Internal Auditor Independence: Auditing Theory Quiz and Flashcards

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Questions and Answers

To operate effectively, an internal auditor must be independent of:

The line functions of the organizations

Internal auditor does not need to be independent of the entity and any member of the organization

The entity (correct)

The employer-employee relationship which exists for other employees in the organization

To provide for the greatest degree of independence in performing internal auditing functions, an internal auditor most likely should report to:

Audit Committee (correct)

Controller

Board of Directors

VP for Finance

Which statement is correct regarding the relationship between internal auditing and the external auditor?

The external audit function's objectives vary according to management's requirements

Certain aspects of internal auditing may be useful in determining the nature, timing and extent of external audit procedures (correct)

Some judgments relating to the audit of the financial statements are those of the internal auditor

The external auditor is responsible for the audit opinion expressed, however that responsibility may be reduced by any use made of internal auditing

Which of the following statements is not a distinction between independent auditing and internal auditing?

Although independent auditors strive for both validity and relevance of evidence, internal auditors are concerned almost exclusively with validity Signup and view all the answers

Physical examination of tangible assets is not a sufficient form of evidence when the auditor wants to determine the:

Ownership of the asset Signup and view all the answers

Which of the following audit procedures is used extensively throughout the audit but does not, by itself, provide sufficient appropriate evidence?

Inquiry Signup and view all the answers

Evidence obtained directly by the auditor is more reliable than information obtained indirectly. Which of the following is not an example of the auditor’s direct knowledge?

Observation Signup and view all the answers

In testing for lower-of-cost-or-net realizable value, the auditor is gathering evidence to support which of the following assertions?

Valuation Signup and view all the answers

What is the primary purpose of an audit program?

Achieve specific audit objectives with selected audit procedures Signup and view all the answers

An audit program is prepared for an audit engagement because it aids in instructing assistants in the work to be done.

True Signup and view all the answers

When can the audit program usually be finalized?

Consideration of the entity’s internal control has been completed Signup and view all the answers

Audit procedures may be classified as ______ and further audit procedures. Risk assessment procedures focus on obtaining an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement at the financial statement and assertion levels.

risk assessment procedures Signup and view all the answers

Match the audit risk components that may be assessed in quantitative terms:

Inherent Risk = No Control Risk = No Detection Risk = Yes Signup and view all the answers

In making arrangements for an audit, which of the following should there be a clear understanding between the auditor and the client? (Select the incorrect option)

Terms of settlement for audit services Signup and view all the answers

Which of the following statements is/are correct regarding recurring audit engagements? Statement 1: The auditor should consider revising the terms of engagement. Statement 2: A new engagement letter is required each year for an established client.

Only statement 2 is correct Signup and view all the answers

Auditors may decide not to send a new engagement letter on a recurring audit engagement in which of the following situations?

Indications of misunderstanding of the objective and scope of the audit Signup and view all the answers

Why is a client’s insistence on quick reporting after the fiscal year end concerning to auditors?

Time pressure from unrealistic deadlines increases the risk of errors in judgment and audit procedures Signup and view all the answers

If the auditor concludes there is reasonable justification for a change in engagement, what should the report include?

Include reference to the original engagement Signup and view all the answers

Which of the following Philippine Standards are to be applied to compilation engagements, agreed-upon procedures, and other related standards as specified by the AASC?

PSREs Signup and view all the answers

These are issued to provide interpretative guidance and practical assistance to professional accountants in implementing PSAs and to promote good practice.

PAPSs Signup and view all the answers

Assurance engagement is:

An engagement intended to enhance the credibility of information about a subject matter Signup and view all the answers

The single feature that most clearly distinguishes auditing, attestation, and assurance is:

Type of service Signup and view all the answers

It refers to the auditor's satisfaction as to the reliability of an assertion being made by one party for use by another party.

