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Since 1977

AUDITING THEORY L. R. CABARLES/J.M. D. MAGLINAO


AT.2815—Considering Work of Other Practitioners MAY 2020

Suggested Readings:
1. PSA 510, Initial Audit Engagements—Opening Balances
2. PSA 402, Audit Considerations Relating to an Entity Using a Service Organization
3. PSA 610, Using the Work of Internal Auditors
4. PSA 620, Using the Work of an Auditor’s Expert
5. PSA 600, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors)
6. Chapter 13, Auditing: A Risk-Based Approach, Part 1-Theory 2019 Issue—1st Edition by Cabarles/Ocampo/Valdez

DISCUSSION QUESTIONS

Initial Audit Engagements—Opening Balances c. Evaluating whether audit procedures performed in


1. For initial audit engagements, the auditor should the current period provide evidence relevant to the
obtain sufficient appropriate audit evidence that: opening balances.
a. The opening balances do not contain d. Performing specific audit procedures to obtain
misstatements that materially affect the current evidence regarding the opening balances.
period's financial statements.
b. The prior period's closing balances have been 5. Which of the following accounts is most difficult for the
correctly brought forward to the current period or, auditor to be satisfied as to the balance at the
when appropriate, have been restated. beginning of the period?
c. Appropriate accounting policies are consistently a. Accounts receivable c. Inventory
applied or changes in accounting policies have b. Accounts payable d. Accrued interest payable
been properly accounted for and adequately
disclosed. 6. If, after performing necessary audit procedures, the
d. All of the above. auditor is unable to obtain sufficient appropriate audit
evidence concerning opening balances, the auditor's
2. Statement 1: Opening balances include matters report should include:
requiring disclosure that existed at the beginning of I. A qualified opinion
the period, such as contingencies and commitments. II. A disclaimer of opinion
III. An opinion which is qualified or disclaimed
Statement 2: Initial audit engagement is an regarding the results of operations and cash flows
engagement in which the financial statements for the and unqualified regarding financial position
prior period were not audited. It does not include an a. Any of the above c. Either I or II
engagement in which the financial statements for the b. None of the above d. I only
prior period were audited by a predecessor auditor.
7. If the opening balances contain misstatements which
Statement 3: If the prior period’s financial statements could materially affect the current period's financial
were audited by a predecessor auditor and there was a statements and the effect of the misstatement is not
modification to the opinion, the auditor shall evaluate properly accounted for and adequately disclosed, the
the effect of the matter giving rise to the modification auditor should express a
in assessing the risks of material misstatement in the a. Unqualified opinion with explanatory paragraph.
current period’s financial statements b. Qualified or adverse opinion.
a. True, true, true c. False, true, true c. Qualified or disclaimer of opinion.
b. True, false, true d. False, false, true d. Adverse or disclaimer of opinion.

3. Which of the following is least considered in 8. If the current period's accounting policies have not
determining the sufficiency and appropriateness of the been consistently applied in relation to opening
audit evidence that the auditor will obtain regarding balances and if the change has not been properly
opening balances? accounted for and adequately disclosed, the auditor
a. The materiality of the opening balances relative to should express a
the current period’s financial statements. a. Unqualified opinion with explanatory paragraph.
b. The accounting policies adopted by the entity. b. Qualified or adverse opinion.
c. The risk of misstatements of accounts. c. Qualified or disclaimer of opinion.
d. The length of years in operations of the entity. d. Adverse or disclaimer of opinion.

4. The following audit procedures may be deemed The Entity’s Use of a Service Organization
necessary by the auditor in obtaining sufficient 9. Which of the following statements is true with respect
appropriate audit evidence regarding opening to Type 1 Report as referred to in PSA 402
balances, except: a. Report on the description and design of controls at
a. Reading the most recent financial statements, if a service organization.
any, and the predecessor auditor’s report thereon, b. A report that comprises a description, prepared by
if any, for information relevant to opening management of the service organization, of the
balances, including disclosures. service organization’s system, control objectives
b. Reviewing the predecessor auditor’s audit and related controls that have been designed and
engagement letter. implemented as at a specified date.

