Excel Professional Services, Inc.: Discussion Questions
Excel Professional Services, Inc.: Discussion Questions
AUDITING THEORY
AT.3011 – Considering the Work of R.C.P. SOLIMAN/ K.J. UY
Others MAY 2021
Reference:
a. PSA 402 (Revised and Redrafted), Audit Considerations Relating to an Entity Using a Service Organization
b. PSA 510 (Redrafted), Initial Audit Engagements – Opening Balances
c. PSA 600 (Revised and Redrafted), Special Considerations – Audits of Group Financial Statements
d. PSA 610 (Revised 2013), Using the Work of Internal Auditors and Related Conforming Amendments
e. PSA 620 (Revised and Redrafted), Using the Work of an Auditor’s Expert
DISCUSSION QUESTIONS
Initial Audit Engagements—Opening Balances c. Evaluating whether audit procedures performed in
the current period provide evidence relevant to the
1. For initial audit engagements, the auditor should opening balances.
obtain sufficient appropriate audit evidence that: d. Performing specific audit procedures to obtain
a. The opening balances do not contain evidence regarding the opening balances.
misstatements that materially affect the current
period's financial statements. 5. Which of the following accounts is most difficult for the
b. The prior period's closing balances have been auditor to be satisfied as to the balance at the
correctly brought forward to the current period or, beginning of the period?
when appropriate, have been restated. a. Accounts receivable c. Inventory
c. Appropriate accounting policies are consistently b. Accounts payable d. Accrued interest payable
applied or changes in accounting policies have
been properly accounted for and adequately 6. If the opening balances contain misstatements which
disclosed. could materially affect the current period's financial
d. All of the above. statements and the effect of the misstatement is not
properly accounted for and adequately disclosed, the
2. Statement 1: Opening balances include matters auditor should express a
requiring disclosure that existed at the beginning of a. Unqualified opinion with explanatory paragraph.
the period, such as contingencies and commitments. b. Qualified or adverse opinion.
c. Qualified or disclaimer of opinion.
Statement 2: Initial audit engagement is an d. Adverse or disclaimer of opinion.
engagement in which the financial statements for the
prior period were not audited. It does not include an
engagement in which the financial statements for the The Entity’s Use of a Service Organization
prior period were audited by a predecessor auditor.
7. Which of the following statements is true with respect
Statement 3: If the prior period’s financial statements to Type 1 Report as referred to in PSA 402
were audited by a predecessor auditor and there was a. Report on the description and design of controls at
a modification to the opinion, the auditor shall a service organization.
evaluate the effect of the matter giving rise to the b. A report that comprises a description, prepared by
modification in assessing the risks of material management of the service organization, of the
misstatement in the current period’s financial service organization’s system, control objectives
statements and related controls that have been designed and
a. True, true, true c. False, true, true implemented as at a specified date.
b. True, false, true d. False, false, true c. A report that comprises a report by the service
auditor with the objective of conveying reasonable
3. Which of the following is least considered in assurance that includes the service auditor’s
determining the sufficiency and appropriateness of the opinion on the description of the service
audit evidence that the auditor will obtain regarding organization’s system, control objectives and
opening balances? related controls and the suitability of the design of
a. The materiality of the opening balances relative to the controls to achieve the specified control
the current period’s financial statements. objectives.
b. The accounting policies adopted by the entity. d. All of the above.
c. The risk of misstatements of accounts.
d. The length of years in operations of the entity. 8. Which of the following statements is true with respect
to Type 2 Report as referred to in PSA 402
4. The following audit procedures may be deemed a. Report on the description, design, and operating
necessary by the auditor in obtaining sufficient effectiveness of controls at a service organization
appropriate audit evidence regarding opening b. A report that comprises a description, prepared by
balances, except: management of the service organization, of the
a. Reading the most recent financial statements, if service organization’s system, control objectives
any, and the predecessor auditor’s report thereon, and related controls, their design and
if any, for information relevant to opening implementation as at a specified date or
balances, including disclosures. throughout a specified period and, in some cases,
b. Reviewing the predecessor auditor’s audit their operating effectiveness throughout a
engagement letter. specified period
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EXCEL PROFESSIONAL SERVICES, INC.
