Topics: Auditing, Audit, Internal audit Pages: 6 (1487 words) Published: November 20, 2013
1 Internal audit
‘Internal audit’ is an appraisal activity established by management for the review of accounting and internal control systems as a service to the entity. It reviews, monitors and make recommendations for the improvement of systems.

Other activities include:
Examination of financial information
Review of economy, efficiency and effectiveness (‘value-for-money’ audits) Review of compliance with external laws and regulations
Review of internal policies
Review of the authorization of transactions
Special investigations, including fraud
Risks assessments

Comparison of internal and external audit function:

Internal auditor
External auditor
Advise management on adequacy of systems to protect the organisation Provide opinion on ‘true and fair view’/present fairly
Legal basis
Not a legal requirement but corporate governance guidance recommends its need to be continually assessed Legal requirement for most limited companies and public bodies Scope
Determined by management, both operational and financial
Financial focus as determine by legislation
Approach to work
Increasingly risk based
Assess risks
Evaluate and test systems and recommend improvements to management Increasingly risk based
Testing underlying records and transactions that form the basis of the financial statements. Responsibility
To advise management on internal control and corporate governance To report to shareholders on the truth and fairness of financial statements

2 The external auditor and reliance on internal audit
ISA 610 Considering the Work of Internal Audit governs the situation where external auditors are auditing that operates an internal audit function.

Reasons why external auditor should use internal audit
Much duplication of work may be eliminated – eg internal audit may already have detailed systems descriptions, flowcharts. Internal audit may have done detailed work on areas of concern to external audit – such as credit control and stock control.

Relationship may be delicate to handle – rivalry between internal and external teams. External auditor cannot reduce his statutory responsibility by delegating. Cost saving may be illusory if highly trained internal staff are diverted from their main activities – which presumably are making or saving money for the company.

ISA 610 requires that the external auditors must obtain a sufficient understanding of the internal audit function to assist in the planning and developing of an effective audit approach, and to determine whether it is possible and desirable to rely on audit work, based on an assessment of: The organizational status of internal audit – including access to management, freedom of operating and communication The scope of the internal audit function and whether management acts on internal audit recommendations The technical competence of the internal auditors; in terms of experience and professional qualifications – hiring and training policies are relevant Due professional care- whether the work of internal audit generally appears to be properly planned, supervised, reviewed and documented as evidence by adequate audit manuals, work programmes and papers.

When evaluating and testing internal audit, the external auditor should: Consider the materiality, judgement needed and risk of items to be tested and other evidence available Set out the extent of planned reliance on internal audit, together with reasons for deciding on that extent, in a planning memorandum Evaluate and test internal audit work to ensure that:

the work has been performed by those with adequate technical training and proficiency and that assistants are properly supervised
sufficient appropriate evidence is obtained to support the conclusions reached
conclusions reached are appropriate and that reports are consistent with conclusions
exceptions or unusual matters are resolved.

Some observance of internal audit...
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