Guide to Using International Standards on Auditing in - IFAC

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196 <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;
197 <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 • Documentation of the work performed; and • Review and reporting procedures. Reporting The external audi<strong>to</strong>r has sole responsibility for the audit opinion expressed, and that responsibility is not reduced by the external audi<strong>to</strong>r’s use of the work of the internal audi<strong>to</strong>rs. Consequently, no reference would be made in the external audi<strong>to</strong>r’s report <strong>to</strong> the work of the internal audi<strong>to</strong>rs. 15.8 ISA 620—<strong>Using</strong> the Work of an Audi<strong>to</strong>r’s Expert Paragraph # ISA Objective(s) 620.5 Objectives of the audi<strong>to</strong>r are: (a) To determine whether <strong>to</strong> use the work of an audi<strong>to</strong>r’s expert; and (b) If using the work of an audi<strong>to</strong>r’s expert, <strong>to</strong> determine whether that work is adequate for the audi<strong>to</strong>r’s purposes. Exhibit 15.8-1 Risk Assessment Is an audi<strong>to</strong>r’s expert needed <strong>to</strong> obtain audit evidence? If yes: and objective? Risk Response Reporting Do not ae reference <strong>to</strong> or of an audi<strong>to</strong>r’s expert uness audi<strong>to</strong>r's report as been odied If insufficient appropriate audit evidence as obtained odify te audi<strong>to</strong>r’s report
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