auditing

95) External auditors should consider the work of internal auditors in their assessment of control risk. a. Are internal auditors independent of management? Explain. b. What is the difference between the primary objective of the external auditors and that of internal auditors? Explain. c. Discuss the factors that should be considered by the external auditors in deciding how much, if any, reliance should be placed on the work of the internal auditors.

No. However, internal auditors may achieve independence from departments they evaluate by reporting to a senior officer, the board of directors, or ideally, the audit committee. b. The external auditors' objective is to express an opinion on the client's financial statements. The internal auditors' primary objective is to aid management in achieving the most efficient and effective administration of the business. c. In deciding the degree of reliance to be placed on the work of the internal auditors, the external auditors should consider the competence, objectivity, the disciplined approach of the internal auditors, and evaluate their work.

Analytical procedures are substantive procedures that may be used to provide evidence about specific accounts and classes of transactions. a. Describe three major types of comparisons the auditor might make in performing analytical procedures b. At what stages of the audit are analytical procedures performed and what purpose do they serve at each stage?

a. comparison to prior year data comp with industry statistics comp with non-financial data b. 1. During risk assessment to identify items that require more audit attention (required analytical procedures). 2. Throughout the audit as a substantive procedure for accounts or classes of transactions. 3. Near the end of the audit to corroborate audit evidence obtained during the audit to assist the auditor in drawing reasonable conclusions (required analytical procedures).

Audit working papers are an integral part of an examination in accordance with generally accepted auditing standards. a. Describe three major functions of the audit working papers. b. Distinguish between the permanent working paper file and the current working paper file.

a. Aid in review of the work. Provide support for the auditors' report. Aid in planning and conducting future audits b. . The permanent file is used to organize working papers of continuing audit interest over a number of years. The current file contains the administrative and evidence working papers for the year under examination.

Audit sampling is used in conjunction with many audit tests, and may be performed on a statistical or nonstatistical basis. a. Define the term audit sampling. b. List and explain two advantages of the use of statistical sampling as compared to nonstatistical sampling.

a. Audit sampling is performing a test on less than 100 percent of an audit population to make a conclusion about a characteristic of the population. b. Statistical sampling may assist the auditors in (only two required): • Designing efficient samples. • Measuring the sufficiency of the evidence obtained. • Objectively evaluating sample results (measuring sampling risk).

84) Many auditors take an approach to assessing the risk of material misstatement by beginning with an assessment of business risks. a. Define business risks. b. Why have auditors found it effective to take the approach of assessing business risks? c. Identify a business risk and explain how it might affect the auditor's audit procedures.

a. Business risks are those that threaten management's ability to achieve the organization's objectives. b. Auditors have found this approach effective because significant business risks often create related risks of material misstatement (inherent risks) that the auditors should address in designing their audit procedures. Assume that the auditors have identified as a significant business risk and audit risk that sales personnel, informally or through written side agreements, may be modifying the terms of contracts with customers which may affect the amount of revenue that should be recognized. The auditors must design tests that are focused on determining whether such modifications of terms have been made, perhaps by obtaining tailored confirmations from customers about the existence of such side agreements.

Teal Corporation has 2,000 accounts receivable, with a total book value of $300,000. Ricardo Ramaro, CPA, has selected and audited a sample of 100 of the accounts with a combined book value of $16,100; the total of the audited values was $16,000. Using the mean-per-unit method, calculate the: a. Accounts receivable estimated audited value. b. Projected misstatement.

a. The accounts receivable estimated audited value is calculated as: Estimated total audited value = Mean audited value × Number of accounts = $161 × 2,000 accounts = $322,000 b. The projected misstatement is calculated as the difference between the estimated total audited value and the book value, calculated as follows: Projected Misstatement = Est. total audited value − Book value of population = $322,000 − 300,000 = $22,000 overstatement

) When considering a client's internal control, the auditors focus on its various characteristics. For each of the following characteristics indicate the auditors' responsibility under generally accepted auditing standards and the procedures used to meet that responsibility. a. The design of internal control. b. Controls have been implemented (placed in operation). c. The operating effectiveness of controls.

a. The auditors have a responsibility to obtain an understanding of internal control that is sufficient to plan the audit. An understanding of the design of the structure is obtained by inspecting control manuals, organization charts, and job descriptions, and by interviewing client personnel. b. The auditors have a responsibility to determine whether significant internal control policies and procedures are implemented (placed in operation) in every audit. The auditors may determine whether the controls have been implemented (placed in operation) by observation, inspection, and inquiry. Walk-through tests may also be used. c. The auditors have a responsibility to determine the operating effectiveness of controls that provide the basis for the auditors' assessment of control risk at levels below the maximum. The auditors use observation, inspection, inquiry, and reperformance to test the operating effectiveness of controls.

Auditors are required to consider a client's internal control. a. Describe the two purposes of the auditors' consideration of a client's internal control. b. Even the best internal control has certain limitations. List three of those limitations.

a. The auditors' consideration of their clients' internal control is integral to both (1) to assess the risks of material misstatement in the financial statements and (2) to design the nature, timing and extent of further audit procedures. b Carelessness. • Misunderstanding of instructions • Top management may override the system.

As a part of the planning process, auditors develop an audit strategy, an audit plan, and a time budget. a. Describe an audit strategy and explain its purpose. b. Describe an audit plan and explain its purpose. c. Describe a time budget and explain its purpose.

a. The overall audit strategy involves determining the characteristics of the engagement that define its scope, determining the engagement's reporting objectives to plan the timing of procedures, and considering important factors that will determine the focus of the audit team's efforts. b. The audit plan is a written or electronic document that includes the nature, timing, and extent of audit procedures to be performed by the audit team members in order to obtain sufficient audit evidence. It includes planned risk assessment procedures, planned further audit procedures, and other necessary audit procedures. It is also used as a tool for scheduling and controlling the work. c. The time budget includes an estimate of the time required for each audit task. It serves as a basis for the fee estimate, controls the audit work, and may be used to evaluate performance by the audit staff.

Engagement letters are used by most auditors in performing professional services. a. Describe the purpose of an engagement letter. b. List four items that are normally included in an engagement letter.

a. The purpose of an engagement letter is to establish a written contract between the auditors and the client. Thus, the letter tends to prevent misunderstandings between those two parties. b.• Name of the entity and statements to be examined • Scope of services. • Description of responsibility for detecting fraud • Obligations of the client's staff to prepare schedules