Dada Adefolami

2B: Evaluation of the level of competence of the internal auditors
Competence of the internal audit function is likely to be deemed satisfactory where it can be evidenced that the function as a whole operates at the level required to (i) enable assigned tasks to be performed diligently and (ii) in accordance with applicable professional standards. To make such evaluation, the external auditor can take into consideration the following factors:

1. Whether there are established policies for hiring, training and assigning internal auditors to internal audit engagements
2. Whether the internal auditors have adequate technical training and proficiency in auditing (e.g. with relevant professional designation and experience)
3. Whether the internal auditors possess the required knowledge relating to the entity’s financial reporting and the applicable financial reporting framework
4. Whether the internal audit function possesses the necessary skills (for example, industry-specific knowledge) to perform work related to the entity’s financial statements.

Points to note in the evaluation
The above evaluation regarding the internal auditors’ objectivity and competence should not be new to candidates as it forms the basis for any assessment by the external auditor when determining if reliance can be placed on the work of internal auditors and as such the requirement for these evaluations has been present in previous versions of ISA 610. The external auditor should bear in mind that the assessment of competence and objectivity are of equal importance, and should be assessed individually and in aggregate. For example, if the internal auditors are deemed appropriately competent but the external auditor identifies significant threats to objectivity it is unlikely that the external auditor will be able to use the internal auditors to provide direct assistance and vice versa.

Finally
Following the above detailed evaluation, if the external auditor determines that internal auditors, can be used to provide direct assistance for purposes of the audit, the next decision to be made by the external auditor is to determine the nature and extent of work that can be assigned to internal auditors.

This is a matter that requires the auditor to exercise professional judgment, due to the fact that extensive use of direct assistance could affect perceptions of the independence of external auditors. ISA 610 (Revised 2013) limits the circumstances in which direct assistance can be provided. The external auditor is advised to consider the following factors in such determination:

The external auditor should have performed the assessment of the first two factors when determining whether the internal auditors can provide direct assistance in the first instance. The less persuasive the evidence regarding the internal auditors’ objectivity and competency, the more restrictive the nature and extent of work that can be assigned.

As a starting point the external auditor should consider the amount of judgment needed in
(i) Planning and performing relevant audit procedures and
(ii) Evaluating audit evidence gathered.

The greater the level of judgment required, the narrower the scope of work that can be assigned to internal auditors. The following activities are deemed to involve significant judgment and therefore are not expected to be assigned to internal auditors providing direct assistance:

1. Assessing risks of material misstatements
2. Evaluating the sufficiency of tests performed
3. Evaluating the appropriateness of management’s use of the going concern assumption, and
4. Evaluating significant accounting estimates.

For any particular account balance, class of transaction or disclosure, the external auditor has to take into consideration the assessed risk of material misstatement when determining the nature and extent of work that they propose to assign to internal auditors. The higher the assessed risk, the more restricted the nature and extent of work that should be assigned to internal auditors. If the risk of material misstatement is considered to be anything other than low, the more judgment that has to be involved and the more persuasive the audit evidence required. Therefore, in these circumstances, in order to reduce audit risk to an acceptably low level it is expected that the external auditor has to perform more procedures directly and place less reliance on assistance provided by internal auditors when collecting sufficient appropriate evidence. The ISA provides some specific examples of areas where reliance should be restricted.

ISA 610 (Revised 2013) states that internal auditors cannot carry out procedures when providing direct assistance that:
1. Involve making significant judgment in the audit
2. Relate to higher assessed risks of material misstatements where the judgment required in performing the relevant audit procedures or evaluating the audit evidence gathering is more than limited
3. Relate to decisions the external auditor makes in accordance with ISA 610 (Revised 2013) regarding the internal audit function and the use of its work or direct assistance
4. Relate to work with which the internal auditors have been involved and which has already been or will be reported to management or those charged with governance by the internal audit function. This restriction intends to minimize self-review threats.

ISA 610 (Revised 2013) also states that the following should not be assigned to or involve internal auditors providing direct assistance:
1. Discussion of fraud risks
2. Determination of unannounced or unpredictable audit procedures as addressed in ISA 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, and
3. Maintaining control over external confirmation requests and evaluation of results of external confirmation procedures.

• Dada Suraju Adefolami, FIMC, CMC. Professor of Finance, School of Business Administration, UNEM University Costa Rica, is a Finance / Management Consultant and Certified Forensic Accountant. You can reach him via: [email protected]; 08052043855