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• Providing for effective segregation of duties among individuals responsible for
making investment and credit decisions, and those responsible for the custody of
the securities, disbursing and receiving funds, record keeping, conformation of
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Objectivity is achieved when the auditor makes a balanced assessment of all the relevant
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In making judgments about the nature and effect of the internal auditors’ work on the
external auditor’s procedures in specific audit areas, the external auditor considers the
following issues:
2. Level of judgment involved in planning and performing the procedure
and evaluating the audit evidence obtained
4. Level of competence of the internal auditors
For some assertions, such as existence and occurrence, the evidence gathered is objective.
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• The existence and disclosure of related- party transactions, contingencies,
uncertainties, and subsequent events
In contrast, areas where evidence evaluation is more objective include cash, prepaid
assets, and additions to long- lived assets.
For some assertions, the external auditor may decide that because of work performed by
internal auditors, the audit risk has been reduced to an acceptable level and that testing of
the assertions directly by the auditor may not be necessary. However, the external auditor
should reperform or test some of the work completed by the internal auditors.
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Factors that might be considered in evaluating competence include:
• Educational level and professional experience of internal auditors.
• Professional certification and continuing education.
• Audit policies, programs, and procedures.
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a. The external auditing standards indicate that objectivity should be assessed
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b. The students may have different perspectives on this issue. On the one hand, some
may indicate that the internal auditor can achieve the same level of objectivity on a given
audit as does the external auditor. Objectivity is a state of mind – an unbiased approach to
gathering, evaluating, and analyzing evidence. It is extremely important that both audit
functions strive for the highest level of objectivity on each audit engagement.
c. Arguments for using the work performed by the internal audit function are:
• Documented performance (through the external quality reviews) at the highest
In terms of arguments against using the work performed by the internal audit
function, all of the brief information about the internal audit function is positive.
However, there is additional information that the external auditor would want to
know before making a decision to rely on the internal auditor’s work. The first issue
is whether the internal auditor’s work is relevant to the financial statement audit or
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a. There are obviously no correct solutions to this question. The description of the
internal audit function includes many of the factors that are indicated in the professional
external auditing standards. The intention when designing the description was that the
internal audit function would be assessed to be of a moderate level of quality, at best. The
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confirmations) while in other cases the sample size was smaller than the external auditor
would have used (testing controls).
b. The auditing standards do not provide any guidance to suggest that the evaluation
of an internal audit function would differ if that function were staffed in-house or
outsourced. However, some students might suggest that the objectivity of an outsourced
c. The answer to this question should incorporate the issues of risk (inherent and
control) of material misstatement, level of judgment involved in the planning and
performing the procedures and evaluating the audit evidence gathered in support of the
assertions, level of objectivity of the internal auditors, and level of competence of the
internal auditors. Although there is not enough information to conclude whether the
accounts receivable balance is material, such a conclusion would seem reasonable. There
d. In addition to, or in place of, relying on the work already performed by
REDTOP’s internal audit function, the external auditors may choose to have REDTOP’s
internal auditors provide direct assistance during the performance of the audit In this
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a. The main difficulty that the auditor faces in determining whether management’s
analysis is reasonable is to understand management’s procedures and to decide if they
have merit. The auditor will have to understand the following types of issues:
• What was the underlying data used in determining the award allocation amount?
Was the calculation of the award allocation amount reasonable?
b. The consequences of the auditor’s decisions are associated with assuring that the
goodwill is not inappropriately over-valued on the balance sheet (with resulting under-
expensing of impairment charges on the income statement) or under-valued on the
balance sheet (with resulting over-expensing of impairment charges on the income
c. The risks are those associated with inaccurate financial reporting, particularly if
the impairment charges are material to the client’s financial statements.
