Question

3) Mr Dewy, of the CPA firm Dewy, Cheatem, & Howe (DCH), has told his audit juniors
that internal auditors are fellow professionals and that, as such, they and their audit work
can always be a trusted.
Required:
a) Is Mr. Dewy correct in the above assertion?
b) What factors must the external auditor be satisfied with, if s/he is to rely on the work
of the internal auditor?

Answer 1

1. The assertioni of Mr. Dewy may not always be correct. The statutory auditor is entitled to rely on the work of the internal auditor, but this reliance is subject to many factors. Therefore, it cannot be said that the statutory auditor can "always" blindly rely on the work of the internal auditor. Reliance of course, can be placed, but subject to conditions. Therese conditions are outlined in the relevant auditing standards.

2. Factors that the statutoy auditor must be satisfied with if he/she has to place reliance on the work of an internal auditor:

a. Scope of the internal audit work

b. The reporting structure of the internal audit, whether the internal audit reports to CFO or MD or the Board or Audit committee can often determine the kind of reliance that can be placed

c. The type of policies (recruitment, retention, compensation) for either internal audit staff recruited or the firm hired for internal audit

d. Overall competence of the internal audit function

e. Own professional judgement, based on the scope of internal audit, audi procedures performed and documented by internal audit and actions taken by the management on internal audit recommendations.

Therefore, reliance on the work of an internal auditor is a matter of professional judgement by the statutory auditor and such reliance cannot be placed unconditionally