function, what characteristic of the internal auditor is the external auditor assessing? |
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Definition
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Term
| 541. With respect to the organizational status of a client’s internal audit function, what relationship(s) is of greatest concern to the external auditor? |
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Definition
| Whether the organizational status ensures broad coverage and adequate consideration of, and action on, findings and recommendations of internal auditor. Whether the internal auditor has direct access to and reports regularly to the audit committee, or its equivalent. Whether the board of directors, the audit committee, or the owner-manager oversees employment decisions related to the internal auditor. |
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Term
| 542. On every GAAS audit, the external auditor must obtain a sufficient understanding of internal control. How might the internal auditor’s work affect the way in which the external auditor develops this understanding? |
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Definition
| Since a primary objective of many internal audit functions is to review, assess, and monitor controls, the procedures performed by the internal auditors in this area may provide useful information to the auditor. |
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Term
| On every GAAS audit, the external auditor must assess internal control. How might the internal auditors work affect the way in which the external auditor makes this assessment at the financial statement level? At the account balance or class of transactio |
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Definition
| the auditor may consider the results of procedures planned or performed by the internal control auditors, the results may provide appropriate info about the effectiveness of controls and change the N-T-E of testing the auditor would otherwise need to perform |
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Term
| 544. On every GAAS audit, the external auditor must determine the substantive tests to be performed. How might the internal auditor’s work affect the way in which the external auditor makes this determination? |
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Definition
| results of procedures can provide evidence the auditor may consider in restricting detection risk for the related assertions. The auditor may be able to change the timing of the confirmation procedures, the # of accts receivable to be confirmed, or the number of locations oh physical inventories to be observed |
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Term
| 545. How does a client’s internal audit function affect the external auditor’s responsibility as relates to the third standard of field work? |
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Definition
| internal auditors work may affect procedures performed by the auditor, but the auditor should obtain SCEM to support the auditor’s report – this responsibility cannot be shared |
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Term
| 546. Although the internal auditor’s work may affect the nature, timing, and extent of the work performed by the external auditor, certain crucial audit judgments cannot be delegated. What are some of these judgments? |
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Definition
| Because the external auditor has the ultimate responsibility to express an opinion on the financial statements, judgments about: 1. Assessments of inherent and control risks. 2. The materiality of misstatements. 3. The sufficiency of test performed. 4. The evaluation of significant accounting estimates. |
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Term
| 547. In making judgments about the extent of the effect of internal auditors’ work on the external auditor’s procedures, what three assertion-related characteristics should the external auditor consider? |
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Definition
| Materiality of financial statement amounts – that is, account balances or classes of transactions. Risk (inherent and control risk) of material misstatement of the assertions related to these financial statement amounts. Degree of subjectivity involved in the evaluation of the audit evidence gathered in support of the assertions. |
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Term
| How does Materiality, Risk, and Degree of Subjectivity influence the extent to which external auditors must rely upon their own work (i.e., as opposed to that performed by the internal auditors)? |
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Definition
| As the materiality of the financial statement amounts increases and either the risk of material misstatement or the degree of subjectivity increases and either the risk of material misstatement or the degree of subjectivity increases, the need for the auditor to perform his or her own tests of assertions increase. |
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Term
| 549. With regard to the extent to which the internal auditor’s work may affect the external audit, what is one example of an account and related assertion that normally will require direct testing by the external auditor? |
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Definition
| Valuation of assets and liabilities involving significant accounting estimates |
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Term
| With regard to the extent to which the internal auditor’s work may affect the external audit, what is one example of an account and related assertion that may not require direct testing by the external auditor? |
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Definition
| Existence of cash, prepaid assets, and fixed assets additions |
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Term
| 551. If the external auditor has decided to make use of the work of internal auditors, the quality and effectiveness of that work must be evaluated. What is one of the two ways in which the external auditor makes this evaluation? |
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Definition
| By re-examining some of the controls, transactions, or balances that the internal auditors examined. By also examining similar controls, transactions, or balances not actually examined by the internal auditors. |
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Term
| 552. In addition to utilizing the work they already may have done for the client, how else can the external auditor make use of the internal audit staff? |
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Definition
| They may assist the auditor in obtaining an understanding of internal control. They may perform tests of controls or substantive tests. |
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