d. The auditor can gather various types of evidence, including:
• Documentation of management’s process and assumptions
• Documentation of the sales on which the award allocation is based
Fraud Focus: Contemporary and Historical Cases
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a. Materiality concerns the significance of an item to users of a registrant’s financial
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considered relevant factors, or even the above definition of materiality. For example, the
auditors should have included qualitative factors in their assessment, such as the riskiness
of the client. In fact, AAER 904 notes that the engagement partners were aware of red
flags that should have caused a heightened level of professional skepticism. For example,
b. The AAER notes that the audit partners placed undue reliance on management’s
representations and failed to exercise due care in connection with assessing the
c. The auditor should evaluate each misstatement individually, and the auditor
should consider the aggregate effect of all misstatements. Further, if an individual
Application Activities
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a. The auditor needs to update materiality levels as new information comes to light
during the audit that would have resulted in setting a different materiality level. In fact,
one difficulty that commonly arises in making materiality judgments is that the auditor’s
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So, while it is appropriate to change materiality during the audit engagement, the PCAOB
would have been concerned with Anderson’s actions because the change did not seem to
be supportable. Rather, the change was intended to allow the client to not book
adjustments to the financial statements that should have been required.
b.
• Identify the ethical issue(s). The overall ethical issue is whether Anderson should
allow for an unqualified audit opinion to be issued on financial statements that he
believed contained material misstatements. The students will likely recognize that
Anderson faced a number of dilemmas leading up to the audit opinion dilemma.
For example, should he have increased the level of materiality? The enforcement
action also describes instances of Anderson accepting accounting decisions and
adjustments that did not seem to have economic substantive or reliable support.
Were those appropriate actions on Anderson’s part?
• Determine who are the affected parties and identify their rights. As with most
dilemmas, there are a number of affected parties. Most notably, affected parties
include current and existing shareholders, lenders, and management. Shareholders
have a right to know how well management has safeguarded and managed the
standards.
• Determine the most important rights. It is the author’s assessment that the owners
of the organization (shareholders) have a right to know the financial position of
the organization and whether the financial statements are materially correct. If
investors make “bad” decisions with accurate information, then they should suffer
the consequences. However, if they make decisions based on inaccurate
information (when the audit opinion indicated that the information was materially
correct), then their rights have been violated.
• Develop alternative courses of action. One course of action is to issue and
unqualified opinion on NFC’s financial statements. Alternatively, Anderson can
recognize that given the circumstances, an unqualified opinion is not appropriate
and advise the client and the NIC engagement team of his decision. Anderson,
may prefer to discuss these actions with someone else in the firm and/or may
choose to make his concerns known through the firm’s whistleblower program.
• Determine the likely consequences of each proposed course of action. Obviously
one of the consequences of issuing an unqualified opinion (and not following
professional standards) is that Anderson will find himself subject to disciplinary
engagement team of the parent organization.
• Assess the possible consequences, including an estimation of the greatest good for
the greatest number. Determine whether the rights framework would cause any
course of action to be eliminated. In this scenario, the rights of the shareholders
would seem to dominate. The purpose of the audit is to add credibility to
NOTE: There is a second PCAOB enforcement action in which a second partner, Thomas
J. Linden, was also disciplined in this case. See PCAOB Release No. 105-2009-004.
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The purpose of this problem is to encourage students to locate relevant materials online
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a. The area of financial instruments is highly complex and evolving. The purpose of
this research is to reinforce to the students that there is a need to look at the economic
(1) Identify the ethical issue(s). The ethical difficulty arises in this situation because of
(2) Determine who are the affected parties and identify their rights. The affected parties
are:
Management- they have a right to make decisions about the organization’s investments,
and shareholders have delegated them that authority.
(3) Determine the most important rights. The most important rights are to shareholders,
(4) Develop alternative courses of action.
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Alternative B. The auditor could require disclosure.
(5) Determine the likely consequences of each proposed course of action.
Alternative A. Given the probability that the financial instrument will not decline in
value, the odds are in favor of this alternative. Maybe the auditor, the organization,
management, shareholders, and other stakeholders will get lucky! That’s what
(6) Assess the possible consequences, including an estimation of the greatest good for the
greatest number.
