Question

In: Accounting

Several firms have internal audit function to govern their business operations. The head of internal audit...

Several firms have internal audit function to govern their business operations. The head of internal audit department of one of your clients has invited you to give a talk to the members of his department during their annual training week. He would like your views on the different roles of external and internal auditors, the type of work that each carry out and their reporting responsibilities. Required: Draft notes that you will use when giving your talk, paying particular attention to the differences and similarities of the following features of internal and external auditors: (i) independence; (ii) the work carried out on systems of internal control and operations; (iii) reporting responsibilities. (Please provide Minimum of 550 words. Maximum of 600 words)

Solutions

Expert Solution

International Standard on Auditing (ISA) 610, Using the Work of Internal Auditors was revised and published in 2013. This standard focuses on whether the external auditor can use the work of the internal audit function for purposes of audit, and the revised version of the standard, clarified whether the internal auditors could be used to provide direct assistance to the external auditor.

External and internal auditors

Much of the work performed by a company’s internal audit function can overlap with the work conducted by the external auditor, specifically in areas dealing with the assessment of control processes. It is likely that in carrying out detailed work evaluating and reviewing the company’s internal control framework internal audit perform procedures on financial controls relevant to the external audit. As such, the external auditor, rather than duplicating these procedures, may be able to place reliance on the work carried out by the internal auditor.

Here we have to focus on the provision of direct assistance by the internal auditors, which historically has been a very controversial issue. Internal auditors are the employees of the entity, which could result in threats to independence (either in fact or perceived) if direct assistance is provided by the internal auditors. On the other hand, the following benefits relating to provision of direct assistance by the internal auditors cannot be ignored:

  • There will be a strengthened relationship between the external and internal auditors through a more effective dialogue
  • With the knowledge of the internal auditors, the external auditor can gain additional insights into the entity
  • The external auditor can use internal auditors who may have relevant expertise in particular areas, and
  • The external audit team can focus on the more significant audit issues.


Where such use is not prohibited by law or regulation, the ISA provides a robust framework to ensure that direct assistance is obtained only in appropriate circumstances, that the external auditor considers the relevant limitations and safeguards, and that the auditor’s responsibilities are clearly set out.


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