Chapter 4: Strategic Planning Issues

A corporate balance sheet indicates that one of the corporate assets is a patent. An auditor will most likely obtain evidence regarding the continuing validity and existence of this patent by obtaining a written representation from

A patent attorney.

The work of internal auditors may affect the independent auditor's Procedures performed in obtaining an understanding of internal control Procedures performed in assessing the risks of material misstatement Substantive procedures performed in gathering direct evidence

ALL THREE!

The auditor's evaluation of the reasonableness of accounting estimates

Considers that management bases its judgment on both subjective and objective factors.

After identifying related party transactions, an auditor most likely would

Determine whether the transactions were approved by the board of directors or other appropriate officials.

In evaluating the reasonableness of an entity's accounting estimates, an auditor considers whether assumptions are significant. These are most likely to be

Deviations from past experience.

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 the

Existence of fixed asset additions.

In which of the following circumstances is an auditor most likely to rely on work done by internal auditors?

For financial statement amounts judged by the auditor to require little or no subjectively evaluated audit evidence.

Which of the following steps should an auditor perform first to determine the existence of related parties?

Inquire about the existence of related parties from management.

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 will

Nevertheless need to make direct tests of assertions about material financial statement amounts for which the risks of material misstatement are high.

Buldger Retailing, Inc., has an internal auditing staff of four full-time auditors. The auditor has determined that the internal auditors are competent and objective. The auditor may share which of the following responsibilities with Buldger's internal auditors?

Performing substantive procedures.

In assessing the competence of internal auditors, an independent CPA most likely would obtain information about the

Quality of the internal auditors' working paper documentation.

Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions?

Reviewing accounting records for nonrecurring transactions recognized near the balance sheet date.

Which of the following procedures most likely could assist an auditor in identifying related party transactions?

Reviewing confirmations of compensating balance arrangements.

Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions?

Reviewing confirmations of loans receivable and payable.

An auditor most likely modifies the opinion if the entity's financial statements include a note on related party transactions

Stating without substantiation that a particular related party transaction occurred on terms equivalent to those that would have prevailed in an arm's-length transaction.

In auditing related party transactions, an auditor ordinarily places primary emphasis on

The adequacy of the disclosure of the related party transactions.

When a management's specialist has assumed full responsibility for taking the client's physical inventory, reliance on the specialist's work is acceptable if

The auditor conducted the same audit tests and procedures as would have been applicable if the client employees took the physical inventory.

Auditor expresses a qualified opinion or an adverse opinion related to the work of the specialist.

The auditor may refer to an auditor's external specialist only if the opinion is modified. A modified opinion is a qualified opinion, adverse opinion, or a disclaimer of opinion. The reference is made because it is relevant to understanding the modification. An auditor's report with such a reference should state that it does not reduce the auditor's responsibility (AU-C 620).

Which of the following statements is true about related party transactions?

The auditor should consider whether an identified related party transaction outside the normal course of business is appropriately accounted for and disclosed.

Which of the following statements concerning the auditor's use of the work of an auditor's external specialist is true?

The auditor's specialist should observe the same confidentiality requirements as the auditor.

For a reporting entity that has participated in related party transactions that are material, disclosure in the GAAP-based financial statements should include

The nature of the relationship and the terms and manner of settlement.

The independent auditor should understand the internal audit function as it relates to internal control because

The work performed by internal auditors may be a factor in determining the nature, timing, and extent of the independent auditor's procedures.

Ajax Company's auditor concludes that the omission of an audit procedure considered necessary at the time of the prior audit impairs the auditor's ability to support the previously expressed unmodified opinion. If the auditor believes shareholders are currently relying on the opinion, the auditor should promptly

Undertake to apply the omitted procedure or alternate procedures that would provide a satisfactory basis for the opinion.

An internal auditor would least likely provide direct assistance to the auditor in

evaluating accounting estimates