Expert or Imposter?
Under CAS 620, which of the following would constitute a time an expert is required in a field other than accounting or auditing?
a.) Examination of simple and consistent tax compliance issues
b.) Evaluating the financial statement to ensure mathematical accuracy
c.) Keeping a record of inventory amounts such as counting office supplies
d.) Estimation of oil and gas reserves
e.) None of the above
d.) Estimation of oil and gas reserves
CAS 620.A1
A1.Expertise in a field other than accounting or auditing may include expertise in relation to such matters as:
• The valuation of complex financial instruments, land and buildings, plant and machinery, jewelry, works of art, antiques, intangible assets, assets acquired and liabilities assumed in business combinations and assets that may have been impaired.
• The actuarial calculation of liabilities associated with insurance contracts or employee benefit plans.
• The estimation of oil and gas reserves.
• The valuation of environmental liabilities, and site clean-up costs.
• The interpretation of contracts, laws and regulations.
• The analysis of complex or unusual tax compliance issues.
What does an accountant say when getting on a train?
Mind the GAAP.
When conducting an audit, determining the materiality of the financial statement is established by applying a fixed percentage to a chosen benchmark, and not assessing other factors like industry or volatility.
a.) True
b.) False
b.) False
CAS 320.A4
A4. Determining materiality involves the exercise of professional judgment. A percentage is often applied to a chosen benchmark as a starting point in determining materiality for the financial statements as a whole. Factors that may affect the identification of an appropriate benchmark include the following:
• The elements of the financial statements (for example, assets, liabilities, equity, revenue, expenses);
• Whether there are items on which the attention of the users of the particular entity's financial statements tends to be focused (for example, for the purpose of evaluating financial performance users may tend to focus on profit, revenue or net assets);
• The nature of the entity, where the entity is in its life cycle, and the industry and economic environment in which the entity operates;
• The entity's ownership structure and the way it is financed (for example, if an entity is financed solely by debt rather than equity, users may put more emphasis on assets, and claims on them, than on the entity's earnings); and
• The relative volatility of the benchmark.
Why are accountants so cool, calm, and collected?
They have strong internal controls.
Based on CAS 500, which of the following would best illustrate external information sources that an auditor will use throughout an audit?
a.) Micro-Economic Data
b.) Information/Data from entities internal meetings
c.) Inventory and pricing listings
d.) Credit history data
d.) Credit history data
CAS 500.A1
External information sources may include pricing services, governmental organizations, central banks or recognized stock exchanges. Examples of information that may be obtained from external information sources include:
• Prices and pricing related data;
• Macro-economic data, such as historical and forecast unemployment rates and economic growth rates, or census data;
• Credit history data;
• Industry specific data, such as an index of reclamation costs for certain extractive industries, or viewership information or ratings used to determine advertising revenue in the entertainment industry; and
• Mortality tables used to determine liabilities in the life insurance and pension sectors.
What do you call an accountant with an opinion?
An auditor.
What is the primary reason an auditor would require an auditor’s expert as stated in CAS 620?
a.) When operating in a field that is not accounting or auditing and the necessary expertise is required to gather appropriate audit evidence
b.) Management always requests an expert when knowledge about a specific sector or market is needed
c.) If the company decides it's necessary to hire an expert to provide support during an audit
d.) The auditor only wants to focus on internal controls and doesn’t have time to evaluate the financial statements
a.) When operating in a field that is not accounting or auditing and the necessary expertise is required to gather appropriate audit evidence
CAS 620.7
7. If expertise in a field other than accounting or auditing is necessary to obtain sufficient appropriate audit evidence, the auditor shall determine whether to use the work of an auditor's expert. (Ref: Para. A4-A9)
When performing an audit, an auditor will gather evidence to provide reasonable assurance, which of the following would explain how audit evidence is obtained?
a.) Evidence obtained by auditors is from external sources such as third-party confirmations and requires no further analysis or testing of procedures
b.) Audit evidence is collected by performing procedures through the process of analyzing accounting records, reperforming procedures, and reconciling information that is related.
c.) Gathering information from interviews with management
d.) Using processes such as automated tools to help gather information and doesn’t require further testing.
b.) Audit evidence is collected by performing procedures through the process of analyzing accounting records, reperforming procedures, and reconciling information that is related.
CAS 500.A11
A11. Some audit evidence is obtained by performing audit procedures to test the accounting records, for example, through analysis and review, reperforming procedures followed in the financial reporting process, and reconciling related types and applications of the same information. Through the performance of such audit procedures, the auditor may determine that the accounting records are internally consistent and agree to the financial statements.
