Guide to Using International Standards on Auditing in - IFAC

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<strong>Guide</strong> <strong>to</strong> <strong>Using</strong> <strong>International</strong> <strong>Standards</strong> on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts
Where the objectives and scope of internal audit work includes a review of internal controls over financial
reporting, the work of the internal audi<strong>to</strong>r may (subject <strong>to</strong> its adequacy) be relied upon by the external audi<strong>to</strong>r <strong>to</strong>
modify the nature and extent of the external audi<strong>to</strong>r’s procedures. However, because internal audi<strong>to</strong>rs are hired
by the entity and form part of its internal control, they are not completely independent. Consequently, their work
would not be relied upon <strong>to</strong> the same extent as that performed by the external audit team.
Summary of Requirements
The following exhibit outlines a summary of the requirements.
Exhibit 15.7-2
Task
Will Internal Audit
Work Be Adequate
for External Audit
Purposes?
What Effect Will
Reliance on
Internal Audit
Work Have on the
External Audit?
Evaluate the
Adequacy of
Internal Work for
External Audit
Reliance
Considerations
• What are the objectives and scope of the internal audit function?
• How objective (independent) is the internal audit function?
• Are the internal audi<strong>to</strong>rs technically competent?
• Will their work be carried out with due professional care?
• Is the communication between the internal and external audi<strong>to</strong>rs effective?
Consider:
• Nature and scope of specific work performed, or <strong>to</strong> be performed, by internal audi<strong>to</strong>r;
• Assessed risks of material misstatement at the assertion level for particular
classes of transactions, account balances, and disclosures; and
• Degree of subjectivity involved in the evaluation of the audit evidence gathered
by the internal audi<strong>to</strong>rs in support of the relevant assertions.
• Did the internal audi<strong>to</strong>rs performing the work have adequate technical training
and proficiency?
• Was the work properly supervised, reviewed, and documented?
• Was adequate audit evidence obtained <strong>to</strong> enable the internal audi<strong>to</strong>rs <strong>to</strong> draw
reasonable conclusions?
• Were the conclusions reached appropriate in the circumstances?
• Were any reports prepared by the internal audi<strong>to</strong>rs consistent with the results of
the work performed?
• Were any exceptions or unusual matters disclosed by the internal audi<strong>to</strong>rs
properly resolved?
Document Results • Conclusions reached on the evaluation of adequacy of internal audi<strong>to</strong>rs work; and
• Description of audit procedures performed by the external audi<strong>to</strong>r on that work.
In some cases, the services of the internal audit group may be made available <strong>to</strong> the external audi<strong>to</strong>r <strong>to</strong> speed
up the audit process and reduce the costs of the external audit. In such situations, it would be useful <strong>to</strong> agree
in advance (preferably in writing) on matters such as the following:
• The timing and extent of the work delegated <strong>to</strong> internal audit;
• Materiality for the financial statements as a whole (and, if applicable, materiality level or levels for
particular classes of transactions, account balances, or disclosures) and performance materiality;
• Proposed methods of item selection;