PART II – PLANNING
Chapter 10 Internal Audit Function Evaluation
WP Ref.: Prepared by: Date: Client: Period: Introduction
Internal audit function is an appraisal activity established or provided as a service to the entity. Its functions include, amongst other things, examining, evaluating and monitoring the adequacy and effectiveness of internal control.
This working paper is relevant when the external auditor has determined, in accordance with ISA 315,that the internal audit function is likely to be relevant to the audit. The internal audit function is considered relevant when the nature of the internal audit function's responsibilities and activities are related to the entity's financial reporting, and the auditor expects to use the work of the internal auditors to modify the nature or timing, or reduce the extent, of audit procedures to be performed. However, the external auditor has sole responsibility for the audit opinion expressed, and that responsibility is not reduced by the external auditor's use of the work of the internal auditors.
The objectives of the external auditor, where the entity has an internal audit function that the external auditor has determined is likely to be relevant to the audit, are:
1. To determine whether, and to what extent, to use specific work of the internal auditors; and
2. If using the specific work of the internal auditors, to determine whether that work is adequate for the purposes of the audit.
Examples of internal auditor activities we may review to determine the nature, timing, and extent of procedures are:
Inventory counts at various locations Fixed asset physicals
Documentation for a new computerized sales and receivables system
We consider how the internal audit function affects the entity’s accounting and internal control systems and develop an effective audit approach in the following manner.
Approach Documentation Understand internal
audit’s activities
Strategy and Planning Document
We obtain and document an understanding of the internal audit function, to the extent that it operates as part of management’s control system.
Determine whether, and to what extent, to use specific work
Section I of this working paper
of the internal auditors
auditor is relevant and can be used for the purpose of our audit.
Evaluate and test work of internal auditor
Section II of this working paper
When we intend to use specific work of internal audit we document our evaluation and testing of the effectiveness of internal auditor’s work.
Refer to ISA 610, “Considering the Work of Internal Auditors” for further guidance. Section I—Preliminary assessment of the internal audit function
When it appears that internal audit is relevant to the external audit of the financial statements in specific audit areas, we make a preliminary assessment of internal audit by obtaining information about matters such as:
the objectivity of internal audit function i.e. status and reporting of internal audit
function in the entity
the due professional care of internal audit, especially whether the work is
adequately planned, supervised and reviewed
the technical competence of the internal audit function
whether management acts on internal audit's reports and recommendations and how this is evidenced
Comments/Preliminary Assessment
Section II—Evaluate and test the work of internal audit
When we intend to use specific work of internal audit, we evaluate and test that work to confirm its adequacy for our purposes.
(a) Evaluate that:
the work is performed by persons with adequate technical training and proficiency.
the work of assistants is properly planned, supervised, reviewed and
documented.
sufficient appropriate audit evidence is obtained to afford a reasonable basis
conclusions are appropriate in the circumstances and reports are consistent with the results of the work performed.
any exceptions or unusual matters disclosed by internal audit are properly
resolved by management.
(b) To help understand the internal auditor's work, including scope, it may be appropriate to coordinate work with the internal auditors by:
Holding periodic meetings
Scheduling our work to coordinate with that of the internal auditors to allow us to monitor the quality of their work and discuss any issues as they arise.
Obtaining access to internal audit working papers.
Reviewing internal audits reports and the recommendations made from work performed.Evaluation
(c) Test
We may perform any of the procedures below relating to testing of internal audit that may be considered given specific client circumstances. Our tests of the internal audit function's work may include the following procedures.
Observe the internal audit function perform audit procedures
Re-perform some of the audit procedures previously performed by the
internal audit function
For example, we may test the same controls, transactions or balances as the internal audit function has tested.
Perform different audit procedures
For example, we may test controls, transactions or balances other than those the internal audit function tested.
[List any other procedures relating to internal audit issues that may be considered given specific circumstances. Our procedures, and the documentation of those procedures, are to be sufficient to support our decision to rely on internal auditor’s work.]
# Procedure(s) Done by and date W/P Ref. Conclusion