If an External Auditor's Client Has Used a Service Organization

question 59

Multiple Choice

If an external auditor's client has used a service organization during the year for some of its payroll processing and accounting, which of the following steps should the external auditor take if he or she decides to use the service organization auditor's report as audit evidence that the entity's controls are operating effectively for certain assertions?

• A) Consider the sufficiency and appropriateness of the evidence provided by the service organization auditor's report about the effectiveness of controls intended to prevent or detect material misstatements in the particular assertions.
• B) Double-date the audit report to show the date of the service organization's audit and the date of the client's audit.
• C) The auditor should make reference to the report of the service auditor as a basis, in part, for his or her own opinion on the entity's financial statements.
• D) Re-perform each of the audit tests used by the service organization auditor.

---

Definitions:

Debt-To-Equity Ratio

A financial ratio that measures the degree to which a company is financing its operations through debt versus wholly owned funds.

Equity Multiplier

A financial leverage ratio that measures the proportion of a company’s assets that are financed by its shareholders' equity, indicating the level of debt used to finance assets.

Net Profit Margin

A profitability ratio that shows what percentage of sales has turned into profits after all expenses are deducted.

Gross Margin

The difference between sales revenue and cost of goods sold, often expressed as a percentage, indicating the profitability of a company's core activities.