Auditing & Ethics Issues
Tutorial 21
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Tutorial 21: Reliance on Internal Audit and Other Specialists
Review the lecture notes and reading materials, ask in the tutorial if you do not understand.
Part I Multiple Choice and Fill-in the Blank Questions
- The function of internal audit includes the following except:
- Examine and evaluate accounting and internal control system
- Examine the performance of external auditor
- Examine financial and operating information for management
- Conducting special investigations assigned by directors
- The relationship between external auditor and internal auditor is as follows:
- External auditor follows the decision of internal auditor
- Internal auditor is employee of external auditor
- Co-operation between internal and external auditors may include discussion of scope of audit findings
- External auditor is appointed by internal auditor
- Reliance on work of internal auditor will depend on, except
- Levels of judgement required
- Sufficiency of complementary audit evidence
- Specialist skills possessed by internal auditors
d. Audit fee provided by the company
- Which of the following is not the factor to be considered if reliance is to be placed on experts:
- Appropriateness of expert's work
- Scope of expert's work
- Independence of expert
- Organization status of the company
- Internal audit is an element of ______system set up by management
- Internal auditor will review the implementation of corporate polices, ______and procedures of the company.
- Internal auditor is an independent appraisal function within and an ______of the organization.
- Before placing reliance on work of internal auditor, ______has to assess the competence of the internal auditor.
- It is possible for internal and external auditor to reply on each other's ______.
- Expert's may be used to ______the asset such as land and building.
Part II Long Questions
Question 11.
Describe the factors an external auditor would consider before placing any reliance on the work of an internal auditor
Question 12
“When using the work performed by an expert, the auditors should obtain sufficient appropriate audit evidence that such work is adequate for the purpose of the audit. (SAS 520.1)
Required:
- Briefly describe ‘sufficiency’ and ‘appropriateness’ in the context of audit evidence
- Give four factors which may influence the auditors’ judgment as to what is sufficient appropriate audit evidence
- Define the term ‘expert’. Why do auditors need to use the work of an expert? Give Two examples of the work of an expert.
- State Five matters that the auditors would like the client to cover in their written instructions to the expert
- How would the auditors assess the appropriateness of the expert’s work as audit evidence regarding the financial statement assertion being considered?
(June 2002, HKAAT)
Question 13
TGF Ltd. Is expanding rapidly in the last five years. The management of TGF Ltd. would like to improve the internal controls of the company and is evaluating several proposals. One of the proposals is to set up an internal audit department. However, the board of directors does not know how to set up the internal audit department and would like to obtain your professional opinion. The management is considering to transfer an accountant with two years external audit experience and ten years of accounting experience within the company’s Finance Department to manage the internal audit department. The internal auditor will report to the Financial Controller.
Required:
- What is the function of an internal audit?
- Do you support the proposed candidate and the reporting line of the internal auditor? Explain why and give your suggestion in respect of an effective internal audit department.
- Discuss the relationship between external and internal auditors in connection of their nature of work in the same business organization.
(Dec 1995, HKAAT)
Question 14
Powerhouse Bank has a small internal audit department with an internal audit manager and an internal audit clerk. This internal audit department is a new department and reports to the financial controller. Prior to transferring to the internal audit department, the internal audit manager worked in the loans department of the bank for ten years without other working experience. He has just completed a short course on auditing. The internal audit clerk is a fresh graduate who studied biology in the university.
The assignments of internal audit department are assigned by the financial controller. A recent assignment is to document the internal control procedures for the accounting department in the dealing of interest rate swaps. On the day to day operations, one of the duties of the internal audit clerk is to check whether the details on the fixed deposit advise (a computer generated document) agrees with the details on the fixed deposit dealing ticket (a source document). The internal audit clerk is not required to document his work done. When exceptions are found, the internal audit clerk will verbally report the exceptions to the financial controller for further action.
You are the external auditors of Powerhouse Bank and are performing an assessment of its internal audit department to determine whether you would like to place reliance.
Required:
a)Why should the external auditors obtain an understanding of the internal audit and assess the role and scope of internal audit?
b)List and elaborate four important criteria in understanding and assessing the internal audit function
c)Based on the criteria in (b) above, assess the internal audit department of Powerhouse Bank and make recommendations (if any) for improvement.
