Term
| How does the external auditor view the internal audit (IA)? |
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Definition
| The external auditor uses the IA in determining the nature, timing, and extent of audit procedures. |
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Term
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Definition
| No, b/c they work for the entity. However, the internal audit activity (IAA) must be independent. |
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Term
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Definition
| IA s provide analyses, evaluations, assurances, recommendations, and other information to management and those charged with governance. |
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Term
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Definition
| includes an understanding of the IA function sufficient to identify activities relevant to audit planning |
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Term
| inquiries of IAs concern their... |
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Definition
Organizational status
Application of professional standards
Audit plan, including the nature, timing, and extent of audit work
Access to records and limitations on the scope of their work |
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Term
| What provides information about IA objectives? |
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Definition
| Inquiring about the IA's function's charter, mission statement, or similar directive provides information about its objectives. |
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Term
| Which IA activities are relevant to an F/S audit? |
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Definition
Evidence about the design and effectiveness of IC relating to the ability to initiate, authorize, record, process, and report financial data consistent with relevant assertions in the F/S.
Direct evidence about potential misstatements of financial data. |
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Term
| How do you assess relevance of IA activities? |
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Definition
Considering prior-year audits
Reviewing how the internal auditors allocate their audit resources
Reading IA reports |
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Term
| How does the relevance of IA activities correspond with the audit? |
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Definition
If the auditor concludes that the IA's activities are not relevant, s/he need not further consider the function unless the auditor requests their direct assistance.
The auditor may conclude that considering further the work of the IAs would be inefficient, even if some of their activities are relevant. |
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Term
| If IA activities are relevant, what should the auditor do? |
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Definition
| The auditor may decide that it is efficient to consider how the auditors' work might affect audit procedures. The auditor then should assess the competence and objectivity of the IAs in relation to the intended effect of their work on the audit. |
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Term
| assessing competence of IAs |
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Definition
Educational level and professional experience
Professional certification and continuing education
Audit policies, programs, and procedures
Practices regarding assignment of IAs
Supervision and review
Quality of documentation, reports, and recommendations
Performance evaluation |
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Term
| assessing Chief Audit Executive (CAE) position |
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Definition
The CAE reports to someone with sufficient status to ensure broad audit coverage and adequate consideration of, and action on, findings and recommendations.
The CAE has direct access and reports regularly to those charged with governance.
Those charged with governance oversee employment decisions by the CAE. |
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Term
| components of assessing competence and objectivity |
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Definition
| involves considering information from the auditor's previous experience, discussions w/management, and a recent external quality review. |
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Term
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Definition
| review, assess, and monitor IC |
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Term
| Does the IA function affect risk assessment? |
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Definition
Yes. Risk assessment at the financial-statement level involves an overall assessment of the RMM and thus may affect overall audit strategy.
IA function may affect overall risk assessment and decisions about audit procedures. |
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Term
| risk assessment at F/S level |
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Definition
| involves an overall assessment of the RMM and thus may affect overall audit strategy. |
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Term
| risk assessment at balance or class level |
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Definition
| involves obtaining and evaluating evidence about relevant assertions. Auditor assesses RMM for each relevant assertion and performs tests of controls to support an expectation of the operating effectiveness of controls. |
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Term
| Obtaining sufficient appropriate audit evidence and reporting on the F/S are the responsibility of... |
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Definition
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Term
| Judgments about risk assessments, materiality, sufficiency of tests, the evaluation of estimates, and other matters affecting the report are the responsibility of... |
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Definition
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Term
| The extent of the effect of the IA's work depends on... |
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Definition
| the materiality of amounts, RMMs, and the subjectivity involved in evaluating audit evidence. |
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Term
| When is direct testing by the auditor necessary? When is it not necessary? |
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Definition
| Direct testing is necessary when IA work has not reduced RMM and the degree of subjectivity enough to reduce audit risk to an acceptably low level. If RMM and DoS have been reduced sufficiently, then audit risk may be low enough. |
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Term
| When is audit work coordinated? |
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Definition
| When IA work is expected to affect audit procedures (IAAs are relevant). |
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Term
| How do IAs and auditors coordinate their work? |
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Definition
Holding periodic meetings
Scheduling audit work
Providing access to IAs' engagement records (documentation)
Reviewing audit reports