If the financial instrument provides a high return, then management, shareholders, and
(7) Decide on the appropriate course of action. The appropriate course of action is for the
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Education
CIA candidates must hold a 4-year post-secondary degree (or higher) or its educational
equivalent from an accredited university. For further details, please refer to the
Certification Candidate Handbook.
internal audit or its equivalent, OR
• Seven years verified experience in internal audit or its equivalent.
Download the CIA Education Requirement Exceptions FAQ and Application here.
Once you have completed the form, please access the Certification Document Upload
Portal and upload your form(s) there. (Submit the document type as Educational)
Work Experience
CIA candidates with a 4 year post secondary degree must obtain a minimum of 24
months of internal auditing experience or its equivalent. A Masters degree can substitute
for 12 of the required 24 months. Please refer to the Certification Candidate Handbook
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Character Reference
Candidates must exhibit high moral and professional character and must submit a
Character Reference Form signed by a CIA, CGAP, CCSA, CFSA, CRMA, or the
candidate’s supervisor.
Proof of Identification
Candidates must provide proof of identification in the form of a copy of the candidate’s
official passport or national identity card. These must indicate current status; expired
Eligibility Period
Effective November 2010, the certification program’s eligibility requires candidates to
complete the program certification process within four years of application approval. If a
Confidentiality
The CIA exam is a non-disclosed examination. Candidates in the program agree to keep
the contents of the exam confidential and therefore may not discuss the specific exam
Code of Ethics
CIA candidates agree to abide by the Code of Ethics established by The IIA.
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Continuing Professional Education (CPE)
Upon certification, CIAs are required to maintain their knowledge and skills and stay
abreast of improvements and current developments by satisfying CPE requirements.
IIA Membership
In most cases, you do not have to be a member of The IIA to take the CIA exam or
become a CIA, but we encourage you to consider its advantages. There are some
countries, however, that do require candidates to be IIA members to take the CIA exam.
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AU-C 501 provides relevant guidance. The paragraph that provides relevant guidance on
auditor’s responsibilities is 501.06.
Investments in Derivative Instruments and Securities Measured or Disclosed at Fair
Value
.06 With respect to investments in derivative instruments and securities measured or
disclosed at fair value, the auditor should
Academic Research Cases
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a. The issue being addressed is whether companies use restructuring charge
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impairments. Since the charges are estimates management can create a hidden reserve
that can be tapped to increase earnings in future periods. Previous research indicates that
the market actually reacts favorably to companies recording restructuring charges. Recent
research also suggests that the stock market appears to reward companies that meet or
beat earnings target and analyst predictions.
b. The results of the research indicate that management is more likely to record
restructuring reversals in quarters when pre-reversal earnings are below analysts’
forecasts or when an organization has a pre-reversal loss. They are only slightly more
likely to record a reversal in quarters when pre-reversal earnings are below the same
c. In order to improve audit quality, the auditor needs to review any restructuring
charges for valid estimates. When a restructuring charge is reversed, the auditor can
assess the situation to determine whether the organization would have met the analysts’
earnings predictions or would have recorded a net loss if the restructuring reversal had
not been recorded. This analysis would provide the auditor with an indication if
additional review of the restructuring charge reversal needed to be performed.
d. Data was gathered form Lexis/Nexis to identify companies who had recorded a
restructuring charge reversal. Other databases were used to determine the earnings per
share and analysts’ forecast for these companies. Companies where the reversal was
insufficient to raise earnings sufficiently to meet earnings forecast or prevent a report of
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e. The research for this paper is limited in that it only examines reversals that are
disclosed by companies. Companies may record smaller reversals that are not
individually disclosed. Also, the minor explanatory power of the models when examining
the magnitude of the reversals suggests that there are other possible and important
reasons that an organization may be recording restructuring reversals.
