Your firm is the newly appointed external auditor to a large company that sells, maintains and leases office equipment and furniture to its customers and you have been asked to co- operate with internal audit to keep total audit costs down. The company wants the external auditors to rely on some of the work already performed by internal audit. The internal auditors provide the following services to the company: (i) A cyclical audit of the operation of internal controls in the company‘s major functions (operations, finance, customer support and information services); (ii) A review of the structure of internal controls in each major function every four years; (iii) An annual review of the effectiveness of measures put in place by management to minimise the major risks facing the company. During the current year, the company has gone through a major internal restructuring in its information services function and the internal auditors have been closely involved in the preparation of plans for restructuring, and in the related post-implementation review. Required: Explain why it will be necessary for your firm to perform its own work in certain audit areas in addition to relying on the work performed by internal audit

External auditor work
(i) External auditors will wish to perform work independently, regardless of internal audit work, in all areas that are material to the financial statements. For immaterial areas in which internal audit work can be shown by testing and review to be adequate, it may be possible to rely on the work of internal audit without performing any other work.
(ii) Areas material to the financial statements are likely to be long and short-term leasing receivables and inventory. Leases may be complex and the auditors will wish to ensure that accounting policies are appropriate and that they have been properly applied. The valuation of inventory will have a direct effect on the profit for the period. This is an area that is easy to manipulate and external auditors will wish to ensure that this has not happened.
(iii) External auditors will also wish to perform their own risk analysis and final review of financial statements in order to ensure that no high risk areas have been overlooked.

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