ZeePedia buy college essays online


Fundamentals of Auditing

<<< Previous CONSIDERING THE WORK OF INTERNAL AUDITING Next >>>
 
img
Fundamentals of Auditing ­ACC 311
VU
Lesson 40
CONSIDERING THE WORK OF INTERNAL AUDITING
Introduction (Meaning of Internal Audit)
Internal audit is part of internal control, set by the management, delegating its supervisory functions
to specially assigned staff, with the objective to see that the internal controls are in operation and to
assist them in fulfilling their responsibilities such as
1. safeguarding of the assets
2. reliability of financial records and
3. efficiency in operation
Definition
"Internal auditing" means an appraisal activity established within an entity as a service to the entity.
Its functions include, amongst other things, examining, evaluating and monitoring the adequacy and
effectiveness of the accounting and internal control system.
DIFFERENCE BETWEEN INTERNAL AND EXTERNAL AUDITORS
INTERNAL AUDITOR
EXTERNAL AUDITOR
Objective:
Accounting  system  and  internal Report on Financial statements.
control are operating efficiently.
Responsibility
Responsibility to the management.
Responsibility to the share holders.
Scope of work
Determined by management.
Determined by the statute; otherwise
determined through mutual agreement
between auditor and the client.
Scope and Objectives of the Internal Audit Function
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.
128
img
Fundamentals of Auditing ­ACC 311
VU
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:
Organizational status: The internal auditor is an employee of the entity and therefore
i)
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.
Scope and Objectives of Internal Audit Function: The external auditor should examine
ii)
the range and aim of the assignments assigned to internal auditors by the management and
whether management acts on internal audit recommendations.
Technical Competence: The external auditor should ascertain whether staff of the internal
iii)
audit function has adequate technical training and proficiency as auditors.
Due Professional Care: The external auditor should consider whether the internal auditor
iv)
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.
Evaluating Internal Audit Work/Review/Controlling
Where the external auditor has decided to place reliance on the work of internal auditor, he should
review the working papers to satisfy himself as to:-
i)
Audit programs are adequate.
ii)
The work is performed by trained staff and the work of assistants is properly
supervised, reviewed and documented.
iii)
Sufficient appropriate audit evidence was obtained.
iv)
Conclusions made are appropriate.
v)
Reports prepared are based on the work done.
129
img
Fundamentals of Auditing ­ACC 311
VU
vi)
Exceptions or unusual items have been properly resolved. The external auditor
should record all the working he has received. The external auditor should also
test the work of internal auditor.
Testing the Work of Internal Auditing
It can be done in the following ways:
i)
Re-performing the work done by internal auditor, on test basis, to ensure that the same
results are achieved;
ii)
Selecting a few similar items and perform independent test; and
iii)
Observation of internal auditing procedures.
130
Table of Contents:
  1. AN INTRODUCTION
  2. AUDITORSí REPORT
  3. Advantages and Disadvantages of Auditing
  4. OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
  5. What is Reasonable Assurance
  6. LEGAL CONSIDERATION REGARDING AUDITING
  7. Appointment, Duties, Rights and Liabilities of Auditor
  8. LIABILITIES OF AN AUDITOR
  9. BOOKS OF ACCOUNT & FINANCIAL STATEMENTS
  10. Contents of Balance Sheet
  11. ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
  12. Business Operations
  13. Risk Assessment Procedures & Sources of Information
  14. Measurement and Review of the Entityís Financial Performance
  15. Definition & Components of Internal Control
  16. Auditing ASSIGNMENT
  17. Benefits of Internal Control to the entity
  18. Flow Charts and Internal Control Questionnaires
  19. Construction of an ICQ
  20. Audit evidence through Audit Procedures
  21. SUBSTANTIVE PROCEDURES
  22. Concept of Audit Evidence
  23. SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND TESTING THE SALES SYSTEM
  24. Control Procedures over Sales and Debtors
  25. Control Procedures over Purchases and Payables
  26. TESTING THE PURCHASES SYSTEM
  27. TESTING THE PAYROLL SYSTEM
  28. TESTING THE CASH SYSTEM
  29. Controls over Banking of Receipts
  30. Control Procedures over Inventory
  31. TESTING THE NON-CURRENT ASSETS
  32. VERIFICATION APPROACH OF AUDIT
  33. VERIFICATION OF ASSETS
  34. LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES
  35. VERIFICATION OF EQUITY
  36. VERIFICATION OF BANK BALANCES
  37. VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
  38. AUDIT SAMPLING
  39. STATISTICAL SAMPLING
  40. CONSIDERING THE WORK OF INTERNAL AUDITING
  41. AUDIT PLANNING
  42. PLANNING AN AUDIT OF FINANCIAL STATEMENTS
  43. Audits of Small Entities
  44. AUDITORíS REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
  45. MODIFIED AUDITORíS REPORT