AA – Aug 2022 – L2 – Q1b – Audit and Assurance Evidence

Defines the term management’s expert and explains audit approaches for obtaining audit evidence.

Question

Auditors may need to rely on other parties such as management’s experts, internal auditors, or component auditors during an audit engagement. Auditors may also use various audit approaches to obtain audit evidence.

Required:
i) Define the term management’s expert.
(2 marks)

ii) State FIVE (5) factors which the auditor should consider before relying on management’s expert as a means of audit evidence.
(10 marks)

iii) Distinguish between substantive approach and system approach in the audit of financial statements.
(3 marks)

Answer

i) A management’s expert is an individual (possessing expertise) engaged by the management of the company being audited whose work is used in the financial statements.
(2 marks)

ii) The factors which should be considered in relying on a management expert include:

The competence, capabilities, and objectivity of that expert
An understanding of the expert’s work
The appropriateness of the expert’s report as audit evidence
Whether the expert has a financial interest in the audit client, for example, shareholding
The expert’s personal relationship with a senior manager in the audit client
The fee paid for the expert’s services was a fair commercial price
(5 points @ 2 marks each = 10 marks)

iii)

The substantive approach involves testing and vouching every item in the financial statements to supporting documents, typically used for small entities with weak internal controls.
The systems approach involves testing underlying accounting systems with less emphasis on individual transactions and balances to avoid over-auditing.
(3 marks)

Tags: Audit evidence, Management’s expert, Substantive approach, System approach
Level: Level 2

Topic: Audit and Assurance Evidence
Series: AUG 2022

Uploader: Theophilus