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c. A report that comprises a report by the service 14. When the user auditor’s risk assessment includes an
auditor with the objective of conveying reasonable expectation that controls at the service organization
assurance that includes the service auditor’s are operating effectively, the user auditor shall obtain
opinion on the description of the service audit evidence about the operating effectiveness of
organization’s system, control objectives and those controls from one or more of the following
related controls and the suitability of the design of procedures: (Choose the incorrect one)
the controls to achieve the specified control a. Obtaining a type 1 report, if available.
objectives. b. Obtaining a type 2 report, if available.
d. All of the above. c. Performing appropriate tests of controls at the
service organization.
10. Which of the following statements is true with respect d. Using another auditor to perform tests of controls
to Type 2 Report as referred to in PSA 402 at the service organization on behalf of the user
a. Report on the description, design, and operating auditor.
effectiveness of controls at a service organization
b. A report that comprises a description, prepared by 15. Statement 1: The user auditor shall inquire of
management of the service organization, of the management of the user entity whether the service
service organization’s system, control objectives organization has reported to the user entity, or
and related controls, their design and whether the user entity is otherwise aware of, any
implementation as at a specified date or fraud, non-compliance with laws and regulations or
throughout a specified period and, in some cases, uncorrected misstatements affecting the financial
their operating effectiveness throughout a specified statements of the user entity.
period
c. A report that comprises a report by the service Statement 2: The use of a service organization for
auditor with the objective of conveying reasonable external bookkeeping services (ranging from the
assurance that includes: (a) The service auditor’s processing of certain transactions such as payment of
opinion on the description of the service payroll taxes and maintenance of their accounting
organization’s system, control objectives and records to the preparation of their financial
related controls, the suitability of the design of the statements) relieves management of the smaller entity
controls to achieve the specified control objectives, and, where appropriate, those charged with
and the operating effectiveness of the controls; governance of their responsibilities for the financial
and (b) A description of the service auditor’s tests statements.
of the controls and the results thereof.
d. All of the above Statement 3: The user auditor shall evaluate how use
of a service organization affect the nature, timing and
11. Which of the following is least likely entitled to the extent of the user auditor’s further audit procedures,
report of the service organization auditor on the including the effect on the user auditor’s conclusions
suitability of the design and operating effectiveness of and user auditor’s report.
the service organization? a. True, False, True c. False, True, True
a. Service organization’s management b. True, True, True d. False, False, True
b. Service organization’s customers
c. Client’s auditors 16. The following statements relate to the reporting
d. Service organization’s stockholders requirements under PSA 402. Which is incorrect?
a. The user auditor shall modify the opinion in the
12. Under PSA 402, the objectives of the user auditor, user auditor’s report if the user auditor is unable to
when the user entity uses the services of a service obtain sufficient appropriate audit evidence
organization, are: regarding the services provided by the service
a. To obtain an understanding of the nature and organization relevant to the audit of the user
significance of the services provided by the service entity’s financial statements.
organization and their effect on the user entity’s b. The user auditor shall not refer to the work of a
internal control relevant to the audit, sufficient to service auditor in the user auditor’s report
identify and assess the risks of material containing an unmodified opinion unless required
misstatement. by law or regulation to do so.
b. To design and perform audit procedures responsive c. If reference to the work of a service auditor is
to those risks. relevant to an understanding of a modification to
c. Both a and b the user auditor’s opinion, the user auditor’s report
d. Either a or b shall indicate that such reference does not diminish
the user auditor’s responsibility for that opinion.
13. If the user auditor is unable to obtain a sufficient d. The user auditor may not need the consent of the
understanding from the user entity, the user auditor service auditor when making such a reference as it
shall obtain that understanding from one or more of is implicitly and ethically permitted.
the following procedures, except:
a. Obtaining a type 1 or type 2 report, if available. Using the Work of Internal Auditors
b. Contacting the service organization, but not 17. The independent auditors might consider the
through the user entity, to obtain specific procedures performed by the internal auditors
information. because:
c. Visiting the service organization and performing a. They are employees whose work must be reviewed
procedures that will provide the necessary during substantive testing.
information about the relevant controls at the b. They are employees whose work might affect the
service organization. independent auditors' work.
d. Using another auditor to perform procedures that c. Their work impacts upon the cost/benefit tradeoff
will provide the necessary information about the in evaluating inherent limitations.
relevant controls at the service organization. d. Their degree of independence may be inferred by
the nature of their work.