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a. The Securities and Exchange Commission (SEC) has expressed concerns that
misstatements are allowed to go uncorrected on audited financial statements as a result of
auditors’ use of materiality levels. The Financial Accounting Standards Board (FASB)
defines an immaterial misstatement as one that has no effect on a typical or average
user’s decisions. The SEC describes a material misstatement as information about which
an average prudent user ought to reasonably be informed.
b. The results of the research indicate that the average investor has a much lower
materiality threshold than those used during an audit. For each of the following measures
the authors find differences between auditors’ and investors’ materiality thresholds:
(1) percentage effect on net income – the average user has a materiality threshold
using pretax income between 0.1 percent and 0.2 percent, while the auditing
literature suggests that items less than 5 percent are considered immaterial while
those greater than 10% are considered material.
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c. The materiality threshold level of the average investor (one type of financial
statement user) is much lower than the materiality level of the practicing auditor. The
auditor may want to consider lowering the materiality level during an audit to avoid
misleading investors and to reduce the litigation exposure against the auditor in case of a
misstatement. Of course, the auditor would want to consider other relevant factors in
making the materiality threshold judgment.
d. The authors used a sample of 31,470 firm quarters. The researchers adapted a
model from prior research that allowed them to infer the average investors’ materiality
thresholds based on their reactions to new earnings announcements. This equation was
used as the base model and then the researchers extended the model by adding other
e. Readers should be aware that the research for this paper is limited as user
materiality preferences may vary widely among the different users and involve factors
other than those examined in this research. Another limitation is that the analysis focuses
on a broad spectrum of characteristics and the user materiality threshold may be
influenced by specific firm characteristics that were not considered. Further, subsequent
to this study, additional guidance on materiality has been issued by the SEC (see SAB
108) and the AICPA ASB; this additional guidance might have resulted in auditors and/or
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(IAF) to a firm other than their external audit firm. This approach allows that client the
option to secure the firm providing IAF services for other consulting services, which may
lead to cost-savings and increased competence of the IAF.
b. External auditors viewed the competence of the outsourced IAF as similar across
all three settings (assessment in the mid-to-low 8’s on a scale up to 10):
Competency Assessments (out of 10):
IAS Only: 8.13
NAS Same Teams: 8.52
NAS Different Teams: 8.39
Objectivity Assessments (out of 10):
IAS Only: 7.85
NAS Same Teams: 4.28
NAS Different Teams: 5.63
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c. In-house internal auditors and organizations that are considering outsourcing their
IAF primarily for cost savings reasons should consider the findings of this study. Any
cost-savings an organization receives from outsourcing the IAF may be diminished by the
increased cost of the external audit. Thus, this study suggests value to retaining an in-
house IAF.
d. Eighty-nine (89) experienced external auditors participated in a case study in
which they provided several IAF related evaluations: IAF competence, IAF objectivity,
extent of reliance on the IAF, change in audit hours due to reliance on IAF, and change in
audit fees due to reliance on IAF.
The 89 participants were placed in one of three different outsourced settings (which may
trigger objectivity concerns), with each participant providing responses to only one
version.
(1) IA Only: outsourced IAF team provides oversight and monitoring role with no
additional services
e. Experimental studies include several limitations including the fact the information
set is limited and that participants can not consult with others as they may do in an actual
audit setting. Further, the case setting only considered IAF reliance in one audit area –
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Ford and Toyota
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ACL
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Data files are in italics. ACL icons, commands, and equations in bold:
Approach
To Begin
Create a new project by clicking on the New Project icon or choose File,
New, Project from the menu and give it the name Benford. Be sure to
save the project on the medium that contains the data files. Import
Expense Reimbursements, name it Expense Reimbursements.
1
Click on Analyze, Perform Benford Analysis. Perform the test on
Amount. Set the Number of Leading Digits to 2. Click on the output tab
and choose graph. Click OK. Notice that there is a very significant
difference between the actual and expected counts for 49.
2
By double-clicking on the tall bar of the graph for 49 you will see all of
the employees that had expense reimbursements beginning with 49.