Assurance Signup and view all the answers

The three types of attestation services are:

Audits, compilations, and other attestation services Signup and view all the answers

Assurance engagement includes the following, except:

An engagement conducted to provide a moderate level of assurance Signup and view all the answers

Which of the following is an objective of a review engagement?

Reporting whether material modifications should be made to financial statements Signup and view all the answers

Not all engagements performed by professional accountants are assurance engagements. Other engagements frequently performed by professional accountants that are not assurance engagements include the following, except:

Management consulting Signup and view all the answers

Unlike consulting services, assurance services:

Report on quality information Signup and view all the answers

Which of the following is a management control method that most likely could improve management's ability to supervise company activities effectively?

Establishing budgets and forecasts to identify variances from expectations. Signup and view all the answers

PSA 315 requires the auditor to obtain an understanding of the client’s internal controls for which audits?

Whenever it would be appropriate Signup and view all the answers

In planning the audit, what is not among the auditor's primary objectives for obtaining an understanding of existing internal control?

Design effective substantive tests. Signup and view all the answers

The primary purpose of the auditor’s consideration of internal control is to provide a basis for

Determining the nature, timing and extent of audit tests to be applied. Signup and view all the answers

When obtaining knowledge about an entity's internal control, the auditor should consider the competence of its employees.

True Signup and view all the answers

Match the following internal control evaluation components:

Evaluating the design of a control = Considering whether the control, individually or in combination with other controls, is capable of effectively preventing, or detecting and correcting, material misstatements. Determining whether the control has been implemented = Determining whether the control exists and that the entity is using it. Testing the effectiveness of a control = Observing the application of specific controls. Signup and view all the answers

What describes the phrase 'evaluating the design of a control'?

Considering whether the control, individually or in combination with other controls, is capable of effectively preventing, or detecting and correcting, material misstatements. Signup and view all the answers

The procedures employed in doing compilation are:

Not designed to enable the accountant to express any form of assurance. Signup and view all the answers

Indicate the level of assurance provided by audit and related services:

Audit = High Review = Moderate Agreed-upon procedures = Limited Compilation = None Signup and view all the answers

The expertise that distinguishes auditors from accountants is in the

Accumulation and interpretation of evidence. Signup and view all the answers

Identify the following as financial audit (FA), compliance audit (CA), and operational audit (OA):

A supervisor is not carrying out his assigned responsibilities.

A company's tax return does not conform to income tax laws and regulations.

A municipality's financial statements correctly show actual cash receipts and disbursements.

A company's receiving department is inefficient.

OA, CA, CA, OA Signup and view all the answers

Independent auditing can best be described as a

Discipline that attests to the results of accounting and other operations and data Signup and view all the answers

An operational audit is designed to

Assess the efficiency and effectiveness of management's operating procedures Signup and view all the answers

A review of any part of an organization's procedures and methods for the purpose of evaluating efficiency and effectiveness is classified as a (n)

Operational audit Signup and view all the answers

An audit designed to determine the extent to which the desired results of an activity established by the legislative or other authorizing body are being achieved is a (an)

Program audit Signup and view all the answers

Of the following, which best describes what is meant by the term PSA?

Pronouncements issued by the Auditing Standards Board. Signup and view all the answers

A financial statement audit:

Guarantees that FS are presented fairly. Signup and view all the answers

Which of the following best describes the objective of an audit of financial statements?

To express an opinion whether the financial statements are prepared in accordance with prescribed criteria. Signup and view all the answers

Which of the following is responsible for an entity's financial statements?

The entity's management Signup and view all the answers

For an entity's financial statements to be presented fairly in conformity with PFRS, the principles selected should:

Reflect transactions in a manner that presents the financial statements within a range of acceptable limits. Signup and view all the answers

As used in auditing, which of the following statements best describes 'assertions'?

Assertions are the representations of management as to the fairness of the financial statements. Signup and view all the answers

How does the auditor communicate the results of their work in auditing?

