Chapter 18 Using work of others

Question 1

Differentiate b/w internal and external auditor.

Answer 1

Internal Auditor:
a) Employee of the entity
b) Appointed by BODs
c) Qualification is determined by BODs
d) Objective is to evaluate and improve governance, Risk management, and internal controls.
e) Objective/scope is determined by BODs
f) Reports to BODs
g) No particular format of audit report

External Auditor:
a) Independent of the entity
b) Appointed by shareholders
c) Qualification is determined by law
d) Objective is to express an opinion on F/S
e) Scope/objective is determined by ISAs and law
f) Reports to shareholders
g) Prescribed form of audit report

Question 2

Specify the objectives/scope/benefits of internal audit function

Answer 2

1) Monitoring of internal controls:
Internal auditor perform the test of control to ensure the operating effectiveness of internal controls.
2) Examination of financial and reporting information:
Internal auditor perform tests of details to examine transactions and amounts.
3) Review compliance with laws and regulations:
Internal auditor review whether the entity is complying with applicable laws and regulations.
4) Review of operating activities:
Internal auditor reviews whether operations are operating economically, efficiently, and effectively
5) Special investigation:
Internal auditor investigates a particular area such as suspected fraud within the entity

Question 3

How auditor evaluated the objectivity of the internal audit function of an entity?

Answer 3

Objectivity:
a) Internal auditor shall be reportable to TCWG(directors,audit committee) not to management(CFO,CEO)
b) Scope of the work of the internal auditor shall be determined by TCWG, not by management.
c) Internal auditor shall be free from conflicting responsibilities. They shall not perform any managerial work(preparation of F/S, Design and implement internal controls)
d) There shall not be any restrictions on internal auditors.
e) Internal auditors should be periodically rotated to avoid familiarity threats.

Question 4

How auditor evaluated the competence and work of the internal audit function of an entity?

Answer 4

1) Competence:
The auditor shall evaluate:
a) Level of education, professional qualification, and experience
b) Whether the internal auditors possess the required knowledge and skills in financial reporting
c) Whether there are any established practices for technical training and hiring of internal auditors.

2) Whether the internal auditor applies a disciplined and systematic approach:
a) Whether the work of internal auditor is properly planned, supervised, performed, documented, and reviewed.
b) Whether the internal audit function has quality control procedures to ensure good quality of audit work and working papers.

Question 5

Specify the circumstances where the auditor shall not use or use less work of internal audit function.

Answer 5

1) Shall not use:
When there are serious/significant concerns about the competence and objectivity of internal audit function.

2) Shall use less work:
a) when there are some concerns about the competence and objectivity of the internal auditor
b) When there is high risk and judgment involved in an area.

Question 6

Specify the circumstances where the auditor can use the work of the internal audit function.

Answer 6

1. Documentation of accounting and internal control system
2. Risk assessment performed by the internal auditor.
3. Test of the operating effectiveness of internal controls
4. Substantive procedures involved limited judgment
5. Observation of inventory counts
6. Test of compliance with legal requirements by the entity

Question 7

How external auditor can evaluate the adequacy of the work of internal auditor to be used?

Answer 7

The external auditor shall evaluate the following factors:
1. Whether the work was properly planned, supervised, performed, documented, and reviewed.
2. Sufficient appropriate audit evidence was obtained by internal auditor to draw a reasonable conclusion.
3. The conclusion reached is appropriate and the reports prepared by internal auditor are consistent with the result of work performed by internal auditor.
4.Exception/unusual matters were resolved.

For such evaluations auditor shall perform following procedures:
1. Reperformance of work performed by internal auditor to validate his conclusion
2. Inquiry from internal auditors
3. Observation of procedures performed by internal auditors
4.Inspection of working papers prepared by internal auditors.

Question 8

If external auditor uses the internal auditor’s work what discussions should he do with the internal auditor/

Answer 8

1. Nature, extent, and timing of work to be used
2. Materiality and performance materiality
3. Methods of item selection and sample size
4. Documentation of audit work
5. review and reporting requirements.

Question 9

What documentation shall the external auditor prepare if he uses the internal auditor’s work?

Answer 9

1. Evaluation of
   a) Level of competence of internal auditors
   b) Whether the organizational status, policies, and procedures support the objectivity of the internal audit function
   c) Whether the internal audit function applies a systematic and disciplined approach
2. Basis of decision regarding nature and extent of use of internal auditor’s work
3. Procedures performed by internal auditor to evaluate the adequacy of internal auditor’s work

Question 10

Determine whether and in which areas auditor shall obtain direct assistance?

Answer 10

Auditor shall consider the following factors to determine the nature and work to assigned:
1. Risk and judgement involved in the area
2. Competence and objectivity of internal auditors
3. Involvement of external auditor in audit after obtaining direct assistance

However, Direct assistance shall not be obtain in the following areas:
  1. Areas involving high risk and judgment
  2. Evaluating and addressing fraud risks
  3. Determination of unannounced procedures 
  4. Assigning the responsibilities to handle external confirmation request.