CONSIDERING THE WORK OF INTERNAL AUDITING

OVERVIEW

Objective

To determine the nature and extent of reliance on the work of internal audit.

RELATIONSHIP

External v Internal
Optional

UNDERSTAND ACTIVITIES
& ASSESS

Basic principles Internal auditing

Assessment criteria Scope and objectives
Basic principle
Co-ordination of work

EVALUATION INTERNAL
AUDIT
WORK
Essential procedure
Factors

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 CONSIDERING THE WORK OF INTERNAL AUDITING

1 RELATIONSHIP BETWEEN EXTERNAL AND INTERNAL AUDITORS

1.1 External 1.2 Internal

Role To report an opinion on financial statements (see To appraise, examine and evaluate organisational activities and
Session 1). assist management in discharging its responsibilities (see
Session 3).

Required by Statute (typically) Management, usually in larger organizations, may be urged by

best practice to review need for internal audit from time to time

Appointed by Shareholders (usually at an Annual General Highest level of management (eg audit committee)
Meeting) or directors

Reports to Shareholders (primary statutory duty) and Audit committee (or highest level of management)
management (professional responsibility)

Reports on Financial statements Internal controls system and quality of performance

Forms opinions on “True and fair view” (or similar) Adequacy of ICs as a contribution to the economic, efficient
and effective use of resources

Status Independent of client company Employee (therefore potentially less objective)

Qualification Usually ACCA, ICAEW, ICAI or ICAS May also be members of other professional bodies (eg IIA) or
unqualified

Scope of assignment Unlimited, to fulfil statutory obligation Prescribed by management

Conduct of audit In accordance with ISAs, for example. Similar, Standards for the Professional Practice of Internal
Auditing.

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 CONSIDERING THE WORK OF INTERNAL AUDITING

2 ACTIVITIES OF INTERNAL AUDITING

2.1 Internal auditing

An appraisal activity established within an entity as a service to the entity. Its

functions include, amongst other things, examining, evaluating and monitoring the
adequacy and effectiveness of the accounting and internal control systems.

2.2 Scope and objectives

Operate in the
following areas

Review of Examination of Review of the Review of compliance Special

A&IC systems financial and Economy, With external and Investigations
operating info (incl Efficiency and Internal requirements
detailed testing of Effectiveness of (eg laws and
transactions and operations management policies)
balances)

Of direct interest to auditor May impact on external audit

Internal auditing personnel may also assist in carrying out external audit
procedures.

2.3 Basic principle

The effect, if any, internal auditing activities on external audit procedures should be
considered.

2.4 Co-ordination of work

Internal and external auditors can assist each other by:

sharing information obtained for planning purposes;

discussing business developments with key personnel;

discussing materiality, risk assessments and audit objectives;

reviewing each other’s work plans and programs;

liasing on the timing of internal audit reviews to allow the external auditor to
make use of their findings.

 Accountancy Tuition Centre (Overseas Courses) Ltd 2001 1203

 CONSIDERING THE WORK OF INTERNAL AUDITING

3 UNDERSTAND AND ASSESS

3.1 Basic principles

The external auditor should:

obtain a sufficient understanding of internal audit activities

make a preliminary assessment of the internal audit function if relevant.

Effectiveness of internal audit is just one factor to be considered in the

external auditors’ assessment of the control environment.

3.2 Assessment criteria

Factors to consider

(a) organizational status − Direct access to highest level of management?

− Free of operating responsibility?
− Free to communicate fully with external auditor

(b) scope of function − Nature/extent of assignments (including extent, direction and

timing of tests)
− Evidence of recommendations being actioned by management (see
Reports to management)

(c) technical competence − Technical training/proficiency

− Recruitment policy
− Professional qualifications

(d) due professional care − Planning, supervision, review and documentation

− Existence of audit manuals, work programs and working papers

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 CONSIDERING THE WORK OF INTERNAL AUDITING

4 EVALUATION

4.1 Essential procedure

If it is to be used, the work of internal audit should be evaluated and tested to confirm
its adequacy.

4.1 Factors

Risk
External auditors’ involvement must be
sufficient to form own conclusion
Materiality

Assessment of internal audit function. Consider

technical training/proficiency
proper supervision, review and documentation
sufficient appropriate audit evidence
appropriate conclusions
reports consistent with results of work performed
exceptions resolved
amendments to audit program
need to test work of internal audit.

Illustration

A company holds stock at 15 locations. Internal audit may observe year-end

stocktaking procedures at 4 (say) provided external auditor observes 6 (say). Visits
would be rotated each year.

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 CONSIDERING THE WORK OF INTERNAL AUDITING

FOCUS

You should now be able to

distinguish between the roles of internal and external auditors

outline the planning considerations in co-ordinating the work of others

define the possible reliance on the work of internal audit

recognise the factors which determine the extent to which reliance can be
placed on the work of internal audit.

 Accountancy Tuition Centre (Overseas Courses) Ltd 2001 1206