Discussing possible accounting and auditing issues |
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Term
| ISA rule w/regards to IA and auditor coordination |
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Definition
| The ISAs state that, when specific work of the IAs is to be used, it should be evaluated and tested. This only happens in the U.S. if IA work is expected to significantly affect the auditor's work. |
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Term
| using IAs to provide direct assistance |
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Definition
| The auditor may request direct assistance from the IAs when performing an audit. When direct assistance is provided, the auditor should assess the IAs' competence and objectivity and supervise, review, evaluate, and test the work performed by IAs to the extent appropriate. |
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Term
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Definition
| person/firm possessing special skill or knowledge in a particular field other than auditing or accounting |
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Term
| What are specialists used for? |
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Definition
Valuation
Determination of physical characteristics relating to quantity or condition
Determination of amounts by using special techniques or methods
Interpretation of technical requirements, regulations, or agreements |
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Term
| considerations for selecting a specialist |
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Definition
Professional certification, license, or other recognition of competence
Reputation and standing
Relationship w/client, preferably unrelated to client |
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Term
| ISA considerations for specialist |
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Definition
| capabilities and competence of specialist don't need to be evaluated if the expert is employed by the audit firm. |
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Term
| What should the auditor understand with regards to the specialist? |
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Definition
The objectives and scope of the work
The specialist's relationship, if any, with the client
Methods/assumptions used compared with those used in prior year
Appropriateness of using specialist's work
Form and content of specialist's report that will enable the auditor to evaluate whether the findings support the assertions |
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Term
| using the specialist's findings |
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Definition
| Auditor should obtain an understanding of the methods/assumptions used to determine whether the findings may serve as corroboration, consider whether the findings support the assertions, and test the data provided by the client. |
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Term
| referring to specialist in audit report (same as reference to additional auditors) |
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Definition
| Don't reference specialist in unqualified opinion w/emphasis-of-matter paragraph unless describing a substantial doubt about the entity's ability to continue as a going concern, emphasizing a matter, or if specialist departs from unqualified opinion. |
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Term
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Definition
| If the work of an expert in a modified report and a reference to or description of the work, the auditor obtains the permission of the expert. |
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Term
| accounting considerations for related parties |
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Definition
Accounting principles ordinarily do not require transactions w/related parties to be accounted for specially.
Emphasis on adequacy of disclosure.
Substance over form. |
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Term
| What types of transactions indicate the existence of related parties? |
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Definition
Borrowing or lending interest-free or at a rate significantly different from prevailing market rates at the time of the transaction
Selling real estate at a price significantly different from appraised value
Making nonmonetary exchanges of similar property
Making loans with no scheduled terms of repayment |
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Term
| auditing considerations for related parties |
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Definition
No special procedures for related-party transactions, but auditors should be aware of them when doing normal audit procedures.
Consider
IC relevant to management activities
Business purpose served by entity components
Whether business structure and operating style are designed to obscure related-party transactions. |
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Term
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Definition
| related party transactions |
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Term
| When should RPTs be considered out-of-the-ordinary? |
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Definition
When they are motivated by:
Lack of sufficient working capital or credit
Desire for favorable earnings to support stock price
Overly optimistic earnings forecast
Dependence on one or a few products, customers, or transactions for success
Declining industry w/many business failures
Excess capacity
Significant litigation, especially between shareholders and management
Significant obsolescence b/c entity is in a high-technology industry |
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Term
| When specific audit procedures are necessary for determining the existence of RPs, what should be done? |
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Definition
Evaluating the entity's procedures for identifying and properly accounting for RPTs
Requesting from management the names of all RPs and inquiring whether transactions occurred w/them
Reviewing filings when the SEC and other regulatory agencies for the names of Rps and for other businesses in which officers and directors occupy directorship or management positions
Determining the names of all pensions and other trusts established for employees and the names of their officers and trustees
Reviewing shareholder listings of closely held entities to identify principal shareholders
Reviewing prior years' audit documentation for the names of known RPs
Inquiring of predecessor, principal, or other auditors of related entities concerning their knowledge of existing relationships and the extent of management involvement in material transactions
Reviewing material investment transactions during the period to determine whether they have created RPs |
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Term
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Definition
Provide audit personnel w/names of known RPs
Review minutes of meetings of BOD and committees
Review SEC/regulatory filings
Review conflict-of-interest statements obtained by entity from its management
Review business transacted w/major customers, suppliers, borrowers, and lenders for indications of undisclosed relationships.
