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 the extent to which your firm will seek to rely on the work of the internal auditors in each of the areas noted above

Reliance on work of internal auditors

(i) As requested, the external auditors will seek to rely on the work of internal audit to the maximum extent possible. This might cover planning, risk assessment, tests of controls and substantive testing.
(ii) In all cases, the external auditor should be aware that the purpose of internal audit‘s work will not be primarily directed towards the financial statements.
(iii) In relation to the audit of internal controls, it may be possible to rely on the work of internal audit in relation to all of the areas noted, but only if the internal controls audited affect the financial statements. It may be that internal audit‘s work on operations and customer support is less relevant than its work in other areas.
(iv) In relation to the four-year review of internal controls – the extent of reliance will depend on how long ago the last review was conducted. If it was conducted recently, it will provide help in relation to the external auditor‘s assessment of the accounting and internal control systems.
(v) In relation to risk management – the relevance of internal audit work depends on the extent to which risks in relation to reporting in general, and the financial statements in particular, have been addressed separately by management. This work will be relevant to
the external auditor‘s risk assessment and planning