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18. The work of internal auditors may affect the c. avoid duplicating the work performed by the
independent’s auditor’s internal audit staff.
I. Procedures performed in obtaining an d. place limited reliance on the work performed by
understanding of internal control the internal audit staff.
II. Procedures performed in assessing the risk of
material misstatement 25. For which of the following judgments may an
III. Substantive procedures performed in gathering independent auditor share responsibility with an
direct evidence entity’s internal auditor who is assessed to be both
a. I and III only c. II and III only competent and objective?
b. I and II only d. I, II and III a. b. c. d.
Materiality of
19. Which of the following is most correct regarding misstatements Yes No No Yes
external auditors use of internal auditors directly on Evaluation of accounting
the audit engagement? estimates No Yes No Yes
a. Discourage c. Encourage
b. Prohibit d. Permit Using the Work of an Auditor’s Expert
26. Which statement is incorrect regarding the auditor’s
20. In making judgments about the effect of the internal use of the work of an expert?
auditors’ work on the external auditor’s procedures in a. “Expert” means a person or firm possessing special
specific audit areas, which of the following is not skill, knowledge and experience in a particular field
among three issues related to the audit areas that other than accounting and auditing.
should be considered by the external auditor? b. When using the work performed by an expert, the
a. Materiality of the financial statement amounts. auditor should obtain sufficient appropriate audit
b. Risk of material misstatement of the assertions evidence that such work is adequate for the
related to these financial statement amounts. purposes of the audit.
c. Degree of subjectivity involved in the evaluation of c. The auditor's education and experience enable the
the audit evidence gathered in support of the auditor to be knowledgeable about business
assertions. matters in general, but the auditor is not expected
d. Review of quality of audit policies, programs, and to have the expertise of a person trained for or
procedures. qualified to engage in the practice of another
profession or occupation.
21. Under what circumstance is it appropriate for the d. In all cases, the auditor cannot obtain sufficient
auditor to rely on the work of an internal auditor? appropriate audit evidence in areas that are other
a. It is never acceptable for the external auditor to than accounting and auditing.
rely upon the work of the internal auditor.
b. The external auditor may rely on certain of the 27. Each of the following procedures requires the
work of the internal auditor after making a assistance of an expert, except
comprehensive assessment of the auditor and a. Determining the physical condition or quantity of
his/her work. underground mineral.
c. The external auditor may rely on the work of the b. Determining the value of works of art.
internal auditor if he/she is also a CPA. c. Determining the adequacy of disclosure in the
d. There is no restriction in relying upon the work of notes to the financial statements.
internal auditors. d. Interpreting major contracts.

22. External auditors would consider internal auditors 28. In accordance with PSA 620, Using the Work of an
effective if they are: Auditor’s Expert, each of the following is the work of
a. Independent of the operating units being an expert, except
evaluated. a. Applying methods of accounting for deferred
b. Competent and well trained. income tax.
c. Have performed relevant audit tests of the internal b. Applying legal expertise in taxation law
controls and financial statements. c. Performing complex modeling for the purpose of
d. All of the above. valuing financial instruments.
d. Valuing of environmental liabilities, and site clean-
23. To assess the objectivity of the internal auditors, an up costs.
independent auditor would most likely
a. Consider the professional qualifications and 29. When determining the need to use the work of an
experience of the internal auditors. expert, the auditor would consider the following,
b. Consider the proper planning, supervision and except
documentation of internal auditor’s work. a. The quantity and quality of other audit evidence
c. Consider the nature and extent of the internal available.
auditors’ assignment. b. The materiality of the F/S item being considered.
d. Consider the organizational level to which the c. The risk of misstatement based on the nature and
internal auditors report the results of their work. complexity of the matter being considered.
d. The professional certification or licensing by, or
24. Hanlon Corp. maintains a large internal audit staff that membership in, an appropriate professional body.
reports directly to the chief financial officer. Audit
reports prepared by the internal auditors indicate that 30. When planning to use the work of an expert, the
the system is functioning as it should and that the auditor should assess the objectivity of the expert.
accounting records are reliable. An independent This will involve considering the expert's:
auditor will probably: I. Professional certification or licensing by, or
a. eliminate tests of controls. membership in, an appropriate professional body.
b. increase the depth of the study and evaluation of II. Experience and reputation in the field in which the
administrative controls. auditor is seeking audit evidence.

