If the auditor request an internal auditor to directly assist…what type of work may the internal auditor assist with?
- In obtaining understanding of internal control
- Performing test of controls
- Performing substantive procedures.
Can an internal auditor assist auditor in all phases of the audit?
Yes. The internal auditor may assist if:
- internal auditor competence and objectivity has been assessed.
- if the auditor, supervises, reviews, evaluates, and tests the work performed by the internal auditor to the extent appropriate.
When is objectivity promoted?
When internal auditors:
1. report to those charged with governance NOT management
- are free of any conflicting responsibilities.
- work without constraints
- are members of professional organizations that obligate them to be objective.
External auditor should assess each factor when evaluating objectivity.
Can direct testing of assertions with risk of high material misstatements be eliminated, if auditor decides to use the work of internal auditors who are competent and objective, and their work is relevant to the audit?
NO. when amounts are material, and RMM’s are high, or evaluation of material is highly subjective, the considerations of internal auditors work alone cannot reduce the audit risk to an acceptable low.
Auditor is solely responsible for reporting, and makes all judgements about matters affecting the report.
When should an auditor refer to an external specialist in the auditor’s report?
Only if the opinion is modified.
The reference is made because it is relevant to understanding the modification.
An auditor report with such reference should state “it does NOT reduce the auditors responsibility”
What is a modified opinion?
A qualified opinion, adverse opinion, or disclaimer of opinion.
What is a patent?
an intangible asset representing a governmental rights to an invention for a specified time.
How would an auditor obtain validity of a continuing and existing patent?
auditor should obtain a written representation from an auditor’s specialist.
A patent attorney is an auditors external specialist who has expertise not normally possessed by auditors.
Attorney can perform research and express an opinion on which the auditor may reasonably rely.
who is responsible for observation of inventories?
the auditor. whether the client or external specialist takes count of inventory.
Auditor should:
- Examine the specialist’s program.
- Observe its procedures and controls
- make or observe some physical count.
- recompute calculations
- test intervening transactions.
what should an auditor obtain when using a specialist expertise?
auditor should obtain an understanding of specialist sufficient to:
- determine the nature, scope, and objective of the work.
- evaluate the adequacy of the work for the auditors purposes.
What does the application of a systematic and disciplined approach do to planning, performing, supervising, reviewing, and documenting internal auditing activities ?
Systematic and disciplined approach distinguishes it from other monitoring controls that may be performed in the entity
The auditor cannot share work to make judgements with the internal auditor, because the auditor has the ultimate responsibility to express opinion on the FS judgement about:
- Assessments of RMMs
- Materiality of misstatements
- Sufficiency of test performed
- Evaluation of significant accounting estimates.
- Other matters affecting the auditors report always should be those of the auditor.
What is a management specialist?
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.
After identifying a significant related party transaction outside the entity’s normal course of business, an auditor should:
Evaluate the business purpose of the transaction.
Evaluate:
1. the business purpose or (lack of business purpose) implies transaction intent was fraudulent.
2, terms are consistent with management explanations
3. The accounting and disclosure are appropriate.
What are some events that suggests related party transactions?
- Exchanging property for similar property. (non monetary transaction)
- Borrowing or lending at rates significantly above or below market rates.
- Selling realty at a price materially different from its appraised value, and
- Making loans with no scheduled repayment terms.
Why does the auditor places primary emphasis on assessing the RMMs of related party transactions?
Because it is the auditors responsibility to perform audit procedures to identify, assess, and respond to the risk of material misstatements (RMM) arising from the entity failure to account for or disclose related party relationships, transactions, or balances.
An auditor most likely modify the opinion if the entity’s FS include a note on related party transactions:
stating without substantiation that particular related party transaction occurred on terms equivalent to those that would have prevailed in arms-length transactions.
Auditor must obtain sufficient appropriate audit evidence.
Management is responsible for substantiating the assertion.
What are some procedures to identify related party transactions?
- review of minutes from board of director and its committee meetings
- review of filings with regulators.
- Review of conflict of interest statements
- review of transactions with major customers, suppliers, lenders, and borrowers.
- Review of accounting records for large, unusual, or nonrecurring transactions or balances
- review of Invoices of law firms
- review of confirmations of compensating balances arrangements.
what step should an auditor perform first in attempt to determine existence of related parties transactions?
auditor should inquire of management:
1. the identity of entity related parties. including changes from prior period.
- the relationship of the entity with those parties and
- the types and purposes of transactions with them.
What are some factors considered when the auditor evaluates the reasonableness of estimates?
- The entity experience in making past estimates.
- Any changes that may cause factors different from those previously considered to become significant.
- The need to obtain written representations from management regarding the key factors and assumptions.
What are the auditors evaluation of reasonableness of accounting estimates based on?
Subjective and objective factors. Control over estimates may be difficult to establish. Given the potential bias in the subjective factors.
The auditor should adopt an attitude of professional skepticism toward both subjective and objective factors.
When evaluating the entity accounting estimates, the auditor objective is to?
evaluate the reasonableness of the accounting estimates made by management in the context of the applicable financial reporting framework.