Consider whether unrecognized transactions are occurring, such as receiving or providing accounting, management, or other services at no charge or a major shareholder absorbing entity expenses
Review accounting records for large, unusual, or nonrecurring transactions or balances, especially those near the end of the period.
Review confirmations of compensating balance arrangements for indications that balances are or were maintained for or by RPs
Review invoices from law firms.
Review confirmations of loans receivable and payable for guarantees. |
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Term
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Definition
After identifying RPTs, auditor should become satisfied about their purpose, nature, extent, and effect.
Business purpose of transaction.
Examine invoices, executed copies of agreements, contracts, and other documents.
Determine whether the transaction has been approved by those charged w/governance.
Test for reasonableness the compilation of amounts to be disclosed or considered for disclosure.
Arrange for the audits of interentity balances to be performed as of concurrent dates, even if the fiscal years differ, and for the examination of specified, important, and representative RPTs by the auditors for each of the parties, w/appropriate exchange of relevant information.
Inspect or confirm and obtain satisfaction concerning the transferability and collateral value. |
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Term
| To understand a transaction, the auditor may... |
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Definition
Confirm the transaction amount and terms, including guarantees and other significant data, w/other parties.
Inspect evidence in possession of other parties.
Confirm or discuss significant information w/intermediaries.
Refer to financial publications, trade journals, and credit agencies.
W/respect to material uncollected balances, obtain information about the financial capabilities of the other parties. |
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Term
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Definition
Except for routine transactions, determining whether a transaction would have occurred if the parties had not been related or what the terms and manner of settlement would have ordinarily not been possible. Accordingly, representations by management that a transaction was consummated on terms equivalent to those that prevail in arm's length transactions are difficult to substantiate.
If transaction can't be substantiated, give qualified or adverse opinion. |
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Term
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Definition
approximates an element, item, or account by measuring the effects of past transactions or events or the current status of an asset or liability
Auditors should obtain and evaluate sufficient appropriate evidence to support significant accounting estimates. |
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Term
| Why are accounting estimates necessary? |
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Definition
Measurement or valuation may be uncertain pending future events.
Relevant data for past events cannot be accumulated on a timely, cost-effective basis. |
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Term
| Who is responsible for making judgments about accounting estimates? How are such estimates made? |
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Definition
| Management. These judgments are normally based on subjective as well as objective factors including knowledge about past and current events and assumptions about conditions and courses of action. |
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Term
| How should auditors evaluate the reasonableness of accounting estimates? |
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Definition
| in the context the F/S taken as a whole. |
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Term
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Definition
Even when the estimation process involves competent personnel using relevant and reliable data, potential bias exists in the subjective factors, and control may be difficult to establish.
Professional skepticism is necessary. |
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Term
| tolerable/reasonable difference |
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Definition
Difference between estimate best supported by the evidence and the F/S estimate must be reasonable/tolerable.
If it is not reasonable, is should be treated as a likely misstatement and aggregated w/other likely misstatements.
If differences are individually reasonable but collectively indicate possible bias, the auditor should reconsider the estimates as a whole. |
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Term
| developing accounting estimates |
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Definition
Determination of when estimates are required
Identifying the relevant factors
Accumulating relevant, sufficient, and reliable data
Developing assumptions regarding the most likely circumstances and events w/respect to the relevant factors
Determining the estimated amount based on the assumptions and other relevant factors
Determining that presentation and disclosure conform w/applicable accounting principles |
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Term
| RMM of accounting estimates varies with... |
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Definition
Complexity and subjectivity of the process
Availability and reliability of relevant data
Number, significance, and degree of uncertainty of the assumptions |
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Term
| relevant aspects of IC related to accounting estimates |
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Definition
Management communication of the need for proper estimates
Accumulation of relevant, sufficient, and reliable data
Preparation of estimates by qualified personnel
Adequate review and approval by proper authority of
Sources of relevant factors
Development of assumptions
Reasonableness of assumptions and resulting estimates
Consideration by proper authority of the need to use the work of specialists
Consideration by proper authority of changes in methods
Comparison of prior estimates with results to assess the reliability of the process
Consideration by management of whether the resulting estimate is consistent w/operational plans. |
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Term
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Definition
obtain sufficient appropriate evidence to provide reasonable assurance that
All material accounting estimates have been developed.
