Although the exact nature of internal audit function is determined by the management, however, Generally the aims and objectives of the internal audit function are:
i) Review and assessment of the internal control procedures and accounting system.
ii) Examination of financial and operating information for management, including detailed testing of transactions and balances.
iii) Review of efficiency, economy and effectiveness of operation.
iv) Review of compliance with laws, regulations, management policy and other internal requirements.
Relationship between Internal Auditing and the External Auditor
- Management’s Requirements Vs Independent Report on Financial Statements
Unlike the internal auditor who is an employee of the enterprise, the external auditor is required to be independent of the enterprise, usually having a statutory responsibility to report on the financial statements giving an account of management’s stewardship.
- Common Means
Some of the means adopted by both the auditors to achieve their respective objectives are common, e.g. evaluation of internal control. Therefore, certain aspect of internal auditing may be useful in determining the nature, timing and extent of external audit procedures.
- Dependence Vs Independence
Whatever be the degree of autonomy given by the management to internal auditing it cannot enjoy the same degree of independence as external auditors. Moreover, the responsibility for the report is that of the external auditor alone, and therefore is indivisible and is not reduced by the reliance on internal auditing. As a result, all final judgments relating to matters which are material to the financial statements or other aspects on, which he is reporting, must be made by the external auditor himself.
- Understanding of Internal Auditing
The external auditors should obtain a sufficient understanding of internal audit activities to assist in planning the audit and developing an effective audit approach. Effective internal auditing will often allow a reduction in the procedures performed by the external auditors but cannot eliminate them entirely. However, external auditor may decide not to use the internal auditor’s work.
- Preliminary Assessment of Internal Auditing
After obtaining understanding of internal auditing, if it appears that its work is relevant for external auditors, the external auditor should, during the course of planning perform preliminary assessment of internal auditing function. An effective internal audit may allow a modification in the nature, timing and extent of procedures performed by external auditors.
- Criteria while Obtaining Understanding and Preliminary Assessment of Internal Auditing
Before relying on the work performed by the internal auditor, it is necessary for the external auditor to make an assessment of the effectiveness and relevance of the internal audit function by considering the following:
i) Organizational status: The internal auditor is an employee of the entity and therefore cannot be independent, however the external auditor should evaluate to what extent he is free in performing his duties and communicate with external auditor and consider any constraints placed upon his work. Ideally, internal auditor should be reporting to the highest level of management and should be free from other operating responsibility.
i) Organizational status: The internal auditor is an employee of the entity and therefore cannot be independent, however the external auditor should evaluate to what extent he is free in performing his duties and communicate with external auditor and consider any constraints placed upon his work. Ideally, internal auditor should be reporting to the highest level of management and should be free from other operating responsibility.
ii) Scope and Objectives of Internal Audit Function: The external auditor should examine the range and aim of the assignments assigned to internal auditors by the management and whether management acts on internal audit recommendations.
iii) Technical Competence: The external auditor should ascertain whether staff of the internal audit function has adequate technical training and proficiency as auditors.
iv) Due Professional Care: The external auditor should consider whether the internal auditor has performed his work with reasonable care and skill i.e. work is properly planned, supervised and reviewed. He should also consider existence of working papers, work programs, audit manuals etc.
- Liaison and Coordination
The extent of liaison would normally encompass the following:
i) Initial planning to formulate a joint approach to minimize the tests performed by the two auditors i.e. tests level, sample selection, documentation of work performed, review and reporting procedures.
ii) Regular meetings between the internal and external auditors during the year.
iii) Exchange of knowledge between the two auditors i.e. the external auditors should be informed of any significant matter that comes to the knowledge of internal auditor which he believes may affect to work of external auditor. Similarly the external auditor should inform the internal auditor of any significant matters which may affect his work.
