You are the auditor of Bei Nafuu Supermarkets Limited across the country. The management has informed you that they intend to set up an internal audit function. Required: List four factors that you would consider before placing reliance on the work of the auditors of Bei Nafuu Supermarkets Limited

When the external auditor intends to use specific work of internal auditing, the external auditor should evaluate and test that work to confirm its adequacy for the external auditors purposes. Before evaluating any specific work with the intention of relying on it the auditor should carry out a preliminary evaluation of the function. In carrying out this evaluation the following factors should be considered:

1. Organization status
Since internal audit function is part of the entity it cannot be totally independent. To boost it‘s independence the status of the function within the organization should be such that the internal auditor reports to the highest level of management. The internal auditor should also be free of any other operating responsibility such as performing accounting functions, which may conflict with his role as an independent watchdog of controls and operations of the entity. There should be no restrictions placed upon his work by management. Such restrictions could impair the effectiveness of the function.
2. Scope of the function
The external auditor should ascertain the nature and depth of coverage of internal audit assignments. He should also ascertain whether management considers and acts upon internal audit recommendations. Where the recommendations are not acted upon this represents a weakness in the function and hence the level of reliance should consequently be reduced.
3. Technical competence
The external auditor should ascertain whether internal audit work is performed by persons having adequate technical training and proficiency as auditors. Qualifications and experience of the internal audit staff should be considered.
4. Due professional care
The external auditor should ascertain whether internal audit work appears to be properly planned, supervised, reviewed and documented. Exercise of due professional care is evidenced by the existence of adequate audit manuals, work programs and working papers.
5. Internal audit reports
The external auditor should consider the quality of the internal audit reports prepared and submitted for management action. He should ascertain whether management considers, responds to and acts upon internal audit reports and whether there is evidence to prove that action.
6. Level of resources available
The external auditor should consider whether internal audit has adequate resources to be able to carry out their duties effectively. Such resources would include staff and computer facilities.
If having carried out the above preliminary review the auditor concludes that the internal audit function is effective and he wishes to rely on some specific work done by the internal auditor the following procedures should be carried out.
(a) The work is performed by staff who have adequate technical training and proficiency as internal auditors;
(b) the work of assistants is properly supervised, reviewed and documented;

(c) sufficient appropriate audit evidence is obtained to form a reasonable basis for the conclusions reached;
(d) the conclusions reached are appropriate;
(e) reports by the internal audit are consistent with the results of the work performed;
(f) any exceptions and unusual matters disclosed by internal audit are properly resolved;
(g) amendments to the external audit programme are required as a result of matters identified by the internal audit work;
(h) there is a need to test the work of internal audit to confirm its adequacy.

NB: The nature timing and extent of the testing of the specific work of internalauditing will depend on the external auditors judgment as to the risk and materiality of the area concerned, the preliminary assessment of internal auditing and the evaluation of specific work by internal auditing.

Share through

Leave a Reply

Your email address will not be published. Required fields are marked *