AUD - 4

An auditor is reviewing changes in sales for a product. Sales volume (quantity) declined 10% while sales price increased by 25% for the product. Prior year sales were $75,000. The auditor expects this year's sales for the product to be approximately

$84,375

The work of internal auditors may affect the independent auditor's 1. Procedures performed in obtaining an understanding of internal control 2. Procedures performed in assessing the risks of material misstatement 3. Substantive procedures performed in gathering direct evidence

1, 2, and 3

Ann Covington, CPA, has been asked to perform a consulting services engagement concerning the analysis of a potential merger. She has little experience with the industry involved. What is her most appropriate action?

Accept the engagement and perform additional research or consult with others to obtain sufficient competence.

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 may

Allow the internal auditor to perform tests of internal controls

In which of the following instances would it be appropriate for the auditor to refer to the work of an appraiser in the auditor's report

An adverse opinion is expressed based on a difference of opinion between the client and the auditor's external specialist about the value of certain assets.

When auditing related party transactions, an auditor places primary emphasis on

Assessing the risks of material misstatement of related party transactions

An auditor may refer to and identify an auditor's external specialist in the auditor's report if the

Auditor expresses a disclaimer of an opinion as a result of the specialist's findings

An auditor referred to the findings of an auditor's external specialist in the auditor's report. This may be an appropriate reporting practice if the

Auditor's report contains a qualified opinion

Which of the following most likely would indicate the existence of related parties

Borrowing money at an interest rate significantly below the market rate

When assessing internal auditors' objectivity, an auditor should

Consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned

The auditor's evaluation of the reasonableness of accounting estimates

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

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

As part of the audit of fair value estimates and disclosures, an auditor may need to test the entity's significant assumptions. In these circumstances, the auditor should

Evaluate whether the assumptions individually and as a whole form a reasonable basis for the fair value estimates

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

Hill Corporation has hired Jones, a CPA, to audit its financial statements for year end. Jones, when searching for related party transactions, should seek information to obtain an understanding about each of Hill's subsidiary's relationships because

Hill's business structure might be designed in such a way as to deliberately obscure related party transactions.

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

George Karl, an auditor with extensive experience in the retail industry, is assigned to audit the reasonableness of accounting estimates in the Year 1 financial statements of Haas Company. Haas, which was formed in Year 1, markets fishing lures. Which of the following is the least important consideration for Karl's audit of the reasonableness of accounting estimates

Karl has never been involved in an audit of a company that sells fishing lures

For which of the following judgments may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective

Materiality of Misstatements - No Evaluation of Significant Accounting Estimates - No

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

May be individually reasonable but collectively indicate possible bias

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

During an audit, an internal auditor may provide direct assistance to an independent CPA in

Obtaining an Understanding of Internal Control - Yes Performing Tests of Control - Yes Performing Substantive Tests - Yes

In connection with the audit of financial statements by an auditor, the client suggests that members of the internal audit staff be used to minimize audit costs. For which of the following tasks may the auditor most appropriately request direct assistance from the internal audit staff

Preparation of schedules for negative accounts receivable responses

An auditor would be most likely to consider modifying an otherwise unmodified opinion if the client's financial statements include a note on related party transactions

Representing without substantiation that certain related party transactions were consummated on terms equivalent to those obtainable in transactions with unrelated parties.

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

Transactions indicative of the existence of related parties include all of the following except

Selling real estate at a price significantly different from the carrying amount.

In using the work of an auditor's external specialist, an agreement should exist between the auditor and the specialist as to the nature of the specialist's work. This agreement most likely should include

The applicability of the same confidentiality requirements to the auditor and the specialist.

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.

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 is true about the use of the work of an auditor's specialist

The auditor should obtain an understanding of the methods and assumptions used by the specialist

An auditor searching for related party transactions should obtain an understanding of each subsidiary's relationship to the total entity because

The business structure may be deliberately designed to obscure related party transactions

Which of the following factors should an external auditor obtain updated information about when assessing an internal auditor's competence

The educational level and professional experiences of the internal auditor

An auditor might consider the procedures performed by the internal auditors because

They are employees whose work may affect the nature, timing, and extent of audit procedures

Which of the following audit procedures is an auditor most likely not to perform related to newly identified related party transactions outside the normal course of business

Understand the controls over authorization and approval of such transactions

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

If the auditors plan to use the work of the internal auditors to obtain audit evidence or to provide direct assistance, they should assess the internal auditors'

competence and objectivity

When assessing an internal auditor's objectivity, an auditor should

consider the organizational level to which the internal auditor reports

In assessing the objectivity of internal auditors, an independent auditor should

determine the organizational level to which the internal auditors report

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

Which of the following is an element of a CPA firm's quality control policies and procedures applicable to the firm's accounting and auditing practice

engagement performance

An auditor must obtain professional experience primarily to

exercise professional judgment

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

which of the following is not considered an auditor's specialist

internal auditor

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

When assessing the competence of the internal auditors, an auditor should obtain information about the

quality of the internal auditors' working paper documentation

In evaluating an entity's accounting estimates, one of the auditor's objectives is to determine whether the estimates are

reasonable in the circumstances

In evaluating the reasonableness of an entity's accounting estimates, an auditor normally is concerned about assumptions that are

susceptible to bias

In using the work of an auditor's external specialist, an agreement should exist between the auditor and the specialist as to the nature of the specialist's work. This agreement most likely should include

the applicability of the same confidentiality requirements to the auditor and the specialist

In assessing the competence and objectivity of an entity's internal auditor, an independent auditor would least likely consider information obtained from

the results of analytical procedures