Estimates are reasonable/free from bias.
Presentation and disclosure conform w/applicable accounting principles. |
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Term
| audit procedures used to determine if all material accounting estimates have been made |
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Definition
Consider F/S assertions to determine need for estimates
Evaluate information obtained from other procedures- industry, litigation, minutes, regulatory agencies
Inquiring of management about circumstances indicating the need for an estimate. |
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Term
| evaluating reasonableness of estimate |
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Definition
key factors and assumptions that are
Significant to the estimate
Sensitive to variations
Different from historical patterns
Subjective and susceptible to misstatement and bias |
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Term
| How do auditors test management's process of developing the estimate? |
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Definition
Review and test the process used by management.
Develop an independent expectation of the estimate to corroborate management's estimate by using other key factors or alternative assumptions.
Review subsequent events. |
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Term
| reviewing and testing the process used by management to develop the estimates (specific steps in this( |
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Definition
Identifying any controls over the process that might be useful in the evaluation
Identifying the sources of data and factors used in forming the assumption and considering whether they are relevant, reliable, and sufficient in light of information from other audit tests
Evaluating whether the assumptions are consistent with each other and with relevant data.
Analyzing historical data used to develop assumptions to assess comparability, consistency, and reliability
Considering whether business or industry changes cause other factors to become significant to the assumption
Reviewing documentation of the assumptions and inquiring about plans and objectives that might related to them
Using the work of a specialist
Testing calculations used to translate assumptions and key factors into the estimate |
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Term
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Definition
| transactions occurring after the date of the balance sheet but prior to the date of the auditor's report that are important in identifying and evaluating the reasonableness of accounting estimates, key factors, or assumptions. |
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Term
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Definition
| amount at which an asset (liability) can be bought (incurred) or sold (settled) in a current transaction between willing parties, not in a forced sale. |
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Term
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Definition
| preferable measure of FV when it is available |
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Term
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Definition
| fair value measurement and disclosure. FVMD arise from initial recording or from later changes in value reflected in NI or OCI. |
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Term
| Management's responsibility w/regards to FVMD |
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Definition
| Management's responsibility is to establish a process for determining FVMD, selecting proper valuation methods, identifying significant assumptions, and ensuring conformity w/GAAP. |
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Term
| Must assumptions be included in valuation methods? |
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Definition
| Absent observable market prices, yes. |
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Term
| auditor understanding of FVMD |
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Definition
| The auditor should understand the entity's process for making FVMD and the relevant controls. This understanding is used to (like everything else) assess the RMM and determine the nature, timing, and extent of audit procedures. |
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Term
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Definition
The auditor evaluates internal and external evidence to determine whether significant assumptions, individually and in the aggregate, form a reasonable basis for FVMD.
Tests of the data used to prepare the FVMD are performed to verify that they are accurate, complete, and relevant.
The evaluation of whether fair-value disclosures conform w/GAAP is based on the same kinds of procedures as those applied to measurements in the statements. The auditor determines the adequacy of disclosures and assesses whether they are sufficiently informative about measurement uncertainty.
Written management representations about FVMD normally should concern the reasonableness of assumptions and whether they reflect the ability and intent to carry out specific relevant actions.
The auditor should communicate with those charged with governance about the process used to develop especially sensitive fair value estimates. |
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Term
| consideration of omitted audit procedures after the report date |
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Definition
When auditor decides that a necessary procedure was omitted, s/he should assess its importance to his/her current ability to support the previously expressed opinion.
The results of other procedures applied or audit evidence obtained in a later audit (possibly at an interim date) may compensate for an omitted procedure. |
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Term
| Should the auditor do the omitted procedure, especially since the auditor is not obligated to review the work after the report date? |
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Definition
The auditor may determine that the omission impairs his/her current ability to support the opinion. If s/he believes persons are currently relying- or are likely to rely- on the report, the auditor should promptly undertake to apply the omitted procedure or alternative procedures that would provide a satisfactory basis for the opinion.
If the auditor is unable to apply the previously omitted procedure or alternative procedures, s/he should consult an attorney. |
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