To: CEO
From: Audit Senior
Date: 01/09/2020
Re: Report on factors determining the External Auditors reliance on Internal Auditors’ work

Factors that may affect the external auditor’s determination of whether the work of the internal auditors is likely to be adequate for the audit include:

Objectivity

• The status of the internal audit function within the entity and the effect such status has on the ability of the internal auditors to be objective.
• Whether the internal audit function reports to those charged with governance or an officer with appropriate authority, and whether the internal auditors have direct access to those charged with governance.
• Whether the internal auditors are free of any conflicting responsibilities.
• Whether those charged with governance oversee employment decisions related to the internal audit function.
• Whether there are any constraints or restrictions placed on the internal audit function by management or those charged with governance.
• Whether and to what extent management acts on the recommendations of the internal audit function, and how such action is evidenced.                 (2 points for 2 marks)

Technical competence

• Whether the internal auditors are members of relevant professional bodies.
• Whether the internal auditors have adequate technical training and proficiency as internal auditors.
• Whether there are established policies for hiring and training internal auditors.          (2 points for 2 marks)

Due professional care

• Whether activities of the internal audit function are properly planned, supervised, reviewed and documented.
• The existence and adequacy of audit manuals or other similar documents, work programs and internal audit documentation.
  (2 points for 2 marks)

Communication
Communication between the external auditor and the internal auditors may be most effective when the internal auditors are free to communicate openly with the external auditors, and:
• Meetings are held at appropriate intervals throughout the period;
• The external auditor is advised of and has access to relevant internal audit reports and is informed of any significant matters that come to the attention of the internal auditors when such issues may affect the work of the external auditor; and
• The external auditor informs the internal auditors of any significant matters that may affect the internal audit function.
(2 points for 2 marks)
(Format and presentation = 2 marks)

Governance Processes
The objectives of the governance processes are the following:

• To ensure that the organization is able to achieve its mission
• To ensure the right strategic direction of the organization
• To ensure that the operation of the entity will be carried out in compliance with the laws and regulations and internal systems and procedures
• To ensure the stability and growth of the entity
• To protect the interest of the stakeholders
• To prevent fraud and other malfeasance in the entity
• To safeguard the assets of the entity and help to preserve the environment
• To ensure effective organizational performance and accountability
• To ensure smooth information flow and proper risk management
• To co-ordinate the activities and communication of information among the board,
• To establish and monitor whether controls and standards are working.
  Audit work
• Evaluation of the design, implementation and effectiveness of organization’s ethics-related objectives, programmes and activities
• Assessing whether the information technology governance of the organization supports the organization strategies and objectives

Risk management
Objectives to be assessed in risk management are ensuring that:

• risk procedures are in place
• Strategies are in place and are working effectively.
• Reliability and integrity of financial and operational information
• Effectiveness and efficiency of operations
• Safeguarding assets
• Compliance with the Laws, regulations, and contracts
  Audit work:
• Identifying and evaluating significant exposure to risk management and control system.
• Monitor and evaluate the effectiveness of the organization’s risk management system
• Suggest improvement of the risk management systems.

Consultancy projects are one-off projects designed to address adhoc issues. It is playing an increasing role in the work of internal audit. Taking on this projects enables internal auditors to extend their skills and the organization to draw on the knowledge of internal auditors. However there are dangers in becoming too involved in consultancy projects.
The resultant dangers include:

• Internal audit staff may be diverted to consultancy projects, and the regular audit reviews may be inadequately resourced.
• By taking on consultancy projects and suggesting solutions, internal audit could be getting too much involved in operational concerns. There is a serious lack of independence if internal audit has to review solutions that internal audit staff have provided.
• Management is relying on internal audit to solve problems instead of having operational staff and managers solve or preferably prevent them. Certain steps can be taken in order to avoid these problems.

• The terms of reference of the internal audit department should draw a clear distinction between regular audit services and consultancy work.
• Enough resources for regular audit services should be guaranteed. Consultancy work should be separately resourced and additional resources obtained if necessary.
• If managers are concerned about improving controls, reviewing these improvements can legitimately be included in the work of internal audit.
• Regular audit reviews and consultancy projects can be undertaken by different staff.
• If consultancy work identifies serious control deficiencies, these must be incorporated into internal audit reviews.

Internal audit assignment involve the following areas and their contributions may be viewed as follows:

• Testing operational or financial controls.
  This may help the auditors to discover deficiencies in the design and operation of internal control and enable them to make recommendations to management to rectify the deficiencies and to ensure strict adherence to the required controls. This should result in the effectiveness and efficiency of the control systems.
• IT system reviews.
  Information technology has become pervasive in the operation of entities. Proper functioning of the IT systems will ensure orderly conduct of transmitting and generation of information on the operations. System review carried out by internal auditors should ensure the system is functioning effectively and efficiently to enable management achieve the objectives of the entity.
• Value for money reviews
  In the non-profit entities the objective is to serve the needs of the various stakeholders. Value for money reviews ensures that the entity or the organisation is fulfilling the need of its stakeholders through the proper use of resources at the minimum cost for higher output.
• Fraud investigations
  Fraud can results in organisation losing valuable assets and this may affect its survival and ability to achieve its objectives. Investigation carried out by internal auditors can help to identify the perpetuators, quantify the loss and help to recover it and make recommendations to prevent future recurrence and this can contribute to survival of the entity
• Review of compliance with laws and regulations
  The existence and operations of organisations are governed by laws and regulations, non-compliance of which may results in various sanctions including fines, damages and outright prohibitions of the operations of the entity. Reviews of compliance with laws and regulations by internal audit will help management to avoid the consequence of non-compliance to ensure the survival of the organisations.
• Customer service reviews
  The continued survival and growth of an organisation depends on continuous patronage of services and products by customers. Customer service reviews conducted by internal auditors should ensure that customers are satisfied with the services of the organisation so that the organisation can survive.

REPORT ON ASSESSMENT OF THE NEED FOR INTERNAL AUDIT IN ADEPA LTD. TO THE SENIOR PARTNER.
In assessing the need for an internal audit function in Adepa Ltd., consideration should be given to the following factors:

• The cost of setting up an internal audit department versus the predicted benefits
• Predicted savings in external fees where work carried out by consultants will be carried out by the new internal audit department.
• The complexity and scale of the Adepa Ltd.’s activities and the systems supporting those activities especially with the current growth of the company and the desire to use the most modern technology in its activities
• The ability of existing managers and employees to carry out assignments that internal audit may be asked to carry out
• Management’s perceived need for assessing risk and internal control as demonstrated by the management of Adepa Ltd.
• Whether it will be more cost effective or desirable to outsource the work
• The pressure from external stakeholders to establish an internal audit department.

If the volume of internal audit work required is such that the price differential between employing an internal audit team and outsourcing the work is small, the company will need to consider that there are longer term benefits such as:

• Establishing an internal audit department will help maintain a group of highly skilled people which may help the business develop faster that it would otherwise have been
• Working in internal audit can be a route providing training for future senior executives because internal auditors are likely to obtain knowledge of many aspects of the business and liaise with personnel at all levels.

If management considers these factors, it will be in a position to take a decision on the establishment of an internal audit department.

Signed
Audit Manager.