QUESTIONS AND ANSWERS Auditing Help

How can the audit committee improve the effectiveness of external auditor’s work?

Audit Committee may be useful in improving the effectiveness of external auditor’s work in the following areas.

– Avoidance of duplication of work when internal auditors have performed the similar work
– Consideration of going concern validity
– Provide a link between management and auditor for sorting out differences between management and auditor.
– Review draft financial statements before submission to auditors.

The management of a company running various super markets is concerned about high audit fee. Internal controls are not considered to be satisfactory. The external auditors have suggested appointment of an internal auditor. The management believes that such appointment will result in reduction of fee charged by external auditor.

Assume that you have been called for an interview for the job of internal auditor.

At the interview the management has explained you the problems and asks you to explain work you should perform as internal auditor.
Give a brief job description of your suggested functions as internal auditor.

My objective will be to assist members of organization in effective discharge of their responsibilities. In meeting this objective, I will provide analyses, appraisals, recommendations, counsel, and information concerning the activities that have been audited.

More specifically, I propose to perform following functions
1. Reviewing reliability and integrity of financial and operating
functions and the means used to process information,
2. Reviewing the systems established to ensure compliance with those policies, plans, procedures, laws, and regulations that could have significant impact on operations and reports, and determining
whether the organization is in compliance.
3. Reviewing the means of safeguarding assets.
4. Appraising the economy and efficiency with which resources are employed.
5. Reviewing operations or programs to ascertain whether results are consistent with established objectives and goals and whether the operations or programs are being carried out as planned.
6 Checking the reliability of computer operations by using audit
software and test data.
7 Visiting central warehouse to ensure effective operation of the
controls.
8 Visiting supermarkets I propose to visit all supermarkets at least twice a year and more frequent visits to larger super markets and where controls are weak.
9 Carrying out cash counts and test count of inventories at super
markets
10 Coordinating with external auditors so that maximum reliance may be placed.

what matters should be considered in outsourcing internal audit function to external auditor? 

1 Close monitoring of the standard of service provided by the auditor.
2 The auditors should be adequately briefed of the entity, industry and its control environment
3 conflict of interest should be monitored
4 cost should be closely controlled
5 independence should not be impaired
6. The scope and terms of Outsourcing should be agreed in writing
7. The external auditors should be asked to provide a write up on audit procedures.

When obtaining an understanding and performing preliminary assessment of the internal audit functions, one significant criterion is “due professional care”. Explain you understanding of this criterion.

Matters to be considered whether or not the internal auditor has taken due care are:

– Whether internal auditing is properly planned, supervised and reviewed
– Planning documentation including risk analysis, design of accounting and internal control system
– Existence of adequate audit manuals
– Existence of audit programs and working papers for tests of controls and substantive procedures
– Documentation relating to hiring and internal audit staff.

You are the statutory auditor of Northwest company (private) Limited, a manufacturing concern. The company has used the services of an expert in valuation of plant and machinery at the year end. You being the statutory auditor of the company, has expressed to the chief financial officer (CFO) of the company that you intend to evaluate the competence and objectivity of the expert and his work. The CFO has asked you to explain to him the specific provision of applicable standard on auditing on the subject. State the relevant requirements of the auditing standard with regard to the above.

Relevant requirements of ISA 620 Using the work the expert, as   regards evaluation of the work of an expert are:

– Consider whether the substance of the expert’s findings is properly
reflected in the financial statements
– Source data used
– Result’s of expert’s work in the light of the auditor’s overall knowledge of the business and other audit procedures.
– Review and test data used by expert
– Obtain understanding of the assumptions and methods used
– Consider whether assumptions are reasonable based on auditor’s knowledge of business
– Consider competence and objectivity of expert.

Your audit client Aequum Limited, a large manufacturing company that has substantial investment in plant and machinery, has used the services of Mr.Samad Hussain, a qualified engineer, for assessing the remaining life of a major plant. This plant, which was installed during the year, is expected to double the production capacity of the company. The assessment useful life of plant will have significant impact on the estimate  of depreciation expense for the year. You noted that Mr.Hussain has been in the employment of the company for last four

Brief your audit team using the work of M. Hussain

following matters should be considered by the auditor:

1.  Mr. Hussain is employed by the company and the auditor may be
concerned with his objectivity. The matter should be discussed with
management and the auditor should consider whether sufficient
Oppropriate evidence can be obtained concerning the work of Mr.
Hussain. The auditor may need to undertake additional audit
procedures or seek audit evidence from another expert.