Through the audit report Signup and view all the answers

Which of the following least likely limits the auditor's ability to detect material misstatement?

Most audit evidences are conclusive rather than being persuasive. Signup and view all the answers

What matters would an auditor most likely consider when establishing the scope of the audit?

The expected audit coverage, including the number and locations of the entity’s components to be included. Signup and view all the answers

Which of the following statements is always correct in the planning phase of an audit engagement?

A portion of the audit of a continuing audit client can be performed at interim dates. Signup and view all the answers

How would an auditor most likely compensate for the limitation that the documentation of purchase transactions will be retained for only a short period of time?

Perform tests several times during the year, rather than only at year-end. Signup and view all the answers

Which matter would an auditor least likely consider when setting the direction of the audit?

The manner in which the auditor emphasizes to engagement team members the need to maintain a questioning mind and to exercise professional skepticism in the gathering and evaluation of audit evidence. Signup and view all the answers

Study Notes

Assurance and Non-Assurance Engagements

Assurance engagements include all types of attestations, such as audits, reviews, and agreed-upon procedures.
The primary goal of the CPA in performing the attest function is to determine whether the client's assertions are fairly stated.
Assurance engagements provide a level of assurance to users, which can be high, moderate, or limited.
Non-assurance engagements include services like management consulting, compilation of financial or other information, and examination of prospective financial information.

Types of Assurance Engagements

Audits: provide a high level of assurance that the subject matter conforms in all material respects with identified suitable criteria.
Reviews: provide a moderate level of assurance that the subject matter is plausible in the circumstances.
Agreed-upon procedures: provide a limited level of assurance that the subject matter conforms in all material respects with identified suitable criteria.

Criteria for Evaluating Subject Matter

Criteria are the standards or benchmarks used to evaluate or measure the subject matter of an assurance engagement.
Criteria must be suitable, which means they are relevant, sufficient, and neutral.
Examples of criteria include International Accounting Standards, Generally Accepted Accounting Principles, and Regulations of the BIR.

Risk and Evidence

The risk of misstatement affects the level of assurance required, and therefore the amount of evidence needed.
The sufficiency and appropriateness of evidence are interrelated, and the practitioner must use professional judgment and exercise professional skepticism to determine the sufficiency and appropriateness of evidence.
Obtaining more evidence will not compensate for its poor quality.

Independence

Independence is a critical aspect of the independent practitioner's attest function.
The Code of Ethics requires independence in mind and appearance, and ultimately, the decision about whether or not a practitioner is independent must be made by the practitioner.
Independence is especially important in audit engagements, as it provides assurance to a wide range of potential users.

Auditing

Auditing is a discipline that attests to the results of accounting and other operations and data.
Independent auditing can be described as a professional activity that measures and communicates financial and business data.
An audit is designed to provide assurance that the financial statements are presented fairly in conformity with the identified financial reporting framework.

Types of Audits

Financial audit: examines the financial statements and expresses an opinion on their fairness and conformity with the identified financial reporting framework.
Compliance audit: examines whether the entity is complying with applicable laws and regulations.
Operational audit: evaluates the efficiency and effectiveness of management's operating procedures.
Governmental audit: may extend beyond an examination of financial statements to include an evaluation of program results, economy, and efficiency.

Philippine Standards on Auditing (PSA)

PSA provides rules and guidelines for auditors to follow in conducting audits.
The auditor is responsible for following the guidance provided by the PSA, and should be able to justify any departures.
The PSA requires auditors to exercise professional judgment and skepticism in conducting audits.### Auditing Theory and Review of Audit Process

Assertions

Assertions are representations of management as to the reliability of the financial statements.
Assertions can be implicit or explicit and relate to the accounts in the financial statements.

Audit Objectives and Audit Procedures

Audit objectives define specific desired accomplishments, while audit procedures provide the means of achieving these objectives.
Audit procedures are activities performed to achieve audit objectives, such as inspecting records, observing processes, and inquiring about information.

