Strategic Planning Issues

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?

Assessment of Inherent Risk - NO Assessment of Control Risk - NO

A management's specialist most likely is useful to

Assist the client in preparing the financial statements.

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

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

I., II., & III.

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 - YES Evaluation of Significant Accounting Estimates - YES

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 Controls - YES Performing Substantive Tests - YES

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

Quality of the internal auditor's documentation

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

Which of the following would not necessarily be a related party transaction?

a sale to another corporation with a similar name

Which approach to planning, performing, supervising, reviewing, and documenting internal audit activities distinguishes it from other monitoring controls that may be performed within the entity

a systematic and disciplined approach

The existence of a related party transaction may be indicated when another entity

absorbs expenses of the corporation

When assessing an internal auditor's competence, an auditor ordinarily obtains information about all of the following except

access to information about related parties

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

Which of the following statements is correct regarding an independent auditor's reliance on a client's internal audit staff?

an independent auditor should assess the organizational status of the director of internal audit

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 who uses the work of an auditor's external specialist may refer to and identify the specialist in the auditor's report if the

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

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

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

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 judgement on both subjective and objective factors

An auditor is assessing the appropriateness of management's rationale for selecting a model to measure the fair value of debt securities. If, during the current year, an active trading market for the debt security was introduced, the auditor should validate each of the following criteria, EXCEPT whether the valuation model is

consistently applied from prior periods

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

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

educational background and professional certification of the internal auditors

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 reasonable basis for the fair value estimates

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

evaluating accounting 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

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

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

internal auditor

In assessing the competence of a client's internal auditor, an auditor most likely would consider the

internal auditor's compliance with professional internal auditing standards

Which of the following events most likely indicates the existence of related parties?

making a loan without scheduled terms for repayment of the funds

Auditors should obtain and evaluate sufficient appropriate evidence to support significant accounting estimates. Differences between the estimates best supported by the evidence and those in the financial statements

may be individually reasonable but collectively indicate possible bias

In using the work of an auditor's external specialist, an auditor may refer to the specialist in the auditor's report if, as a result of the specialist's findings, the auditor

modifies the opinion because of a material misstatement with effects that are not pervasive

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

When performing procedures to identify and assess the risks of material misstatement for accounting estimates, the auditor should

obtain an understanding of how management developed its estimates

Which of the following procedures would an auditor ordinarily perform first in evaluating the reasonableness of management's accounting estimates?

obtain an understanding of how management makes its estimates

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 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

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

quality of the internal auditor's 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

An auditor who uses the work of an auditor's external specialist may refer to the specialist in the auditor's report if the

reference is needed for an understanding of a modification of the opinion

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 procedures would most likely assist an auditor in identifying related party transactions?

review the minutes of the meetings of the board of directors and its committees

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 loan receivable and payable

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

selling real estate at a price significantly different from appraised value

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

Which of the following events most likely would indicate the existence of related party transactions?

selling real estate at a price that differs significantly from its appraised value

An auditor intends to use the work of an actuary. Under these circumstances, the auditor

should assess the actuary's competence and objectivity

Auditors should evaluate significant accounting estimates included in the financial statements. The auditor

should understand how management developed the estimate but may adopt a variety of approaches to evaluating its reasonableness

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

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

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

susceptible to bias

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

the adequacy of the disclosure of the related party transaction

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

Which of the following factors would the independent auditor most likely consider in assessing the objectivity of an internal auditor?

the audit committee reviews employment decisions related to the to the director of internal auditing

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

Under which of the following circumstances would an auditor be considered to be using the work of a specialist?

the auditor engages a lawyer to interpret the provisions of a complex contract

Which of the following statements is correct concerning an auditor's use of the work of an actuary in assessing a client's pension obligations?

the auditor is required to understand the objectives and scope of the actuary's work

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

Which of the following statements is correct regarding accounting estimates?

the auditor's objective is to evaluate whether accounting estimates are reasonable in the circumstances

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

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

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

Which of the following factors most likely would assist an auditor in assessing the objectivity of the internal auditor?

the organizational status of the director of internal audit

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

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

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

What is the primary purpose of reviewing conflict-of-interest statements signed by members of management?

to identify transactions with related parties

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

During the audit of fair value estimates and disclosures, the auditor most likely should

use the understanding of the audited entity's process for determining fair value estimates to assess the risks of material misstatement

Which of the following events least likely would indicate the existence of related party transactions?

writing off obsolete inventory to net realizable value just before year end