Question

Tukai is a listed limited-liability company with a year-end of 30 June. Tukai’s main activity is selling health
products to the public. Products sold range from soap, perfume and herbal supplements. Products are
purchased from approximately 100 different suppliers around Asian countries. Tukai has 20 stores in 5
different countries.
Tukai is managed by Karl Kalulu who is an accountant with CPA from Australia and with his influence has a well-trained
staffed internal audit department, who report on a regular basis to the audit committee. Karl has impressed the owners
of the company with his professional reports and timely external audits.
Areas where the internal and external auditors may carry out work include:
1. attending the year-end inventory count in 20 stores annually. All stores are visited on a rotational basis
2. checking the internal controls over the procurement systems (e.g. ensuring a liability is only recorded
when the inventory has been received)
3. reviewing the operations of the marketing department.
Required: For each of the above three areas, discuss:
(a) the objectives of the internal auditor
(b) the objectives of the external auditor
(c) whether the external auditor will rely on the internal auditor and, if reliance is required, the extent of that
reliance.

Answer 1

(a) Objectives of Internal Auditor:

While attending the inventory count at different branches, the internal auditor must keep a check on the interenal controls placed. The internal auditor must make sure that the inventory counting measures adopted are suitable for each type of asset and depending on the characteristics of the inventory. They must also ensure that there are no unauthorised movements happening in the same and there are proper controls placed to ensure that no inventory has moved out without proper supporting approvals.

While checking the procurement process, the internal auditor has to ensure that there are no deficiencies in the process planned for the company. The auditor must ensure that the entire flow of goods happen as per the standard procedures as mentioned in the company policies. They must also ensure the efficiency of each controls that are already placed in the company.

While reviewing the operations of marketing department, the internal auditor has to review the marketing techniques that are already introduced by the company. They must check if all the marketing techniques are in use and how efficient they are in generating reveue for the company.

(b) Objectives of External Auditor:

When performing the stock counting, the main target of the external auditor must be to ensure that the inventory available physically with the company matches the number as per their system/ softwares. In case there are any visible variations, the auditor must obtain proper explanations for the variation and in case the company is not able to locate the difference, the same has to be reported.

While checking the internal controls in procurement system, the duty of external auditors will be to verify if the said controls are performing well and are delivering the required results. The external auditors must try to measure the efficiency of the internal controls and in case of any shortfalls, the same need to be reported and also an altrernative way of doing the same need to be advised.

When the external auditor reviews the marketing department, he need to check the effectiveness of the marketing expenses. External auditor must verify the expenses incurred on marketing with the supporting bills. He must also do a comparitive analysis of marketing expense from previous year to current year and any increase in the expense must have a equivalent increase in revenue of the company.

(c) Using the works of Internal auditor

As per the standards on auditing, the external auditors are allowed to use the works of the internal auditors. But reliability on the same need to be decided by the external auditor. If the external auditor uses the work done by the internal auditor, the same need to be mentioned in the report issued by the external auditor.

ISA 610 (Revised 2013), Using the Work of Internal Auditors and Related Conforming Amendments clearly states the useability of such works.

If the external auditor plans to use the work of the internal audit function, the external auditor shall discuss the planned use of its work with the function as a basis for coordinating their respective activities. The external auditor shall read the reports of the internal audit function relating to the work of the function that the external auditor plans to use to obtain an understanding of the nature and extent of audit procedures it performed and the related findings. The external auditor shall perform sufficient audit procedures on the body of work of the internal audit function as a whole that the external auditor plans to use to determine its adequacy for purposes of the audit, including evaluating whether: (a) The work of the function had been properly planned, performed, supervised, reviewed and documented; (b) Sufficient appropriate evidence had been obtained to enable the function to draw reasonable conclusions; (c) Conclusions reached are appropriate in the circumstances and the reports prepared by the function are consistent with the results of the work performed. (Ref: Para. A27–A30) 24. The nature and extent of the external auditor’s audit procedures shall be responsive to the external auditor’s evaluation of: (a) The amount of judgment involved; (b) The assessed risk of material misstatement; (c) The extent to which the internal audit function’s organizational status and relevant policies and procedures support the objectivity of the internal auditors; and (d) The level of competence of the function;8 (Ref: Para. A27–A29) and shall include reperformance of some of the work. (Ref: Para. A30) 25. The external auditor shall also evaluate whether the external auditor’s conclusions regarding the internal audit function in paragraph 15 of this ISA and the determination of the nature and extent of use of the work of the function for purposes of the audit in paragraphs 18–19 of this ISA remain appropriate.