Inquiry is key when performing an audit, from the following options illustrate the use of inquiry in an audit based on CAS 500.
a.) It is where a firm seeks information from knowledgeable individuals, whether it be inside or outside the firm, and can presented in a written format or orally.
b.) A formal procedure where the audit firm will use written questions, and is kept separate from other audit procedures
c.) Both B and C
d.) The process of inquiry is used during the beginning of the audit and ignored after sufficient progress is made in the audit process.
a.) It is where a firm seeks information from knowledgeable individuals, whether it be inside or outside the firm, and can presented in a written format or orally.
CAS 500.A26
A26. Inquiry consists of seeking information of knowledgeable persons, both financial and non-financial, within the entity or outside the entity. Inquiry is used extensively throughout the audit in addition to other audit procedures. Inquiries may range from formal written inquiries to informal oral inquiries. Evaluating responses to inquiries is an integral part of the inquiry process.
When assessing and evaluating an auditor’s expert work and performance, what is one of the key factors that an auditor must take into account?
a.) The expert’s report should be well-written and comprehensible, even if the expert’s assumptions used aren’t applicable to the audit.
b.) If the expert has a strong reputation within the industry, regardless of whether their results are consistent with other audit evidence or if assumptions are reasonable
c.) Expert findings or conclusions are relevant, reasonable, and consistent with other audit evidence and in line with the audit’s overall findings
d.) Expert’s work is completed quickly, appears to be detailed, and requires no further review of the relevance of assumptions or conclusions
c.) Expert findings or conclusions are relevant, reasonable, and consistent with other audit evidence and in line with the audit’s overall findings
CAS 620.12
12. The auditor shall evaluate the adequacy of the auditor's expert's work for the auditor's purposes, including: (Ref: Para. A32)
(a) The relevance and reasonableness of that expert's findings or conclusions, and their consistency with other audit evidence; (Ref: Para. A33-A34)
(b) If that expert's work involves use of significant assumptions and methods, the relevance and reasonableness of those assumptions and methods in the circumstances; and (Ref: Para. A35-A37)
(c) If that expert's work involves the use of source data that is significant to that expert's work, the relevance, completeness, and accuracy of that source data. (Ref: Para. A38-A39)
When performing an audit, the appropriate approach to abide by when selecting items for testing would be?
a.) To select every item for testing when performing an audit, despite the level of risk, and ensure the audit is performed properly with appropriate audit evidence
b.) The audit firm should have its auditors use only audit sampling to select various items for testing, as this is the only way to provide reasonable assurance.
c.) Auditors can use a variety of methods, such as selecting all items, selecting specific items, or audit sampling. Each method varies based on materiality and level of risk
d.) Audit firms can choose to disregard relevance and reliability when it comes to selecting items to test. Only sufficiency is important to the audit firm.
c.) Auditors can use a variety of methods, such as selecting all items, selecting specific items, or audit sampling. Each method varies based on materiality and level of risk
CAS 500.A64
A63. An effective test provides appropriate audit evidence to an extent that, taken with other audit evidence obtained or to be obtained, will be sufficient for the auditor's purposes. In selecting items for testing, the auditor is required by paragraph 7 to determine the relevance and reliability of information to be used as audit evidence; the other aspect of effectiveness (sufficiency) is an important consideration in selecting items to test. The means available to the auditor for selecting items for testing are:
(a) Selecting all items (100% examination);
(b) Selecting specific items; and
(c) Audit sampling.
The application of any one or combination of these means may be appropriate depending on the particular circumstances, for example, the risks of material misstatement related to the assertion being tested, and the practicality and efficiency of the different means.
How many accountants does it take to screw in a lightbulb?
How many did it take last year?
Marvel Co, an audit firm, is conducting an audit for a large corporation that needs expertise in valuing complex financial instruments. The expertise exceeds the knowledge of the auditors and is outside the norm of accounting and auditing practices. The audit partner plans on using an auditor’s internal expert within Marvel Co. The expert is a senior valuation specialist and was hired by the company over the last 10 years.
Marvel Co. falls under a large network of firms that are subject to and share standardized policies and procedures under CSQM 1 (Canadian Standards on Quality Management 1). Based on these standards, Marvel Co. is subject to the following criteria when ensuring the reliability and quality of the auditor’s internal expert.
