OVERVIEW
Objective
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To describe the extent to which auditors are able to rely on the work of experts.EXPERT
COMPETENCE & OBJECTIVITY DETERMINING
NEED
SCOPE OF WORK ¾ Audit evidence
provided
¾ Factors to consider
¾ Written terms
ASSESSING FINDINGS
¾ Considerations
¾ Source data
¾ Corroboration
REPORTING ¾¾ Insufficient/inconsistent evidence Reference to experts ¾ Modified opinions
¾ Meaning
¾ Engaging
¾ Auditors’ responsibility
CONSIDERING WORK OF INTERNAL AUDIT
¾ Session 34 ¾ Competence
considerations
1.1
Meaning
A person/firm possessing special skill, knowledge and experience in a field other than accounting and auditing.
1.2
Engaging
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Will usually be engaged or employed by the entity. In some circumstances, the expert may need to be engaged by the auditor to carry out specific work. If employed by the auditor (i.e. a member of the audit firm or associate firm) a self-review threat will arise if their work (e.g. an asset valuation) will need to be audited. In most circumstances the use of an expert for this type of work would not be permitted (see Session 4).1.3
Auditors’ responsibility
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Whilst auditors have sole responsibility for their opinion, they may, none-the-less, use the work of an expert in arriving at their opinion.¾
If using the work of an expert, the auditor must ensure that such work is adequate for audit purposes, i.e. that it provides sufficient and appropriate audit evidence for the auditor’s purpose.2
DETERMINING NEED
2.1
Audit evidence provided
2.1.1
Form
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Acceptable in most forms, eg: Reports Opinions Valuations Statements
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Cannot be given in verbal form, e.g. over the telephone, as must be documented from the expert to be filed as audit evidence.2.1.2
Examples
Example 1
During the course of an audit it is sometimes necessary for the auditor to consider audit evidence obtained from the company’s legal advisers.
Required:
Suggest circumstances in which this may be necessary.
Solution
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2.2
Factors to consider
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Includes, for example: importance of item in the financial statements (e.g. a material balance);
risk of misstatement (highly subjective and open to aggressive interpretation by management);
other available evidence.
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An expert is expensive if sufficient appropriate evidence is available from other reliable sources.3
COMPETENCE AND OBJECTIVITY
The competence and objectivity of an expert should be assessed if planning to use his work.
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Basically, treat the expert as if they were a member of the audit team, e.g. competence, objectivity, independence, briefing, supervision and review.3.1
Competence considerations
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Professional/technical certification/licensing/membership (e.g. search membership records of professional body via internet).¾
Experience and reputation (e.g. visit company website, “Google”, local Chamber of Commerce).¾
The risk of objectivity being impaired increases if the expert is: employed by entity; or related to entity or management (e.g. financially dependent upon, having an investment in or a family/personal relationship).
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However, these facts alone do not prevent the auditor from placing reliance on the work of an internal expert (e.g. employed surveyor to value building work-in-progress) – they just place the auditor ‘on guard’.3.3
Reservations
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Any reservations should be discussed with management and documented.¾
Additional audit procedures may be undertaken (i.e. evidence is not sufficient) or the evidence of another expert sought.¾
If unable to obtain sufficient appropriate audit evidence the implications for theauditors’ report of the limitation on scope should be considered in accordance with ISA 701 (see Session 30).
4
SCOPE OF WORK
The auditor should obtain sufficient appropriate audit evidence that the scope of the expert’s work is adequate for audit purposes.
4.1
Written terms of reference
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As with any member of the audit team, the expert must be briefed. This may be undertaken by the auditor (e.g. for year end valuation of specialist inventory – industrial diamonds) or by the client (e.g. mid-year valuation of land and buildings).¾
Instructions to the expert (always to be in writing and made available to the auditor) should include: Objectives and scope of work
Specific matters to be covered in report
Intended use (including possible communication to third parties) of work Extent of expert’s access to appropriate records, files, etc
Clarification of expert’s relationship with entity Confidentiality of entity’s information
5
ASSESSING EXPERT’S FINDINGS
5.1
Appropriateness
The appropriateness of the expert’s work should be assessed with regard to the financial statement assertions being considered.
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Considerations include: Source data used; Assumptions used and consistency with prior periods; Auditor’s overall knowledge and findings;
Timing of work carried out.
5.2
Source data
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Make inquiries to establish whether source data is sufficient, relevant and reliable. Review or test the data used by expert to ensure it is appropriate.¾
Whilst the auditor is not the expert, they must be able to form a reasonable idea that the source data and processes are appropriate.5.3
Corroboration
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Wherever possible the expert’s opinion should be corroborated and consistency with the following considered, eg: Correspondence (e.g. regarding legal disputes);
Client or auditor “reasonableness” calculations (e.g. for inventory valuations); Minutes of board meetings.
6
REPORTING
6.1
Insufficient or inconsistent evidence
The auditor should resolve any matter of insufficiency or inconsistency of evidence arising from the expert’s work.
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The reasons for the insufficiency or inconsistency must be ascertained, e.g. did the expert follow the full scope of the terms of reference? Was the scope insufficient?¾
If insufficient, the auditor must consider other means of obtaining the audit evidence needed including the use of other experts.When issuing an unmodified opinion the auditor should not refer to the work of an expert.
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Referring to the use of an expert in an unmodified report might suggest qualification or division of responsibility (neither of which is appropriate).¾
It is the auditor’s responsibility to provide their opinion based on the work carried out, including that of the expert. The auditor takes responsibility for the expert’s work and their findings.¾
If the auditor’s report is modified – reference to the expert may be appropriate in explaining the modification. If so, the auditor should obtain the expert’s permission if necessary to refer to them by name. If they refuse, the auditor should seek legal advice.6.3
Modified opinions
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Limitation on scope, e.g. management unable/unwilling to obtain expert evidence when required.¾
Disagreement, e.g. management refuses to accept and use relevant and reliable expert evidence.FOCUS
You should now be able to:
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discuss the extent to which auditors are able to rely on the work of experts;¾
discuss why auditors rely on the work of others;¾
explain the extent to which reference to the work of others can be made in audit reports.EXAMPLE SOLUTION
Solution 1 — Reliance on legal experts
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Legal interpretation of agreements, statutes, or regulations (e.g. to determine whether the rights, title and interest in financial assets have been legally transferred).