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
controls to achieve the specified control entity and, where appropriate, those charged with
objectives, and the operating effectiveness of the governance of their responsibilities for the financial
controls; and (b) A description of the service statements.
auditor’s tests of the controls and the results
thereof. Statement 3: The user auditor shall evaluate how use
d. All of the above of a service organization affect the nature, timing and
extent of the user auditor’s further audit procedures,
9. Which of the following is least likely entitled to the including the effect on the user auditor’s conclusions
report of the service organization auditor on the and user auditor’s report.
suitability of the design and operating effectiveness of a. True, False, True c. False, True, True
the service organization? b. True, True, True d. False, False,
a. Service organization’s management True
b. Service organization’s customers
c. Client’s auditors 14. 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
10. Under PSA 402, the objectives of the user auditor, user auditor’s report if the user auditor is unable
when the user entity uses the services of a service to 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 c. If reference to the work of a service auditor is
responsive 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
d. Either a or b report shall indicate that such reference does not
diminish the user auditor’s responsibility for that
11. If the user auditor is unable to obtain a sufficient opinion.
understanding from the user entity, the user auditor d. The user auditor may not need the consent of the
shall obtain that understanding from one or more of service auditor when making such a reference as
the following procedures, except: it is implicitly and ethically permitted.
a. Obtaining a type 1 or type 2 report, if available.
b. Contacting the service organization, but not Using the Work of Internal Auditors
through the user entity, to obtain specific
information. 15. The independent auditors might consider the
c. Visiting the service organization and performing procedures performed by the internal auditors
procedures that will provide the necessary because:
information about the relevant controls at the a. They are employees whose work must be reviewed
service organization. during substantive testing.
d. Using another auditor to perform procedures that b. They are employees whose work might affect the
will provide the necessary information about the independent auditors' work.
relevant controls at the service organization. c. Their work impacts upon the cost/benefit tradeoff
in evaluating inherent limitations.
12. When the user auditor’s risk assessment includes an d. Their degree of independence may be inferred by
expectation that controls at the service organization the nature of their work.
are operating effectively, the user auditor shall obtain 16. The work of internal auditors may affect the
audit evidence about the operating effectiveness of independent’s auditor’s
those controls from one or more of the following I. Procedures performed in obtaining an
procedures: (Choose the incorrect one) understanding of internal control
a. Obtaining a type 1 report, if available. II. Procedures performed in assessing the risk of
b. Obtaining a type 2 report, if available. material misstatement
c. Performing appropriate tests of controls at the III. Substantive procedures performed in gathering
service organization. direct evidence
d. Using another auditor to perform tests of controls a. I and III only c. II and III only
at the service organization on behalf of the user b. I and II only d. I, II and III
auditor.
17. Which of the following is most correct regarding
13. Statement 1: The user auditor shall inquire of external auditors use of internal auditors directly on
management of the user entity whether the service the audit engagement?
organization has reported to the user entity, or a. Discourage c. Encourage
whether the user entity is otherwise aware of, any b. Prohibit d. Permit
fraud, non-compliance with laws and regulations or
uncorrected misstatements affecting the financial 18. In making judgments about the effect of the internal
statements of the user entity. auditors’ work on the external auditor’s procedures in
specific audit areas, which of the following is not
among three issues related to the audit areas that a. “Expert” means a person or firm possessing
should be considered by the external auditor? special skill, knowledge and experience in a
a. Materiality of the financial statement amounts. particular field other than accounting and auditing.
b. Risk of material misstatement of the assertions b. When using the work performed by an expert, the
related to these financial statement amounts. auditor should obtain sufficient appropriate audit
c. Degree of subjectivity involved in the evaluation of evidence that such work is adequate for the
the audit evidence gathered in support of the purposes of the audit.