2.  Professional competence of Mr. Hussain should be evaluated

3 The estimate made by Mr. Hussain should be evaluated.

–  Data used by Mr. Hussain, whether it is relevant and reliable
– Assumptions of Mr. Hussain as regards useful life whether  the machine will be operated single shift or three shifts)
– Obtain understanding of the assumptions and methods used
– Consider whether assumptions are sound appropriate and reasonable.

4. If the auditor is not satisfied with the evaluation of the work of expert, additional audit procedures, including possibility of engaging another expert, or modification in the audit report should be considered.

If the auditor is satisfied with the work of Mr. Hussain, the auditor should not refer to the work of Mr. Hussain.

What features in an internal audit department would enable the external auditor to place reliance on the work done by the internal auditing department?

Following matters are to be considered in placing reliance on the work of internal auditor:
1. Objectivity of internal audit function:

(a) Status of internal auditor in the organization chart. Is the
internal auditor at par or above the status of senior management?
(b) To whom the internal auditor reports? If the internal auditor directly reports to those charged with governance, he will be more independent.
(c) Is internal auditor free from operating responsibilities?
(d) Whether the appointment and termination of internal auditor decided by those charged with governance?
(e) Any restrictions on the scope of the work of internal auditor?
(f) Whether the management takes action on the
recommendations of the internal auditor?

2. Technical competence:
(a) Membership of professional body
(b) Technical training as internal auditor

3. Due professional care:
(a) Documentation of planning, supervision and review of internal audit function.
(b) Written procedures and audit programmes

4.Effective communication between the internal auditor and external auditor:
(a) Exchange of ideas through regular meetings
(b) Access to internal audit reports
(c) Communication of audit problems by external auditor to internal auditor

You are the audit incharge of Marble Limited: The company has
established an internal audit function which is headed by a chartered accountant who has significant internal audit experience. The head of intermal audit also reports functionally to audit committee and administratively to the Chief Executive. Based on your preliminary review of internal audit function, you consider that internal auditing activities are relevant to the risk assessment, and therefore, you are planning to obtain understanding and perform an assessment of internal audit . What are the important criteria you would consider for assessment of internal audit specific function?

important criteria to be considered for assessment of the specific work of internal auditor:

1. The work was performed by a knowledgeable person
2. Work was adequalty planned, supervised and reviewed
3. Sufficient and appropriate audit evidences have been obtained
4. Conclusion are consistent with the results of work performed
5. Differences between internal auditor and management have been resolved
6. Testing items already verified by internal auditor
7. Testing items not verified by internal auditor

If the auditor concludes that the work of internal auditor can be relied upon,following matters should be discussed .n advance with internal auditor:

(a) Timings of audit procedures
(b) Population
(c) Basis for selection
(d) Materiality

State scope and functions of internal auditing.

a) Review adequacy and effectiveness of internal controls.

Internal auditors are responsible for providing controls over all other
organizational controls. That is why they should not be involved in
designing and implementing internal controls instead, they serve the
organization as independent appraisers of existing controls. If the
internal auditors are involved in designing and implementing the controls, they cannot be expected to appraise or audit such controls The controls usually take form of policies programmes and
procedures. In appraising controls, the internal auditor’s objective is
to evaluate whether controls are sound and effective in the light of
organizational objectives for which they were designed.

b) Examination of financial and operating information.

An independent review made by the internal auditor, of financial and
operating information enhances the credibility and reliability of such information for decision-making purposes. This function include detailed testing of transactions and account balances, review of monthly management accounts and year – end financial statements.

Reports prepared by various managers provide data for planning an controlling the operations. Inaccurate and unreliable data is entirely useless. The information submitted to management should be useful for a particular type of decision. The internal auditors review the reliability of financial and operating information and the financial and operating information and the means used to identify, measure  classify, and report such information.

The internal auditor appraises the information communicated to management to ensure that such information is sufficient competent, relevant and useful to the entity in order to meet its goals.

c) Review of economy, efficiency and effectiveness of operations including non-financial controls of an entity.

This includes operational auditing or VFM auditing (value for money
auditing) which is a forward looking evaluation of operations with a
view to identify areas where economy, efficiency and effectiveness may be improved.

