Miller Retailing, Inc., maintains a staff of three full-time internal auditors. The independent auditor has found that they are competent and objective. Moreover, the work of the internal auditors is relevant to the audit, and it is efficient to consider how that work may affect the audit. The independent auditor most likely willA. Not evaluate and test the work performed by the internal auditors.B. Increase the extent of the procedures needed to reduce control risk to an acceptable level.C. Nevertheless need to make direct tests of assertions about material financial statement amounts for which the risks of material misstatement are high. D. Decrease the extent of the tests of controls needed to restrict audit risk to the acceptable level.
Answer (C) is correct.
In assessing the competence and objectivity of an entity’s internal auditor, an independent auditor would least likely consider information obtained fromA. External quality reviews of the internal auditor’s activities.B. The results of analytical procedures.C. Previous experience with the internal auditor.D. Discussions with management personnel.
Answer (B) is correct.
Which of the following factors would the independent auditor most likely consider in assessing the objectivity of an internal auditor?A. The internal auditor attends a number of comprehensive continuing professional education courses each year.B. The audit committee reviews employment decisions related to the director of internal auditing.C. The internal auditor has obtained the Certified Internal Auditor designation. D. The internal auditor was previously an employee of the auditor’s public accounting firm.
Answer (B) is correct.
The independent auditor should understand the internal audit function as it relates to internal control becauseA. The work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor’s procedures.B. The procedures performed by the internal audit staff may eliminate the independent auditor’s need for considering internal control.C. The understanding of the internal audit function is an important substantive test to be performed by the independent auditor. D. The audit programs, audit documentation, and reports of internal auditors may often be used as a substitute for the work of the independent auditor’s staff.
Answer (A) is correct.
An internal auditor would least likely provide direct assistance to the auditor inA. Performing substantive procedures.B. Performing tests of controls.C. Obtaining an understanding of internal control. D. Evaluating accounting estimates.
Answer (D) is correct. The auditor has the ultimate responsibility to express an opinion on the financial statements. Judgments about (1) assessments of the risks of material misstatement, (2) materiality of misstatements, (3) sufficiency of tests performed, (4) evaluation of significant accounting estimates, and (5) other matters affecting the auditor’s report always should be those of the auditor.
The work of internal auditors may affect the independent auditor’sI. Procedures performed in obtaining an understanding of internal controlII. Procedures performed in assessing the risks of material misstatement III. Substantive procedures performed in gathering direct evidence
I, II, and III.Answer (D) is correct. The internal audit function is part of the client’s internal control. The auditor should obtain an understanding of this function when obtaining an understanding of internal control. The auditor also may use the internal auditors to provide direct assistance under certain conditions. A primary purpose of internal auditors is to review, assess, and monitor internal control. Thus, their work is relevant to the understanding of internal control and the assessment of risk. Moreover, some procedures performed by internal auditors, such as confirmations, may provide direct evidence about material misstatements.
Which of the following statements is correct regarding an independent auditor’s reliance on a client’s internal audit staff?A. An independent auditor should not reduce the amount of audit testing based on the work of internal auditors.B. An internal auditor should provide direct assistance to the independent auditor during preparation of audit workpapers.C. An independent auditor should use internal audit workpapers when available. D. An independent auditor should assess the organizational status of the director of internal audit.
Answer (D) is correct. Given an expectation of using the work of the internal auditors, the external auditor’s objectives include determining (1) whether to use their work and in what ways and (2), if using their work, whether it is adequate for audit purposes. To determine whether internal audit work can be used to obtain audit evidence, the external auditor should evaluate (1) the competence of the internal audit function,(2) the extent to which its organizational status and policies and procedures support its objectivity, and (3) its application of a systematic and disciplined approach (including quality control). Factors affecting objectivity include whether the internal audit function’s organizational status supports its ability to be free from bias, conflict of interest, or undue influence. For example, the external auditor should determine whether the internal audit function reports to (1) those charged with governance, (2) an officer with appropriate authority, or (3) management but with direct access to those charged with governance.
An auditor might consider the procedures performed by the internal auditors becauseA. They are employees whose work must be reviewed during substantive testing.B. Their work affects the cost-benefit trade-off.C. They are employees whose work may affect the nature, timing, and extent of audit procedures. D. Their degree of independence may be inferred from the nature of their work.
Answer (C) is correct.
Which of the following factors most likely would assist an auditor in assessing the objectivity of the internal auditor?A. The organizational status of the director of internal audit.B. The appropriateness of internal audit conclusions in the circumstances.C. The professional certifications of the internal audit staff. D. The consistency of the internal audit reports with the results of work performed.
Answer (A) is correct. If the external auditor plans to use the work of the internal auditors to obtain audit evidence or to provide direct assistance, the competence and objectivity should be evaluated. Objectivity is promoted when the internal auditors(1) report to those charged with governance rather than management, (2) are free of any conflicting responsibilities, (3) work without constraints, and (4) are members of professional organizations that obligate them to be objective. The external auditor should assess each of these factors in evaluating objectivity.
The company being audited has an internal auditor that is both competent and objective. The auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the auditor mayA. Allow the internal auditor to audit a major subsidiary of the company.B. Allow the internal auditor to perform tests of internal controls.C. Allow the internal auditor to perform analytical procedures but not be involved with any tests of details. D. Not assign any task to the internal auditor because of the internal auditor’s lack of independence.
Answer (B) is correct.
In which of the following circumstances is an auditor most likely to rely on work done by internal auditors?A. For financial statement amounts determined largely or entirely on the basis of estimates made by management.B. For financial statement amounts judged by the auditor to require little or no subjectively evaluated audit evidence.C. If financial statement amounts are material and the degree of subjectivity in evaluating the audit evidence is high. D. If the internal auditors have concluded that the risk of material misstatement at the overall financial level is negligible.
Answer (B) is correct.
An internal auditor’s work would most likely affect the nature, timing, and extent of an independent auditor’s auditing procedures when the internal auditor’s work relates to assertions about theA. Existence of fixed asset additions.B. Valuation of related party transactions.C. Valuation of intangible assets. D. Existence of contingencies.
Answer (A) is correct. |