The director of one of your growing clients have decided to create an internal audit function in their organizational structure. Required: State the extent to which you, as an external auditor, can rely on the work of the internal audit function

When an auditor decides that he can place reliance on the internal auditors work, the extent of his reliance will be influenced by the results of his evaluation of the internal auditors work.
This evaluation will involve:-
(i) Discussion with the clients internal auditor about the timing of internal work, test levels, sample selection and the form of documentation to be used.
(ii) Consideration of:-
a. The materiality of the items or areas to be tested, and also of the information that can be obtained from internal audit.
b. The level of audit risk inherent in the areas or items to be tested or in the information to be obtained.
c. The level of judgment required
d. The sufficiency of complementary audit evidence
e. Specialist skills possessed by internal audit staff
(iii) Setting out the extent of planned reliance on internal audit, together with reasons for deciding on that extent, in a planned memorandum.
(iv) Review of the manner in which the internal audit work is being controlled particularly:-
a) Consider whether work has been properly supervised and also reviewed in detail when it has been completed.
b) Compare the results of the work with those of external auditors staff on similar audit areas or items
c) Satisfy himself that any exceptions or unusual matters that have to come to light as a result of the work have been properly resolved.
d) Examine reports relating to the work produced by internal audit and management‘s response to those reports.
e) From time to time, determine whether internal audit will be able to complete the program that it has agreed to undertake and if not make appropriate arrangements.
(v) Ensuring that the working papers relating to the work of internal audit, on which reliance is being placed, are up to an acceptable standard.
Conclusion: Since the internal auditor cannot meet the prime criteria of independence, the external auditor cannot fully rely on the work of the internal auditor. The extent of reliance will be determined by applying judgement.