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The Internal Auditor considers many factors while auditing, such as the nature, timing, and extent of audit procedures of an organisation’s financial records. One of the factors is existing of an internal audit function.
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The Auditor’s responsibilities in an audit are to comply with the standards and procedures of the Public Company Accounting Oversight Board (PCAOB) and to obtain sufficient evidence to provide reasonable data in the organisational financial statements. To fulfil this responsibility, the Auditor maintains independence from the entity. The auditors provide analyses, evaluations, assurances, recommendations, and other information to the entity’s management, board of directors, or others with equivalent authority and responsibility. To fulfil this responsibility, auditors maintain objectivity concerning the audit.
Additionally, the Auditor might inquire about the internal audit function’s charter, financial statement, or similar directive from management or the board of directors. This inquiry will generally provide information about the objectives and goals established for the internal audit function. Certain audit activities may not be relevant to an audit of the organisation’s financial statements.
For instance, the auditors’ procedures to evaluate the efficiency of specific management decision-making processes are ordinarily irrelevant to a financial statement audit.
Relevant activities give evidence related to the effectiveness and design of internal controls that pertain to the entity’s ability to initiate, process, record and report financial data of the entity. The Auditor may find beneficial results by following procedures.
If some of the auditors’ activities are relevant to the audit, the Auditor may conclude that it would not be efficient to consider further the auditors’ work. Suppose the Auditor decides it would be efficient to consider how the auditors’ work might affect the nature, timing, and extent of audit procedures. In that case, the Auditor examines the objectivity and competency of the internal audit function. While assessing the competency and objectivity of the Auditors, the Auditor obtained some information after considering from previous year’s audit.
While assessing competence and objectivity, the Auditor usually considers information obtained from previous experience with the internal audit function, discussions with management personnel, and quality review. The Auditor used professional internal auditing standards as criteria for making the assessment.
After obtaining a sufficient understanding of the design of controls relevant to financial statements, the Auditor plans the audit and determines whether they have been placed in operation. Since the primary objective of many internal audit functions is to review, assess, and monitor controls, the procedures performed by the internal auditors in this area may provide helpful information to the Auditor.
The Auditor verifies the risk of material misstatement at the financial statement and the account balances-of-transaction levels.
The Auditor makes an overall assessment relating to the risk of the financial-statement level. The Auditor analysed that specific controls may have a pervasive effect on the financial statement. The accounting system and control environment often have a pervasive effect on several account balances and transaction classes and, therefore, can affect many assertions.
At the account balance or class-of-transaction level, the Auditor performs procedures to obtain and evaluate evidential matters concerning management’s assertions. The Auditor assesses control risk for each relevant financial statement assertion related to all accounts and performs tests of controls to support assessments. Some procedures performed by internal auditors may provide direct evidence of material misstatements in assertions about specific account balances or classes of transactions. For example, the internal auditors may confirm certain accounts receivable and observe specific physical invent specific parts of their work. The results of these procedures provide evidence that the Auditor may consider restricting detection risk for the related assertions. Consequently, the Auditor can change the timing of the confirmation procedures, the number of accounts receivable to be confirmed, or the number of locations of physical inventories to be observed.
The work of the auditors is expected to affect Auditor’s procedures. It may be efficient for the Auditor and the internal auditors to coordinate their work:
The Auditor performed the procedures to evaluate the quality and effectiveness of the auditors’ work. The nature and extent of the procedures performed by the auditors in evaluating the account balances or class of transaction.
These tests may be performed by either
(a) examining some of the transactions, controls, or balances that the internal auditors examined or
(b) examining similar controls, transactions, or balances which the auditors do not evaluate. To reach conclusions about the auditors’ work, the Auditor should compare the results of their tests. The extent of the testing depended on the circumstances.
The Auditor requests to provide direct assistance from the internal auditors. For instance, the internal auditors may assist the external Auditor in obtaining an understanding of control or performing substantive tests consistent with the guidance about Auditor’s responsibility when direct assistance is provided. The Auditor examines the internal auditors’ competence and objectivity and supervises, evaluates, reviews and tests the work performed by internal auditors. The Auditor should inform the internal auditors of their responsibilities, the procedure, objectives, and matters that may affect the nature, extent and timing of audit procedures. The Auditor should also inform about the significant accounting and auditing issues identified during the audit should be brought to Auditor’s attention.
The Institute of Internal Auditors and the General Accounting Office have developed the accounting standard for internal auditing. These standards are meant to impart an understanding of the role and responsibilities of Internal auditing to all levels of management, board of directors, public bodies and other related professionals. However, it permits measurement of the internal auditing performance and improves the practice of internal auditing.
Also Read:Objectives of Internal Audit: A general overviewRoles and Responsibilities of Internal AuditorEffective Steps of Performing an Internal Audit Successfully
Minakshi Bindhani has completed LL.M. with a specialization in Criminal Law from Madhusudan Law University, Cuttack, Odisha. She is more inclined toward legal research and writing and have prior experience in Civil and Criminal litigation and content writing.
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