Chapter 18 - Internal Auditor

Question 1

what are objectives of internal audit function?

Answer 1

1. monitoring of internal control
2. examination of financial and operating information
3. review of compliance with laws and regulations
4. review of operating activities
   5.special investigation

Question 2

what is monitoring of internal control?

Answer 2

establishment of internl control system is responsibility of management. internal auditors perform test of controls to monitor internal controls,in recomend improvements through reports to directors

Question 3

what is examination of financial and operating information?

Answer 3

internal auditors perform inquiry and tests of details to examine transactions and balances.

Question 4

what is review of compliance with laws and regulations?

Answer 4

internal auditors review weather entity is emplying with applicable laws and regulations and internal requirements e.g., environmental laws, money laundering regulatios.

Question 5

what is review of operating activities?

Answer 5

they review whether operations are conducting economically , efficiently and effectively.

Question 6

what is special investigation

Answer 6

investigation into particular areas such as suspected fraud within entity.

Question 7

how an external auditor can get help from internal auditors?

Answer 7

two ways
1. by using(or relying on) the work of internal auditor.
2. by internal auditor to rovide assistance.

Question 8

describe auditor functions, other than fraud investigation, the directors of company could ask the department to undertake?????

Answer 8

concept review questions

Question 9

what is criteria to evaluate internal audit functions?

Answer 9

there are three criterions to evaluate internal audit functions.
1. whether organisational status supports objectivity of the internal auditor.
2.level of competence off internal audit functions.
3. whether internal audit functions apply systematic and disciplined approach

Question 10

how to evaluate whether organisational status supports objectivity of the internal auditor?

Answer 10

1. chief internal auditor should be reported to TCWG (e.g., directors or audit committee and not management (e.g., CFO, CEO, director finance or chief accountant.
2. scope of work of internal auditors should be decided by audit committee; and not by management.
3. internal audit function should be free from conflicting responsibilities, they should not perform any managerial work (e.g., design, implementation, operation of control)
   4.internal auditors should be rotated periodically to avoid familiarity threat (i.e., 3 to 5 years)
4. employment decision like hiring, firing or promotions of internal audit functions should be made by TCWG and not by management.
5. there should not any restrictions or limitations on internal auditors.

Question 11

how to evaluate level of competence of internal audit functions?

Answer 11

1. level of education, professional qualification and experience.
2. whether internal auditors possess required knowledge and skills for financial reporting.
3. whether there are establish practises for technical training and hiring of internal auditors.
4. whether internal audit function is adequately resourced.

Question 12

how to evaluate whether internal audit functions apply systematic and disciplined approach?

Answer 12

1.whether work of internal auditor is properly planned, supervised, performed, documented and reviewed.
2. whether internal audit function has appropriate quality control procedures ensuring good quality audit programs and work papers.

Question 13

determine when work of internal auditors cannot be used?

Answer 13

1.work of internal auditors is not used if it lacks competence, objectivity or systematic or disciplined approach.
2. work of internal auditors is not used if it has high risk or judgement is involved.

Question 14

in which areas work of internal auditors is used?

Answer 14

1. documentation of accounting and internal control system.
   risk assessment performed by internal audit department.
2. testing of operating effectiveness of controls.
3. substantive procedures involving limited judgement.
4. observation of inventory counts.
5. testing of compliance with regulatory requirements.
6. tracing transactions throughout the information system.

Question 15

how to evaluate adequacy of work of internal audit functions?

Answer 15

auditor shall perform sufficient audit procedures on the body of work to determine its adequacy for audit purpose, including evaluating whether;
1. the work was properly planned, performed, supervised, reviewed and documented.
2. sufficient appropriate evidence was obtained to enable internal auditors to draw reasonable conclusions.
3. conclusions reached are appropriate and reports prepared by internal audit function are consistan with results of work performed.

Question 16

what procedures external auditor shall perform for to evaluate the work of internal audit?

Answer 16

1. reperformance of work of internal auditors on sample basis to validate his conclusions.
2. inquiry of internal auditors
3. observation of procedures performed by internal auditors
4. inspection of working papers of internal auditors.

Question 17

what discussion should be done with internal audit functions?

Answer 17

1. nature of work performed
2. timing of such work
   3.extent of audit coverage
3. materiality and performance materiality
4. methods of item selection and sample sizing
5. documentation of work performed
6. review and reporting procedures

Question 18

what is the communication with TCWG?

Answer 18

external auditors shall communicate the planned use of work of internal audit function to TCWG for their understanding Of the purposed audit approach.

Question 19

If externa auditor uses the work of internal audit, what he shall document?

Answer 19

1. he should document the evaluation of
   a. level of competence of internal audit functions
   b. whether the organizational status, and policies and procedures of organization support objectivity of internal audit functions.
   c. whether system applies systematic and disciplined approach.
2. basis of decisions regarding nature and extent of work used.
3. the audit procedures performed by external auditors to evaluate the adequacy of the work used.

Question 20

what is direct assistance

Answer 20

it is the use of internal auditors to perform audit procedures under the direction supervision and review of the external auditor.

Question 21

what factors external auditor should consider before obtaining direct assistance?

Answer 21

1. whether law prohibits direct assistance
2. objectivity and competence of internal audit functions
3. risks and judgements involved in the area.

Question 22

where external auditors should not get direct assistance?