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III. Relationship to the entity. subsidiary is audited by a component auditor, while the
a. I, II, III c. I and III group auditor audits the remainder of the corporation
b. I and II d. III only and issues an audit report on consolidated operations.
Which auditor(s) is (are) responsible for evaluating the
31. The auditor shall apply the guidance of PSA 500, Audit appropriateness of the adjustment of the foreign GAAP
Evidence, instead of PSA 620, Using the Work of an statements to full PFRSs?
Auditor’s Expert, when using the work of Group auditor Component auditor
a. Management’s expert. c. Either a or b. a. Yes Yes
b. Auditor’s expert. d. Both a and b. b. Yes No
c. No Yes
32. The risk that an expert’s objectivity will be impaired d. No No
increases when the expert is related in some other
manner to the entity (e.g., by being financially 37. A group engagement partner decides not to refer to
dependent upon or having an investment in the entity) the audit of another CPA who audited a component of
and the expert is the overall group F/S. After making inquiries about the
a. Engaged by the entity other CPA’s professional reputation and independence,
b. Employed by the entity the principal auditor most likely would
c. Engaged by the auditor a. Add an emphasis-of-matter paragraph.
d. Employed by the auditor b. Document in the engagement letter that the
principal auditor assumes no responsibility for the
33. According to PSA 620, Using the Work of an Auditor’s other CPA’s work and opinion.
Expert, which is incorrect? c. Obtain written permission from the other CPA to
a. The auditor shall not refer to the work of an omit the reference in the principal auditor’s report.
auditor’s expert in an auditor’s report unless d. Perform additional audit procedures based on the
required by law or regulation to do so. significance of the subsidiary.
b. It may be appropriate to refer to the auditor’s
expert in an auditor’s report containing a modified Division of Responsibility
opinion to explain the nature of the modification. 38. Reference in a principal auditor’s report to the fact that
c. If the auditor makes reference to the work of an part of the audit was performed by another auditor
auditor’s expert in the auditor’s report, the auditor most likely would be an indication of the
shall indicate in the auditor’s report that such a. Divided responsibility between the auditors who
reference does not reduce the auditor’s conducted the audits of components.
responsibility for that opinion. b. Lack of materiality of the portion of the financial
d. The auditor may not need the permission of the statements audited by the other auditor.
auditor’s expert when making a reference in the c. Principal auditor’s recognition of the other auditor’s
auditor’s report. competence, reputation and professional
certification.
Audits of Group Financial Statements—Including d. Different opinions the auditors are expressing on
Work of Component Auditors the components of the F/S that each audited.
34. When using the work of another auditor (component
auditor), the principal auditor should ordinarily perform 39. The principal auditor is satisfied with the independence
the following procedure and professional reputation of the other auditor who
a. Obtain information regarding the professional has audited a subsidiary but wants to indicate the
competence of the other auditor in the context of division of responsibility. The principal auditor should
the specific assignment undertaken by the other a. Modify only the scope paragraph of the report.
auditor. b. Modify only the opinion paragraph of the report.
b. Advise the other auditor of the applicable c. Modify both the scope and opinion paragraphs of
independence requirements as regards both the the report.
entity and the component and obtain d. Modify the introductory, scope and opinion
representation as to his compliance with them. paragraphs of the report
c. Advise the other auditor of the applicable
accounting, auditing and reporting requirements 40. The introductory paragraph of an auditor’s report
and obtain representation of compliance. contains the following sentences:
d. All of the above
We did not audit the financial statements of EZ Inc., a
35. The financial statements of a company (investee) in wholly-owned subsidiary, which statements reflect
which another company (investor) has a financial total assets and revenues constituting 27 percent and
interest are most likely to be included in a set of 29 percent, respectively, of the related consolidated
consolidated financial statements of the investor totals. Those statements were audited by other
company in which of the following situations? auditors whose report has been furnished to us, and
a. The investee is a joint venture by the investor our opinion, insofar as it relates to the amounts
company and another company in which each included for EZ Inc., is based solely on the report of
investor owns a 50% equity interest. the other auditors.
b. The investor owns 30% of the non-voting shares of
the investee. These sentences
c. The investor holds 20% of the shares of the a. Indicate division of responsibility.
investee as a temporary investment. b. Assume responsibility for the other auditor.
d. The investor holds 60% of the outstanding debt of c. Require a departure from an unqualified opinion.
the investee. d. Are an improper form of reporting.

