Establishment of internal audit function plays a crucial role in effective corporate governance system. Internal audit function exists to perform a number of activities including review of the accounting and internal control systems, identification of significant business and financial risks, performance of value-for-money audits and safeguarding company’s assets. External auditors may from time to time rely on the work of internal audit function in forming audit opinion. However, in doing so external auditors would have to assess the work of internal audit they want to place reliance on.
Required:
Discuss FOUR criteria that will determine the extent of reliance to be placed on the work of internal audit work by external auditors. (8 marks)
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i. Organisational status – internal audit’s specific status in the organisation and the effect this has on its ability to be objective. Ideally, internal audit function should have a direct line of communication to the entity’s main board or audit committee, and be free of any other operating responsibility. External auditors should consider any constraints or restrictions placed on internal audit.
ii. Scope of function – the nature and extent of assignments which internal audit performs. External auditors should also consider whether management and the directors act on internal audit recommendations and how this is evidenced.
iii. Technical competence – whether internal audit work is performed by persons having adequate technical training and proficiency as internal auditors. External auditors may, for example, review the policies for hiring and training the internal audit staff and their experience and professional qualifications, also how work is assigned, delegated and reviewed.
iv. Due professional care – whether internal audit work is properly planned, reviewed and documented. The existence of adequate audit manuals, work programmes and working papers may be considered, also consultation
procedures.