(June, 1997, HKAAT)
Part III Revision Questions
Examination Question 1, page 515 of Chapter 48, Alan Millichamp
Cases 1 and 2, page 524 of Chapter 49, Alan Millichamp
Tutorial Exercise - Answer
Tutorial 21 Reliance on Internal audit and other specialists
1. B2. C3. D4. D
5. Internal control
6. Plan
7. Employee
8. External auditor
9. Work
10. Value
- Factors to be considered before reliance on internal auditor
-degree of independence of internal audit department
-authority of internal auditor to access and investigate sensitive or confidential information
-quality of internal audit working paper
-competence and proficiency of internal auditor
-degree of acceptance on internal audit report produced by internal auditor
-availability of resources to internal audit department
12.
a)Sufficiency is the measure of the quantity of audit evidence
Appropriateness is the measure of the quality of audit evidence
b)What is sufficient appropriate audit evidence is influenced by factors as:
-auditors’ assessment of nature & level of inherent risk
-nature of accounting and internal control systems and assessment of control risk
-materiality of items being examined
-experience gained during previous audits
-results of audit procedures, including fraud or error which is found, and
-source and reliability of information available
c)expert means a person or firm possessing special skill, knowledge and experience in a particular field other than accounting and auditing
Why needs expert:
-auditors are not expected to have the expertise of a person trained for in another profession or occupation, such as surveyor or an actuary
Examples of work of an expert:
-Valuations of certain types of assets, e.g. land & building, plant & machinery
-Determination of quantities or physical condition of assets, e.g. minerals stored
-Determination of amounts using specialized techniques or methods, e.g. actuarial
-Measurement of work completed and to be completed on contract in progress
-Legal opinions of agreements, statutes and regulations
d)matters to be covered in written instructions to expert:
-objectives and scope of the expert’s work
-general outline to specific matters auditors expect the expert’s report to cover
-intended use by auditors of expert’s work
-extent of expert’s access to appropriate records and files
-clarification of expert’s relationship with the entity
-confidentiality of entity’s information, and
-information regarding the assumptions and methods intended to be used by expert and consistency with those used in prior periods.
e)Auditors should assess appropriateness of expert’s work:
-whether the substance of expert’s findings is properly reflected in financial statement or
-support financial statement assertions
-by consideration of source data used
-assumptions and methods used
-results of expert’s work in light of auditor’s overall knowledge of business
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a)Function of Internal audit
-an independent appraisal function
-review systems of control and quality of performance
-evaluates and reports on adequacy of internal control
b)Proposed candidate and reporting line
-not be a suitable candidate because of quality and experience
-internal auditor should not report to Financial Controller, seems to lose independence
-IA should have direct access to all senior and freedom to report to Chief executive
-IA should have an objective attitude of mind & be in sufficient independence position to exercise judgement, express opinions and present recommendations with impartiality
-Aim to appoint staff with appropriate background, personal qualities and potential
c)Relationship between internal auditor (IA) and external auditor (EA)
-IA is an independent appraisal function within organization and are direct employee
-EA has statutory responsibility to express opinion on financial statement and stewardship of organization
-IA does not automatically have right of access to records of EA but EA will be able to access necessary records
-IA evaluates internal control system and EA to ensure that internal audit function is being planned and performed effectively
-Regular meetings held between IA & EA to plan audit, set priorities and scope and discuss findings and exchange information
14
a)Reason of external auditors to understand internal audit:
-consider to determine the reliance on certain internal audit work
-help to plan the audit work
-influence the judgment about the use of the work of internal audit in modifying the nature, timing and extent of external audit procedures
b)Criteria in understanding and assessing the internal audit function:
-the degree of independence
-the scope and objectives of internal audit function
-technical competence
-due professional care
-internal audit report
-level of resources available
c)observations and recommendation made
-internal audit department has conflict of interest in reporting to financial controller, should report to highest level of management, such as board or audit committee
-internal audit staff performing operating responsibility will create a conflict of interest when they attempt to discharge their internal audit function, should not participate in performing operating responsibilities
-assignment of internal audit department are assigned by financial controller, should have its own freedom in determining the nature and extent of work
-internal audit manager does not have adequate training and proficiency as internal auditor, should possess appropriate experience and professional qualifications
-no adequate training is provided to internal audit clerk, proper training should be offered to the internal audit clerk
-the audit work of internal audit clerk has not documented, all work done should be properly documented
-internal audit work has not been supervised and reviewed, should be properly planned, supervised and reviewed
-internal audit report has not been followed up by the management and directors, internal audit department should implement regular meeting with management or directors to ensure that their findings and recommendations are implemented by responsible department
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AEI-TE-L21-2003 Page 1 of 8