Answer 22

1. areas involving higher risks and significant judgements.
2. evaluating and addressing fraud risks
3. determination of unannounced audit procedures.
4. assigning responsibilities to handle external confirmation requests.
5. decisions regarding internal audit functions.
6. areas relating to works in which internal auditor is already involved.

Question 23

before obtaining direct assistance, external audit should get written agreement from where.?

Answer 23

1. from authorised representative of the entity that internal auditors are allowed to follow the external auditors’ instructions, and the entity will not intervene in the work.
2. from internal auditors that they will keep specific matters confidential and will inform external auditor of any threat to their objectivity.

Question 24

why an external auditor shall direct, supervise and review the work of internal auditor?

Answer 24

to ensure whether the internal auditor has obtained sufficient and appropriate audit evidence to support the conclusion.

Question 25

how an external auditor shall direct, supervise and review the work?

Answer 25

1. external auditor shall recognise that internal auditors are not independent of entity. Therefore, direction, supervision shall be of different nature and more extensive as compared t review of audit team member, depending on risk, judgement, objectivity and competence of internal auditor.
2. review procedure shall include checking back some of the work performed to the underlying audit evidence.

Question 26

what is communication with TCWG while obtaining assistance from internal auditor?

Answer 26

external auditor shall communicate with TCWG nature and extent of planned use of internal auditors to provide direct assistance.

Question 27

what would be the documentation , if direct assistance of internal auditor is obtained?

Answer 27

external auditor is required to document the following:
1. evaluation of competence of internal auditor used to provide direct assistance and evaluation of threats of their objectivity.
2. basis for decision regarding nature and extent of work performed by internal auditors
3. who reviewed the work performed, and the date and extent of such review.
4. written agreements obtained from authorised representative of the entity and from internal auditors.
5. working papers prepared by internal auditors in providing direct assistance

Question 28

what would be the steps to obtain direct assistance from internal auditor?

Answer 28

1. determining whether and in which area direct assistance can be obtained.
2. obtain agreements
3. direction supervision and review
4. communication with TCWG
   5.documentation if direct assistance of internal auditor is obtained.

Question 29

who is an expert?

Answer 29

an individual or an orginization which possess experties and experience in the field other than auditing and accounting.

Question 30

in which areas an expert can be used?

Answer 30

1. valuation of assets e.g., property
2. legal opinions
3. actuarial calculations e.g., pension liability
4. engineering data e.g., estimation of life machinery, oil or gas reserves.
5. analysis of unusual or complex tax compliance issues.
6. interpretation of contracts, laws and regulation.
7. IT experts

Question 31

when is there need of auditor’s expert?

Answer 31

the decision to use an expert depends upon:
1. nature, significance and complexity of the matter.
2.risk of material misstatement.
3. availability of alternative sources of evidence.

Question 32

what should be the auditors’ responsibilities in case of use of expert?

Answer 32

1. evaluate competence
2. obtain understanding of field of experts’ work
3. agree terms of engagement with experts.
4. evaluate appropriateness/adequacy of experts’ work.
5. if experts work is not adequate for auditors purpose.

Question 33

how can an auditor test competence, capability and objectivity of expert?

Answer 33

while assessing all these things, auditor shall consider.
1. experts professional qualifications e.g., whether he is the member of the relevant professional body or have necessary relevance.
2. experts experience and reputation on the area.
3. independence of expert from clients company e.g., whether has an interest or relationship with the client e.g., finacial interest, business and personal relationship,provision of othr sevices.

Question 34

how an auditor can get information about expert to test him?

Answer 34

1. personal experience with previous work of that expert.
2. discussion with that expert.
3. discussion with other auditors who have familiarity with that expert work.
4. information regarding experts’ qualification, membership of professional body, or industry association, license to practice or other external recognition.
5. published books or papers written by that expert.

Question 35

how can an auditor get information about field of expert’s work?

Answer 35

1. by determining nature, scope and objectives of that experts’ work for the auditor’s purpose.
2. evaluate the adequacy of that work for the auditor’s purpose.

Question 36

what the terms of an expert which an auditor should agree?

Answer 36

1. the nature, form and work of that expert.
2. the respective responsibilities of that expert and auditor.
3. forms of expert’s report.
4. confidential requirements.

Question 37

how an auditor can evaluate the adequacy of experts work?

Answer 37

by evaluating:
1. accuracy, completeness and relevance of significance source.
2. relevance and reasonableness of significant assumptions and methods.
3. reasonableness of expert’s findings and conclusions & consistency of these conclusions with other audit evidence.

Question 38

what auditor shall do if work is not adequate for his purpose?

Answer 38

auditor shall:
1. agree additional work with expert.
2. perform additional audit procedures appropriate for the circumstances e.g., hiring another expert.
3. if still work is not adequate, it will be scope limitations and auditor shall express qualified (if effect is material) or disclaimer of opinion (if effect is pervasive) on financial statements.

Question 39

hiring of an expert could effects auditors responsibility????

Answer 39

auditor has sole responsibility in auditor report.so expert can affect the procedure of auditor but not his responsibility.

Question 40

how an auditor can refer the expert in an auditor’s report?

Answer 40

expert is referred in auditors report only if:
1. it is required by law or regulation.
2. such reference is relevant to explain nature of modification to the auditors’ opinion.
3. it is a key audit matter.

Question 41

what would be the procedure if experts work is included in auditors report?

Answer 41

if it is referred then:
1. auditors report shall indicate the reference that the reference does not reduces the auditor’s responsibility for audit opinion.
2. auditors may need the permission of the auditors expert before making such a reference.