36. A client follows full PFRSs for its domestic operations - now do the DIY drill -
and foreign GAAP for a foreign subsidiary. The foreign

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DO-IT-YOURSELF (DIY) DRILL

Initial Engagements—Opening Balances (Objectivity) and due care


1. Which of the following procedures the auditor will least a. Yes Yes Yes
likely perform in order to obtain sufficient appropriate b. Yes No Yes
audit evidence that opening balances do not contain c. Yes No No
material misstatement that could potentially affect the d. No Yes No
current period financial statements?
a. Read the most recent financial statements and the 5. In connection with the examination of financial
auditor’s report thereon of the client’s competitors. statements by an independent auditor, the client
b. Determine whether the prior period’s closing suggests that members of the internal audit staff be
balances have been correctly brought forward to utilized to minimize audit costs. Which of the following
the current period. tasks could most appropriately be delegated to the
c. Determine whether the opening balances reflect internal audit staff
the application of appropriate accounting policies. a. Selection of accounts receivable for confirmation,
d. Review of the predecessor auditor’s working based upon the internal auditor's judgment as to
papers to obtain evidence regarding the opening how many accounts and which accounts will
balances. provide sufficient coverage.
b. Preparation of schedules for negative accounts
The Entity’s Use of a Service Organization receivable responses.
2. If the user auditor plans to use a type 1 or type 2 c. Evaluation of the internal control for accounts
report as audit evidence to support the user auditor’s receivable and sales.
understanding about the design and implementation of d. Determination of the adequacy of the allowance for
controls at the service organization, the user auditor doubtful accounts.
shall: (Choose the incorrect one)
a. Evaluate whether the description and design of Using the Work of an Auditor’s Expert
controls at the service organization is at a date or 6. Which of the following is most likely to require special
for a period that is appropriate for the user planning considerations related to asset valuation?
auditor’s purposes. a. Inventory is comprised of diamond rings.
b. Evaluate the sufficiency and appropriateness of the b. The client has recently purchased an expensive
evidence provided by the report for the copy machine.
understanding of the user entity’s internal control c. Assets costing less than P250 are expensed even
relevant to the audit. when the expected life exceeds one year.
c. In determining the sufficiency and appropriateness d. Accelerated depreciation methods are used for
of the audit evidence provided by a type 1 or type amortizing the costs of factory equipment.
2 report, the user auditor shall be satisfied as to
the service auditor’s professional competence, but 7. Which of the following statements is correct about the
not the independence from the service auditor's use of the work of a specialist?
organization; and the adequacy of the standards a. The specialist should not have an understanding of
under which the type 1 or type 2 report was the auditor's corroborative use of the specialist's
issued. findings.
d. Determine whether complementary user entity b. The auditor is required to perform substantive
controls identified by the service organization are procedures to verify the specialist's assumptions
relevant to the user entity and, if so, obtain an and findings.
understanding of whether the user entity has c. The client should not have an understanding of the
designed and implemented such controls. nature of the work to be performed by the
specialist.
3. When the auditor considers that the service d. The auditor should obtain an understanding of the
organization activities are significantly relevant to the methods and assumptions used by the specialist.
audit and he concludes that it would be efficient to
obtain evidence from tests of controls, such evidence Audits of Group FSs—Component Auditors
may be obtained by, except 8. In the auditor’s report, the group engagement partner
a. Visiting the service organization decides not to make reference to a component auditor
b. Performing tests of client’s control activities of the who audited a client’s subsidiary. The group
service organization engagement partner could justify this decision if,
c. Review the service contract between the client and among other requirements, he or she
the service organization a. Issues an unmodified opinion on the consolidated
d. Obtaining a service organization auditor’s report financial statements.
that expresses an opinion as to the operating b. Learns that the component auditor issued an
effectiveness of the service organization’s unmodified opinion on the subsidiary’s financial
accounting and internal control systems for the statements.
processing applications relevant to the audit c. Is unable to review the audit plan (programs) and
working papers of the component auditor.
Using the Work of Internal Auditors d. Is satisfied as to the independence and
4. When obtaining an understanding and performing a professional reputation of the other CPA.
preliminary assessment of the internal audit function,
the auditor should consider the internal auditors’ J - end of AT.2815 - J
Organizational Scope of Technical
status functions competence

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