Does the Statutory Auditor Reliate on the Work of the Internal Auditor?

The answer to this question is nuanced and depends on several factors. Statutory auditors can indeed rely on the work of internal auditors, but this reliance is conditional. The relevant auditing standards provide a framework for determining when and how such reliance is justified.

Relevant Standards

To understand the conditions under which a statutory auditor can rely on the internal auditor's work, we need to look at the relevant auditing standards provided by organizations such as the International Auditing and Assurance Standards Board (IAASB) and the US Public Company Accounting Oversight Board (PCAOB).

International Standards on Auditing (ISA) ISA 610 Rev.

The ISA 610 Revised standard outlines how external auditors can utilize the work of internal auditors. It emphasizes that the external auditor must:

Assess the internal auditor's objectivity and competence. Evaluate the risk of material misstatement. Decide whether the internal audit work is relevant to the external audit objectives.

If the internal auditors' work is deemed reliable, the external auditor may use it to reduce their own testing. However, the external auditor must still perform necessary procedures to ensure the reliability of the internal audit work.

Generally Accepted Auditing Standards (GAAS)

Under GAAS, specifically as provided by the American Institute of Certified Public Accountants (AICPA), external auditors are encouraged to consider the findings and reports of the internal audit function. They should evaluate the scope, methodology, and qualifications of the internal audit staff. This inclusion is aimed at optimizing the audit process and ensuring that the work of the internal auditors complements the external audit efforts.

Justification for Reliance

When relying on the work of internal auditors, statutory auditors must ensure the following:

Objectivity

Adopting a thorough approach, the statutory auditor must assess whether the internal audit function is free from bias and whether its work is performed impartially. If the internal auditor has a direct reporting line to management, it may raise concerns about objectivity, as this could indicate a lack of independence.

Competence

The auditor should evaluate the qualifications and experience of the internal audit staff. Additionally, they should verify that the internal audit function adheres to relevant professional standards. This ensures that the internal auditor has the necessary skills and knowledge to perform their duties effectively.

Nature of Work and Scope

The relevance and scope of the internal audit work are crucial. The internal audit should cover areas that are material to the financial statements and align with the external audit objectives. This alignment ensures that the internal audit findings are valuable and directly contribute to the overall audit process.

Risk Assessment

The external auditor should consider the risk assessment outcomes provided by the internal auditors. A lower risk of material misstatement may lead to greater reliance on the internal audit function, as this indicates a higher level of control within the organization.

Conclusion

In conclusion, while statutory auditors can rely on the work of internal auditors, they must perform due diligence to assess the internal audit function's objectivity, competence, and relevance. This ensures that the reliance on internal audit work is justified in the context of the overall audit strategy.

By adhering to these principles, statutory auditors can enhance the efficiency and effectiveness of their audit processes while maintaining the integrity and reliability of financial reporting.