In order to reflect the evolving role of the internal auditor in the independent outside audit of a company’s financial statements, the IAASB proposes to revise the existing standard on the use of internal audit work, IAS 610, which was last revised in 1994. For one thing, the standard does not currently reflect how the knowledge and findings of the internal audit function should be leveraged by the external auditor to further audit effectiveness. Broadly, the proposal should enhance the performance of external auditors by enabling them to better consider and leverage the knowledge and findings of a firm’s internal audit function in making risk assessments in the external audit, and strengthening the framework for the evaluation and use of the work of internal auditors in obtaining audit evidence.
In some jurisdictions, internal auditors provide direct assistance to the external auditor through performance of audit procedures on the audit engagement under the direction, supervision, and review of the external auditor. The proposal would establish requirements and guidance to ensure that direct assistance is obtained only in appropriate circumstances and clearly sets out the external auditor’s responsibilities in such cases including the required involvement of the external auditor. The revised standard would not require the outside audit firm to obtain direct assistance from the inside auditor. The decision of whether, and if so to what extent, to obtain direct assistance is solely that of the external auditor. The IAASB believes that this discretion is important in order to avoid undue pressures being placed on the external auditor by the company to use internal auditors for cost or other reasons, which could be detrimental to audit quality.
Also, outside auditors do not have to defend their use or non-use of internal audit work to the audit committee or the board, or seek the prior approval of these governance bodies regarding the decision on whether or not to use direct assistance. Nevertheless, in accordance with ISA 260, the external auditor would communicate with those charged with governance the planned scope and timing of the audit, including the extent to which the auditor will use the work of the internal audit function, and any proposal for internal auditors to provide direct assistance to the external auditor on the audit engagement.
The IAASB proposes that the external auditor’s initial assessment of whether the work of the internal audit can be used for the independent audit should be based on an evaluation of the internal audit’s degree of objectivity, level of competence and application of a systematic and disciplined approach, including quality control. The IAASB believes recognition of the fact that the internal audit function applies a systematic and disciplined approach is important. It is this characteristic that differentiates the work of the internal audit function from other internal controls, reasoned the Board, and thereby provides support for the premise underlying the proposed revision to ISA 610.
Specifically, the external auditor’s objective is to obtain sufficient evidence about the internal audit function as a whole, rather than test each individual piece of work performed by the function in relation to other controls. The Board also emphasized that under any revised regime the outside audit firm will continue to have sole responsibility for the audit opinion expressed on the financial statements, and that this responsibility is not reduced by the external auditor’s use of the work of the internal auditors.
Under the proposal, when either the degree of objectivity or level of competence of the internal audit function is assessed as low, the work of the internal audit function should not be used for purposes of the audit. Under this principle, a high degree of objectivity cannot offset a low level of competence and, similarly, a high level of competence cannot offset a low degree of objectivity.