Required:
Comment on the extent of reliance the external auditor should place on the work of the internal audit department at Theobald Ltd. Explain the likely impact of the internal audit department’s work on the audit plan.
The internal audit department focuses on efficiency and effectiveness of production (i.e. performance auditing) and compliance with government regulations (compliance auditing). The head of the internal audit department is a CPA and the other members of the department have performance auditing and compliance relevant experience and qualifications. The internal audit department is highly regarded within the business, reports to the board of directors as well as the CEO, and the reports appear to be acted upon. All these factors suggest that the internal audit department is well run and effective. However, they also suggest that it does not concentrate on issues directly relevant to financial reporting and auditing.
The external auditors are likely to review the internal audit department’s work, particularly where it is relevant to operational indicators which are reflected in the accounts. They are likely to review the internal auditor’s reports and their evaluations of internal control systems, particularly in production and inventory issues and general management issues. However, most of the internal audit department’s findings on waste regulations and efficiency matters will not be directly relevant to the external auditors’ audit of accounting transactions and balances.
You should have been able to find much of this material in ASA 610 – do not expect for this to be made explicit EVERY TIME in these suggestions … I hope by now you are developing the process of seeing if you can identify a relevant professional standard/statement as a starting point for preparing your responses/answers. These should be corroborating what you are learning in the text nearly all the time.