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Thank you for taking our Pop Quiz #139: AUD: Planning Activities: Miscellaneous Planning Topics. Following are the answers and rationales.

Which of the following statements is correct concerning an auditor's use of the work of a specialist?

A. The work of a specialist who is related to the client may be acceptable under certain circumstances.

B. If an auditor believes that the determinations made by a specialist are unreasonable, only a qualified opinion may be issued.

C. If there is a material difference between a specialist's findings and the assertions in the financial statements, only an adverse opinion may be issued.

D. An auditor may not use a specialist in the determination of physical characteristics relating to inventories.

The correct answer is A.

A. Correct!
The work of a specialist who has a relationship with the client may be acceptable. The auditor must assess the risk that the specialist's objectivity has been impaired and consider the need for additional procedures to ascertain that the specialist's findings are not unreasonable.

B. Incorrect...
If the auditor believes that the determinations made by a specialist are unreasonable, the auditor must apply additional procedures which could include obtaining the opinion of another specialist. Determination as to whether or not a qualified or any opinion should be issued is then based upon the evidence collected.

C. Incorrect...
An adverse opinion is issued when the assertions in the financial statements are not in conformity with GAAP. If there is a material difference between a specialist's findings and the assertions in the financial statements, the auditor should apply additional procedures to determine what the impact is on the assertions in the financial statements. If the auditor is unable to resolve the matter after applying additional procedures, the opinion of another specialist may be obtained. Failure to resolve the matter will result in a qualified opinion or a disclaimer due to the inability to obtain sufficient evidence.

D. Incorrect...
A prohibition against using a specialist to determine physical characteristics relating to inventories does not exist. In fact, determining of physical characteristics of inventories is cited in the professional standards as an example of the type of work in which specialists might be utilized.



In using the work of a specialist, an auditor referred to the specialist's findings in the auditor's report. This would be an appropriate reporting practice if the:

A. Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist.

B. Auditor, as a result of the specialist's findings, adds an explanatory paragraph emphasizing a matter regarding the financial statements.

C. Client understands the auditor's corroborative use of the specialist's findings in relation to the representations in the financial statements.

D. Auditor, as a result of the specialist's findings, decides to indicate a division of responsibility with the specialist.

The correct answer is B.

A. Incorrect...
It is not necessary for the client to satisfy him/herself with the qualifications and competence of the specialist. The auditor must be satisfied.

B. Correct!
The auditor may refer to the specialist's findings in the audit report if, as a result of the findings, the auditor adds explanatory language to the report or qualifies the opinion. Under these circumstances, the auditor believes that the reference will make it easier for readers of the financial statements to understand why the explanatory paragraph or qualification was included.

C. Incorrect...
The auditor (not the client) should obtain an understanding of:
1) the objectives and scope of the specialist's work;
2) the specialist's relationship to the client;
3) the methods or assumptions used;
4) a comparison of the methods or assumptions used with those used in the preceding period;
5) the appropriateness of the work; and
6) the form and content of the specialist's findings.

This understanding is required in all cases in which a specialist is used and thus has no bearing on the reference to the specialist in the audit report. The audit report is based solely on the auditor's judgment and would not require client understanding to refer to a specialist.

D. Incorrect...
The auditor bears sole responsibility for the audit opinion and must determine if the specialist's findings support the related assertions in the financial statements. Responsibility cannot be shared with the specialist.



After identifying related party transactions, an auditor most likely would:

A. Substantiate that the transactions were consummated on terms equivalent to those prevailing in arms-length transactions.

B. Discuss the implications of the transactions with third parties, such as the entity's attorneys and bankers.

C. Determine whether the transactions were approved by the board of directors or other appropriate officials.

D. Ascertain whether the transactions would have occurred if the parties had not been related.

The correct answer is C.

A. Incorrect...
It is usually not possible for the auditor to ascertain whether the transactions would have occurred had the relationship not been present. As a result, it is difficult to determine whether or not such transactions were consummated on terms equivalent to those prevailing in arms-length transactions.

B. Incorrect...
While the auditor might discuss the implications of the transactions with third parties, such as the entity's attorneys and bankers, in order to better understand the financial statement effects of such transactions, the auditor would first ascertain that the transactions were properly authorized.

C. Correct!
The auditor's primary concern with regard to related party transactions is disclosure. After identifying related party transactions, the auditor should examine the transactions in order to determine the purpose, nature, and extent of the transactions and their effect on the financial statements. In that process the auditor would look to see if the transactions were properly authorized by the board of directors.

D. Incorrect...
It is usually not possible for the auditor to ascertain whether the transactions would have occurred had the relationship not been present. The auditor's primary focus is disclosure of the related party transactions that have occurred.



When auditing related party transactions, an auditor places primary emphasis on:

A. Confirming the existence of the related parties.

B. Verifying the valuation of the related party transactions.

C. Evaluating the disclosure of the related party transactions.

D. Ascertaining the rights and obligations of the related parties.

The correct answer is C.

A. Incorrect...
When auditing related party transactions, the auditor is primarily concerned with the adequacy of disclosure. The existence of related parties must be determined early in the audit in order to later evaluate whether or not disclosures regarding related party transactions are adequate.

B. Incorrect...
When auditing related party transactions, the auditor is primarily concerned with the adequacy of disclosure. The auditor may test the reasonableness of the amounts but concentrates on whether or not disclosures regarding related party transactions are adequate.

C. Correct!
When auditing related party transactions, the auditor is primarily concerned with the adequacy of disclosure.

D. Incorrect...
When auditing related party transactions, the auditor is primarily concerned with the adequacy of disclosure.

While the auditor may review the rights and obligations of the related parties in considering the substance of related party transactions, the auditor will concentrate on whether or not disclosures regarding related party transactions are adequate.



Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday's predecessor auditor was Post, CPA, who has been notified by Monday that Post's services have been terminated.

Under these circumstances, which party should initiate the communications between Hill and Post?

A. Hill, the successor auditor.
B. Post, the predecessor auditor.
C. Monday's controller or CFO.
D. The chairman of Monday's board of directors.

The correct answer is A.

A. Correct!
The initiative belongs to Hill, the successor auditor. When an auditor has been retained to audit the financial statements of an entity, the auditor may contact the predecessor auditor to obtain information about matters which may affect the conduct of the audit and to review the prior year workpapers. The successor auditor MUST contact the predecessor auditor prior to final acceptance of the engagement.

B. Incorrect...
The initiative belongs to Hill, the successor auditor. It does not belong to Post, the predecessor auditor. When an auditor has been retained to audit the financial statements of an entity, the auditor may contact the predecessor auditor to obtain information about matters which may affect the conduct of the audit and to review the prior year workpapers. The successor auditor MUST contact the predecessor auditor prior to final acceptance of the engagement.

C. Incorrect...
The initiative belongs to Hill, the successor auditor. It does not belong to Post, the predecessor auditor. When an auditor has been retained to audit the financial statements of an entity, the auditor may contact the predecessor auditor to obtain information about matters which may affect the conduct of the audit and to review the prior year workpapers. The successor auditor MUST contact the predecessor auditor prior to final acceptance of the engagement.

D. Incorrect...
The initiative belongs to Hill, the successor auditor. It does not belong to Post, the predecessor auditor. When an auditor has been retained to audit the financial statements of an entity, the auditor may contact the predecessor auditor to obtain information about matters which may affect the conduct of the audit and to review the prior year workpapers. The successor auditor MUST contact the predecessor auditor prior to final acceptance of the engagement.

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