Collaborating with Internal Auditors and Specialists in Audit Planning

What is the primary function of an internal audit department regarding organizational governance?

Evaluating and improving the effectiveness of governance, risk assessment, and internal control processes.

The internal audit department is typically considered part of which component of internal control?

The monitoring aspect of controls.

How does an internal auditor typically assist management with the maintenance of internal controls?

By meeting regularly with management to report findings from internal control testing.

In general, how does the audit plan of an internal auditor compare to that of an external auditor in terms of detail?

The internal audit plan is more comprehensive and detailed than the external audit plan.

Why do external auditors focus their efforts primarily on areas that materially affect financial statements?

To ensure that the financial statements are free from material misstatement.

What common area of overlap exists between the work of internal auditors and external auditors?

The auditing of internal controls.

What responsibility is an external auditor prohibited from sharing with an internal auditor?

The responsibility for issuing the audit report.

Why is the assessment of the risk of material misstatement considered the sole responsibility of the external auditor?

It is a subjective area involving professional judgment and assessment.

Under what condition can an external auditor use the work of an internal auditor to modify their own procedures?

When the internal auditor's work provides evidence about the effectiveness of internal controls.

How might an internal auditor assist an external auditor with substantive procedures?

By performing tasks such as confirming accounts receivable or observing physical inventories.

Why is it impossible for an external auditor to offload all audit work to the internal auditor?

The internal auditor is not independent of the company because they are an employee of the client.

For which type of financial statement assertions can internal audit work NOT eliminate direct testing by the external auditor?

Assertions related to material accounts with a high risk of misstatement or high subjectivity.

What is an example of a financial statement account with low subjectivity where external auditors might minimize direct testing?

Prepaid expenses.

What are the external auditor's responsibilities when an internal auditor provides direct assistance?

Supervising, reviewing, evaluating, and randomly testing the internal auditor's work.

Which three subjective areas are strictly reserved for the external auditor and cannot be shared with internal auditors?

Assessments, materiality determinations, and estimate accounts.

When deciding to use the internal audit function, what three criteria must the external auditor assess?

Competency, objectivity, and the application of a systematic and disciplined approach.

What professional factors reflect the competency of an internal auditor?

Education, professional certifications (like CIA), and membership in professional bodies.

How is the objectivity of an internal auditor primarily evaluated?

By looking at the organizational level to which the internal auditor reports.

To which body should the internal audit function ideally report to ensure maximum objectivity?

Those charged with governance, such as the audit committee.

Why is it ideal for internal auditors to report outside of the accounting department?

To minimize bias when auditing critical financial reporting controls managed by the accounting department.

The use of documented internal audit procedures or guidance is evidence of a _____.

Systematic and disciplined approach.

What is the goal of evaluating whether an internal audit function uses a systematic and disciplined approach?

To ensure audit work is not performed in an informal, unstructured, or ad hoc manner.

Concept: Specialist

Definition: A person or firm with special skills in a field other than accounting or auditing.

What distinguishes an 'auditor specialist' from a 'management specialist'?

An auditor specialist is hired by the auditor, while a management specialist is hired by management.

Under what condition should an auditor engage a specialist for inventory?

When specialized skills are needed to determine physical characteristics or value, such as with diamonds or minerals.

What must an auditor evaluate to ensure a specialist's work is sufficient for audit evidence?

The relevance, reliability, and adequacy of the specialist's work.

What qualities of a specialist are assessed via their reputation, experience, and certifications?

Competence and capability.

Why is it preferable for an auditor to use a specialist who is not related to the client?

It provides the highest level of assurance regarding the specialist's objectivity.

What is required between an auditor and an auditor specialist to ensure no misunderstandings of scope occur?

A written agreement.

How does an auditor evaluate the adequacy of a specialist's work based on company-produced data?

By verifying that the underlying data used by the specialist is accurate and complete.

When evaluating a specialist's findings, the auditor must ensure that the _____ used is appropriate.

Accounting method.

Is an auditor required to apply substantive procedures to verify a specialist's findings?

No, but they may do so if the account is high risk or if the specialist is related to management.

When is an auditor permitted to refer to an auditor specialist in a standard unmodified report?

In general, the auditor does not refer to a specialist in an unmodified report.

In what specific reporting circumstance might an auditor refer to an auditor specialist?

When a modified opinion is issued due to the specialist's findings.

Why is an Information Technology (IT) auditor not considered a 'specialist'?

They are part of the audit team and possess expertise in a specialized area of auditing.

What is the audit partner's responsibility regarding the IT auditor's conduct?

Ensuring the IT auditor is aware of ethical requirements and exercises professional skepticism.

How does an IT auditor assist the lead auditor in the risk assessment phase?

By identifying risks such as the susceptibility of financial systems to being hacked.

Concept: Component Auditor

Definition: An auditor who performs work on the financial information of a subsidiary or segment that is part of a group audit.

What must the group engagement partner verify regarding a component auditor before engagement?

That the component auditor is competent, capable, objective, and independent.

How does a group auditor communicate the nature, scope, and objectives of the work to a component auditor?

By providing written instructions.

What specific information must a component auditor communicate to the group auditor regarding misstatements?

A list of both corrected and uncorrected misstatements found at the component level.

If a group auditor decides to divide responsibility, what must be described in the audit report?

The fact that the component was audited by another auditor and the magnitude of that portion.

Under PCAOB standards, what are auditors who are not employees of the lead firm called when responsibility is NOT divided?

Other auditors.

When must an 'other auditor' be registered with the PCAOB?

When they play a substantial role in creating the audit report for an issuer.

What unique confirmation must a lead auditor obtain from an 'other auditor' that is not required for firm employees?

A written affirmation that they performed the work in accordance with the lead auditor's instructions.

Lead auditors must obtain a written affirmation that 'other auditors' comply with _____ and _____ requirements.

Independence and ethical.

Which document shows that an 'other auditor' has completed all required audit steps?

The engagement completion document.

Why must the lead auditor review the 'other auditor's' significant findings and issues?

To ensure they have sufficient evidence to support the consolidated audit opinion.

What must the 'other auditor' provide to allow the lead auditor to verify the consolidation process?

Information that allows the lead auditor to reconcile component data to the consolidated financial statements.

Which management-related document must the 'other auditor' provide to the lead auditor?

The letter of representation obtained from management.

Why is the reporting line of the internal auditor critical to the external auditor's evaluation of objectivity?

It determines the level of independence the internal auditor has from the management they are auditing.

The external auditor must assess if the internal audit function applies a _____ approach to planning and documenting activities.

Systematic and disciplined.

What should the external auditor do if they determine a specialist's findings are inconsistent with other audit evidence?

Discuss the inconsistency with the specialist and potentially perform additional procedures.

How does the lead auditor determine the necessary extent of supervision for 'other auditors'?

Based on the complexity of the entity, the risk of material misstatement, and the team's knowledge.

Under PCAOB rules, what must other auditors communicate regarding relationships that could impact the audit?

Any relationships that could have an impact on their independence.