CAF-8 · Chapter 12
Reliance on Others MCQs with Answers
10 multiple-choice questions on Reliance on Others for CAF-8 Audit and Assurance Essentials. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under ISA 610, when can the external auditor use the work of the 'Internal Audit Function'?
- A) Whenever they want to save money on staff costs.
- B) Only if the internal audit function is sufficiently objective, competent, and applies a systematic and disciplined approach.
- C) Only if the internal auditors are family members of the external auditor.
- D) Never, because internal auditors are employees of the client.
Show answer & explanation
Answer: B) Only if the internal audit function is sufficiently objective, competent, and applies a systematic and disciplined approach.
ISA 610 permits reliance but requires the external auditor to first evaluate the internal audit function's quality, competence, and organizational status (objectivity).
Question 2
Which of the following tasks is considered too high-risk for the external auditor to delegate to internal auditors as 'Direct Assistance'?
- A) Observing the annual physical inventory count.
- B) Assessing the risk of material misstatement at the financial statement level and making significant professional judgments.
- C) Re-performing mathematical calculations on depreciation.
- D) Tracing a sample of invoices to the ledger.
Show answer & explanation
Answer: B) Assessing the risk of material misstatement at the financial statement level and making significant professional judgments.
External auditors must perform the core judgmental and risk-assessment tasks themselves. Direct assistance is typically limited to lower-risk, more procedural testing.
Question 3
According to ISA 620, what is the definition of an 'Auditor's Expert'?
- A) A junior auditor who is good at Excel.
- B) An individual or organization possessing expertise in a field other than accounting or auditing, whose work is used by the auditor to obtain sufficient appropriate evidence.
- C) A tax consultant who works for the client.
- D) The client's CEO who has 20 years of experience.
Show answer & explanation
Answer: B) An individual or organization possessing expertise in a field other than accounting or auditing, whose work is used by the auditor to obtain sufficient appropriate evidence.
Auditor's experts provide specialized non-accounting skills, such as complex property valuations, legal interpretations, or specialized actuarial calculations.
Question 4
Before relying on the work of a specialized property valuer (Auditor's Expert), the auditor must evaluate:
- A) The expert's favorite color.
- B) The expert's competence, capabilities, and objectivity.
- C) Whether the expert is a friend of the client's manager.
- D) Only the cost of the expert's services.
Show answer & explanation
Answer: B) The expert's competence, capabilities, and objectivity.
As per ISA 620, the auditor must assess if the expert has the skill (competence), resources (capability), and lack of bias (objectivity) to perform the work reliably.
Question 5
What is the external auditor's responsibility for the final audit opinion when they have used the work of an expert or internal auditors?
- A) They share the responsibility equally with the internal auditors.
- B) The expert is solely responsible for any errors in their specific area.
- C) The external auditor remains solely responsible for the audit opinion and this responsibility is not reduced by the use of others.
- D) Responsibility is transferred to the client's board of directors.
Show answer & explanation
Answer: C) The external auditor remains solely responsible for the audit opinion and this responsibility is not reduced by the use of others.
The external auditor has sole responsibility for the audit report. Using the work of others is a tool, not a way to delegate legal or professional responsibility for the opinion.
Question 6
If an auditor uses a 'Service Organization' (e.g., an external company that processes the client's payroll), which ISA applies?
- A) ISA 210
- B) ISA 402
- C) ISA 520
- D) ISA 700
Show answer & explanation
Answer: B) ISA 402
ISA 402 (Audit Considerations Relating to an Entity Using a Service Organization) guides the auditor on how to obtain evidence when a client outsources key business processes.
Question 7
A 'Type 2 Report' from a service organization's auditor provides evidence regarding:
- A) Only the company's marketing strategy.
- B) The design, implementation, and operating effectiveness of the controls at the service organization.
- C) Only the names of the employees at the service organization.
- D) The historical cost of the service organization's office building.
Show answer & explanation
Answer: B) The design, implementation, and operating effectiveness of the controls at the service organization.
A Type 2 report is significantly more useful than a Type 1 report because it includes evidence that the controls were actually operating effectively over a period, allowing the auditor to reduce substantive testing.
Question 8
Which of the following is an indicator of LOW 'Objectivity' for a client's internal audit department?
- A) The internal audit department reports directly to an independent Audit Committee.
- B) The Chief Internal Auditor is also the client's Chief Financial Officer (CFO).
- C) Internal auditors are members of a recognized professional accounting body.
- D) The internal audit team has a formal, written work plan.
Show answer & explanation
Answer: B) The Chief Internal Auditor is also the client's Chief Financial Officer (CFO).
If the person head of internal audit also manages the financial records (as CFO), they are essentially 'auditing their own work', which completely destroys objectivity.
Question 9
When the external auditor decides to use the work of an expert, which of the following must be agreed upon in writing between the auditor and the expert?
- A) The nature, scope, and objectives of the work.
- B) The respective roles and responsibilities.
- C) The confidentiality requirements.
- D) All of the above.
Show answer & explanation
Answer: D) All of the above.
ISA 620 requires a formal agreement (often an engagement letter) between the auditor and their expert covering scope, roles, reporting, and confidentiality.
Question 10
In Pakistan, if the external auditor mentions the name of an auditor's expert in an 'Unmodified' audit report, what is the prerequisite?
- A) It is always mandatory to mention the expert's name.
- B) The expert's name should NOT be mentioned unless required by law or to explain a modification to the opinion.
- C) The expert must pay a fee to be mentioned.
- D) The auditor should only mention the expert if they are a relative.
Show answer & explanation
Answer: B) The expert's name should NOT be mentioned unless required by law or to explain a modification to the opinion.
To ensure researchers/users understand the external auditor takes full responsibility, ISA 620 prohibits naming the expert in an unmodified report unless it is legally required or directly related to a qualified/modified opinion.