Evidence-Gathering Procedures

Evidence-gathering procedures include:
- Inspection of records or documents
- Inspection of tangible assets
- Observation of processes
- Inquiry about information
- Analytical procedures to evaluate financial information
- Reperformance of procedures or controls
- Confirmation of information from third parties
- Recalculation of mathematical accuracy

Types of Audit Evidence

Audit evidence can be obtained directly through inspection, observation, or reperformance, or indirectly through inquiry or confirmation.
Direct evidence is more reliable than indirect evidence.

Management Assertions

Management assertions relate to the financial statements and include:
- Existence or occurrence of transactions or events
- Completeness of transactions or events
- Valuation or allocation of transactions or events
- Rights and obligations
- Presentation and disclosure
Assertions about account balances at the period-end include valuation and allocation.

Audit Process

The audit process involves:
- Planning and risk assessment
- Evidence-gathering procedures
- Evaluating evidence and reaching conclusions
- Reporting audit results

Preliminary Engagement Activities

Preliminary engagement activities include:
- Deciding whether to accept a new client
- Reviewing current clients and discontinuing relationships when necessary
- Evaluating management's integrity and its impact on audit risk
- Determining the auditability of an entity's financial statements

Auditor's Responsibilities

The auditor is responsible for:
- Conducting an audit with an attitude of professional skepticism
- Communicating audit results through the audit report
- Maintaining independence and objectivity throughout the audit process### Accepting a New Audit Engagement
The CPA can include audit procedures to verify the reason given by the client for terminating the predecessor auditor.
The CPA should not communicate with the predecessor auditor without the client's permission, as this would violate the confidential relationship between the auditor and the client.
The CPA should advise the client of the intention to contact the predecessor auditor and request permission for the contact.

Factors Affecting Acceptance of an Audit Engagement

The CPA may not accept an audit engagement if:
- The prospective client has already completed its physical inventory count.
- The CPA lacks an understanding of the prospective client's operations and industry.
- The CPA is unable to review the predecessor auditor's audit documentation.
- The prospective client is unwilling to make all financial records available to the CPA.

Successor Auditor's Responsibilities

If the prospective client refuses to permit the predecessor to respond or limits the predecessor's response, the successor should:
- Continue to ask the predecessor auditor questions on facts that might bear on the integrity of management.
- Inquire as to the reasons and consider the implications in deciding whether to accept the engagement.

Engagement Letter

An engagement letter is prepared with the interest of both the client and the auditor in mind.
The engagement letter is widely used in practice for all types of professional engagements.
The primary purpose of the engagement letter is to provide a written record of the agreement with the client as to the services to be provided.

Contents of the Engagement Letter

The engagement letter should include:
- A reference to the objective of the engagement and the auditor's responsibilities.
- A description of the scope of the audit, including the responsibilities of both the client and the auditor.
- The identification of the reports to be issued and the expected form of those reports.
- The basis on which fees are computed and any billing arrangements.
- A statement regarding the auditor's responsibility to evaluate going concern issues.

Planning the Audit

Adequate planning of the audit work helps the auditor to achieve the following objectives:
- Gather all corroborating audit evidence.
- Ensure that appropriate attention is devoted to important areas of the audit.
- Identify areas that need the service of an expert.
- Complete the audit work efficiently.

Developing the Overall Audit Strategy

The overall audit strategy involves establishing the scope, timing, and direction of the audit.
The auditor should consider the following in developing the overall audit strategy:
- Important characteristics of the entity, its business, its financial performance, and its reporting requirements.
- Conditions requiring special attention, such as the existence of related parties.
- Setting materiality level for audit purposes.
- The focus of the engagement team's efforts, including the financial reporting framework and areas with a higher risk of material misstatement.

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Description

Review of auditing theory including the audit process. This quiz is for accounting students at De La Salle University.

Auditing Theory Review