assertions. c. The auditor's education and experience enable the
d. Review of quality of audit policies, programs, and auditor to be knowledgeable about business
procedures. matters in general, but the auditor is not expected
to have the expertise of a person trained for or
19. Under what circumstance is it appropriate for the qualified to engage in the practice of another
auditor to rely on the work of an internal auditor? profession or occupation.
a. It is never acceptable for the external auditor to d. In all cases, the auditor cannot obtain sufficient
rely upon the work of the internal auditor. appropriate audit evidence in areas that are other
b. The external auditor may rely on certain of the than accounting and auditing.
work of the internal auditor after making a
comprehensive assessment of the auditor and 25. Each of the following procedures requires the
his/her work. assistance of an expert, except
c. The external auditor may rely on the work of the a. Determining the physical condition or quantity of
internal auditor if he/she is also a CPA. underground mineral.
d. There is no restriction in relying upon the work of b. Determining the value of works of art.
internal auditors. c. Determining the adequacy of disclosure in the
notes to the financial statements.
20. External auditors would consider internal auditors d. Interpreting major contracts.
effective if they are:
a. Independent of the operating units being 26. In accordance with PSA 620, Using the Work of an
evaluated. Auditor’s Expert, each of the following is the work of
b. Competent and well trained. an expert, except
c. Have performed relevant audit tests of the internal a. Applying methods of accounting for deferred
controls and financial statements. income tax.
d. All of the above. b. Applying legal expertise in taxation law
c. Performing complex modeling for the purpose of
21. To assess the objectivity of the internal auditors, an valuing financial instruments.
independent auditor would most likely d. Valuing of environmental liabilities, and site clean-
a. Consider the professional qualifications and up costs.
experience of the internal auditors.
b. Consider the proper planning, supervision and 27. When determining the need to use the work of an
documentation of internal auditor’s work. expert, the auditor would consider the following,
c. Consider the nature and extent of the internal except
auditors’ assignment. a. The quantity and quality of other audit evidence
d. Consider the organizational level to which the available.
internal auditors report the results of their work. b. The materiality of the F/S item being considered.
c. The risk of misstatement based on the nature and
22. Hanlon Corp. maintains a large internal audit staff that complexity of the matter being considered.
reports directly to the chief financial officer. Audit d. The professional certification or licensing by, or
reports prepared by the internal auditors indicate that membership in, an appropriate professional body.
the system is functioning as it should and that the
accounting records are reliable. An independent 28. When planning to use the work of an expert, the
auditor will probably: auditor should assess the objectivity of the expert.
a. eliminate tests of controls. This will involve considering the expert's:
b. increase the depth of the study and evaluation of I. Professional certification or licensing by, or
administrative controls. membership in, an appropriate professional body.
c. avoid duplicating the work performed by the II. Experience and reputation in the field in which the
internal audit staff. auditor is seeking audit evidence.
d. place limited reliance on the work performed by III. Relationship to the entity.
the internal audit staff. a. I, II, III c. I and III
b. I and II d. III only
23. For which of the following judgments may an
independent auditor share responsibility with an 29. The auditor shall apply the guidance of PSA 500, Audit
entity’s internal auditor who is assessed to be both Evidence, instead of PSA 620, Using the Working of an
competent and objective? Auditor’s Expert, when using the work of
a. b. c. d. a. Management’s expert. c. Either a or b.
Materiality of b. Auditor’s expert. d. Both a and b.
misstatements Yes No No Yes
Evaluation of 30. The risk that an expert’s objectivity will be impaired
accounting No Yes No Yes increases when the expert is related in some other
estimates manner to the entity (e.g., by being financially
dependent upon or having an investment in the entity)
Using the Work of an Auditor’s Expert and the expert is
a. Engaged by the entity
24. Which statement is incorrect regarding the auditor’s b. Employed by the entity
use of the work of an expert? c. Engaged by the auditor
d. Employed by the auditor
- end of AT.3011 -