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Your firm is the newly appointed external auditor to a large company that sells, maintains and leases office equipment and furniture to its customers and...

      

Your firm is the newly appointed external auditor to a large company that
sells, maintains and leases office equipment and furniture to its customers
and you have been asked to co-operate with internal audit to keep total
audit costs down. The company wants the external auditors to rely on
some of the work already performed by internal audit.
The internal auditors provide the following services to the company:
(i) A cyclical audit of the operation of internal controls in the company’s
major functions (operations, finance, customer support and
information services);
(ii) A review of the structure of internal controls in each major function
every four years;
(iii) An annual review of the effectiveness of measures put in place by
management to minimise the major risks facing the company.
During the current year, the company has gone through a major internal
restructuring in its information services function and the internal auditors
have been closely involved in the preparation of plans for restructuring,
and in the related post-implementation review.
Required:
a) Explain the extent to which your firm will seek to rely on the work of
the internal auditors in each of the areas noted above.
b) Describe the information your firm will seek from the internal auditors
in order for you to determine the extent of your reliance.

c) Describe the circumstances in which it would not be possible to rely on
the work of the internal auditors.
d) Explain why it will be necessary for your firm to perform its own work
in certain audit areas in addition to relying on the work performed by
internal audit.

  

Answers


johnson
(a) Reliance on work of internal auditors
(i) As requested, the external auditors will seek to rely on the work of
internal audit to the maximum extent possible. This might cover
planning, risk assessment, tests of controls and substantive testing.
(ii) In all cases, the external auditor should be aware that the purpose of
internal audit’s work will not be primarily directed towards the financial
statements.
(iii) In relation to the audit of internal controls, it may be possible to rely
on the work of internal audit in relation to all of the areas noted, but
only if the internal controls audited affect the financial statements. It
may be that internal audit’s work on operations and customer support is
less relevant than its work in other areas.
(iv) In relation to the four-year review of internal controls – the extent of
reliance will depend on how long ago the last review was conducted. If
it was conducted recently, it will provide help in relation to the external
auditor’s assessment of the accounting and internal control systems.
(v) In relation to risk management – the relevance of internal audit work
depends on the extent to which risks in relation to reporting in general,
and the financial statements in particular, have been addressed separately
by management. This work will be relevant to the external auditor’s risk
assessment and planning
.
(b) Information required
(i) The information required to determine the extent of external audit
reliance on internal
audit’s will be:
– Internal audit’s systems documentation (the work on
information systems and finance may include documentation of the
company’s accounting and internal control systems);
– Internal audit’s planning documentation, which may cover a
risk analysis, tests of controls and substantive procedures;
johnson mwenjera answered the question on April 3, 2018 at 14:23


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