1. Service organizations may be used by client in two ways:
(a) To maintain accounting records, such as computer service organizations.
(b) Execution of transactions and maintain related accountability.
2. The auditor should consider how the client’s use of a service organization affects internal controls of the client.
3. When the service organization is used only to maintain accounting records the client can implement effective policies and procedures within its organizations.
4. When the service organization is involved in execution of transactions and maintain accountability, the client has to rely on the policies and procedures of the service organization.
5. Auditor’s duties as regards use of service organization include:
-Obtain understanding of the nature of services provided by the service organization.
– Study contract between service organization and the client.
– Consider extent to which service organization’s system affects client’s internal controls.
– Consider internal controls applied by the client to the transactions processed by the service organization.
– Perform tests of the entity’s controls over the activities of the service organization.
– Obtain service organization’s auditor’s report that expresses an opinion as to the operating effectiveness of the service organization activities relating to audit.
(a) Consider nature and contents of the report.
(b) Scope of the work performed by the service organization auditor.
– Visiting service organization and performing tests of controls.