The areas covered include:

i) Purchasing
ii) Marketing
iii) Transportation
iv) Inventories and development
v) Research and development
vi) Quality control
vii) Under – utilization of assets
viii) Human resources
ix) Non productive functions and work which is not cost justified.

In the above context, internal auditors are responsible for determining whether:

i) Operating standards have been established for measuring
economy and efficiency;
ii) Established operating standards are understood and are being met.
iii) Deviations from operating standards are identified, analyzed
and communicated to those responsible for corrective action, and
iv) Corrective action has been taken

The function of appraisal of economic use of resources includes
safeguarding of assets. Internal auditors review the means used to
safeguard the assets from various types of losses such as those resulting from theft, fire, improper or illegal activities, and exposure to elements.

d) Review of compliance with laws, regulations and other external requirements and with management policies and directives and other internal requirements.

It is management’s responsibility to ensure that the entity’s operations , are conducted in accordance with prevailing laws and regulations. The responsibility for the prevention and detection of non-compliance is that of the entity’s management. Internal auditor’s function is to review such compliance through.

i) Ensuring that entity’s procedures are designed to meet
compliance of laws and regulations.
ii) Monitoring compliance of a Code of Conduct
iii) Verifying that appropriate legal advice is sought to ensure
compliance with laws and regulations.

Internal auditors also review operations or programmes to ascertain
whether results are consistent with established objectives and goals and whether the operations or programmes are being carried out as planned. This function includes providing assistance to managers in developing objectives, goals, and systems. The areas of assistance include assessing whether the underlying assumptions are appropriate, whether accurate, current, and relevant information is used, and whether suitable controls have been incorporated into operations and programmes.

e) Reviews risk management.
The task involves a review as to how effective have been the preparations to reduce the impact and probabilities of risks materializing  Also a review is made as to risks regarded acceptable within the entity’s objectives.
f) Detection and reporting frauds
The internal auditor review the process used by management to identify the risks of frauds and investigate significant frauds and recommends  measures to be take to reduce the frauds.
Furthermore, the internal auditor reviews whether all transactions have been authorized by appropriate officials.

During the audit of PQR Limited you have been assigned the task of valuating the work performed by the internal audit department of the company on certain specific areas.

Required
List the important differences between internal and external audit with respect to the following:
– Independence
– Objectives
– Reporting

Important differences between Internal Audit and the External Audit

Independence:
Since internal audit is a part of the entity, no matter how autonomous and objective it is, it cannot reach the level of independence enjoyed by the external auditors.
Objectives:
The objectives of internal audit function vary according to management’s requirements. Whereas the primary objective of external auditor is to ascertain whether or not the financial statements are free of material misstatements.

Reporting:
Report of external auditor is addressed to the members (shareholders) / owners / those charged with governance of the entity.
Internal audit reports are addressed to the management and those
charged with governance.
The reporting requirement of the external auditor is determined by the framework under which the audit is being carried out and by applicable legal and regulatory requirements.

Reporting requirement of internal audit is based on the objectives/scope of work determined by the management and those charged with governance.

What are the elements of internal auditor’s report.

No format has been prescribed for internal auditor’s report in contrast to
external auditor’s report where the form and contents are prescribed by
law. .
However some common elements of the report are:
(a) Title
(b) Objectives
(c) Executive summary
(d) Background
(e) Scope
(f) Brief description of the work performed
(g) Existing system
(h) Weaknesses
(i) Consequences
U) Recommendations
(k) Agreed action of auditees
(I) Appendices
In order to gain the cooperation of auditee the report should set out
constructive recommendations in a way that the auditees should not feel
they have been criticized. Their strengths sbould be appreciated.

Discuss some limitations of internal auditing.

(a) Internal auditor is an employee of the company and does not have same degree of independence as required by the external
auditors.
(b) No qualifications have been prescribed for internal auditors.
(c) Management may restrict scope of the audit.

(d) Internal auditor may sometimes be involved in operating
responsibilities.

In listed companies, however, the auditor is professionally qualified and enjoys degree of independence.

Give some examples where the work of internal auditor has no impact on the procedures performed by external auditor.

– Review of compliance with those laws and regulations which do not affect financial statements
– Report on quality control of products
– Staff training
– Efficiency of management
– Operations audit.

Posted on November 4, 2015 in Considering the Work of Internal Auditors

Share the Story

Back to Top
Share This