To ensure that Marvel Co’s internal expert is abiding by an appropriate system of quality management, which of the following would be the best option?
a.) Internal expert has extensive experience, but there is no requirement to assess if the expert is following the firm’s quality management policies, based on the idea that expertise is best to ensure reliability
b.) When assessing quality management procedures under CSQM 1, the internal expert was obtained from a third-party consulting firm which means they abide by procedures even if Marvel Co. has their policies
c.) The auditor’s internal expert is a part of Marvel Co as a partner or staff member, which subjects them to quality management procedures under CSQM 1 or standards issues by Marvel Co.
d.) Marvel Co’s internal expert works for a separate organization that doesn’t have a connection with the firm, however, if they provide a professional opinion, the audit firm can reliability trust the work.
c.) The auditor’s internal expert is a part of Marvel Co as a partner or staff member, which subjects them to quality management procedures under CSQM 1 or standards issues by Marvel Co.
CAS 620.A11
A11. An auditor's internal expert may be a partner or staff (i.e., personnel), including temporary staff, of the auditor's firm and, therefore, subject to the system of quality management of that firm in accordance with CSQM 1 9 or requirements that are at least as demanding.10 An auditor's internal expert may also be a partner or staff, including temporary staff, of a network firm, and is subject to the firm's policies or procedures for network requirements and network services in accordance with CSQM 1. In some instances, the auditor's internal expert of a network firm may be subject to common quality management policies or procedures as the auditor's firm, given that they are part of the same network.
An audit firm has a large balance in its inventory, and the auditor is tasked with determining and assessing the existence and valuation of the accounts. The audit team is mainly worried about the overstatement of inventory value
Based on the scenario above which audit procedure would be appropriate for testing overstatement for the existence or valuation of the firm's inventory?
a.) Evaluating and testing recorded inventory balance on the company’s financial statement, as it would properly value the inventory on the firm’s books
b.) Testing subsequent sales transactions, purchase invoices, and shipping documents as it would determine whether the inventory is overstated by evaluating the items that are sold.
c.) Evaluating the shipping documents, as the audit team would only focus on the internal inventory figures on their statement and not confirm with external documentation
d.) None of the above
b.) Testing subsequent sales transactions, purchase invoices, and shipping documents as it would determine whether the inventory is overstated by evaluating the items that are sold.
CAS 500.A31
A31. Relevance deals with the logical connection with, or bearing upon, the purpose of the audit procedure and, where appropriate, the assertion under consideration. The relevance of information to be used as audit evidence may be affected by the direction of testing. For example, if the purpose of an audit procedure is to test for overstatement in the existence or valuation of accounts payable, testing the recorded accounts payable may be a relevant audit procedure. On the other hand, when testing for understatement in the existence or valuation of accounts payable, testing the recorded accounts payable would not be relevant, but testing such information as subsequent disbursements, unpaid invoices, suppliers' statements, and unmatched receiving reports may be relevant.
Anderson Accounting is an audit firm, performing an audit for Umbrella Ltd, a company that operates in environmental technology. Throughout the audit, the audit team required an expert in environmental liability valuation to evaluate the future costs associated with site clean-up obligations subject to new government policies. As the expertise was outside normal accounting and auditing knowledge, the auditors hired an auditor’s expert.
Once the audit was completed, Anderson Accounting found significant uncertainties in the valuation process and the expert noted that assumed costs could change due to regulatory changes. The firm issues a modified opinion to address the risk and reference the auditor’s expert in their report.
Based on the following, which would be the most appropriate for Anderson Accounting to continue forward with referencing the auditor’s expert in their audit report?
a.) Anderson Accounting should reference the expert only if no law or regulation applies, such as when there is public sector transparency, even if the expert’s work played a role in the modified opinion.
b.) Since Anderson Accounting chose to reference the auditor’s expert because of the modified opinion, they require permission from the expert before applying the reference in the auditor report.
c.) If Anderson Accounting’s expert provides detailed and necessary information to issue a modified opinion, the company must disclose the expert in the report even without consent.
d.) There should never be a reference to the expert in the audit report for Anderson Accounting, as audit conclusions should only be made by Anderson Accounting. Even if the expert work is important for the audit evidence.
b.) Since Anderson Accounting chose to reference the auditor’s expert because of the modified opinion, they require permission from the expert before applying the reference in the auditor report.
CAS 620.A41 & A42
A41. In some cases, law or regulation may require a reference to the work of an auditor's expert, for example, for the purposes of transparency in the public sector.
A42. It may be appropriate in some circumstances to refer to the auditor's expert in an auditor's report containing a modified opinion, to explain the nature of the modification. In such circumstances, the auditor may need the permission of the auditor's expert before making such a reference.