Page 66 - CA Final PARAM Digital Book.

Part 3- SA 610

QNO Evaluation of Internal Audit Function Old Course -(M05E, N08E, M09E, M12R, N12M, N13R, M13M,
103.100 TITANIUM CNO—SA610.080 N14R, M15E, PM17, SM17, SM21)
State the important aspects to be considered by the External auditor in the evaluation of the Internal Audit
Function.
OR

You are appointed statutory auditor of X Ltd X Ltd has an internal audit system and reports for the same
are given to you Mention the factors you will consider to ensure that the said system of internal audit of
X Ltd is commensurate with the size of the company and nature of its business
Answer Part I -- Relevant Standards & Laws
▪ SA 610 – “ Using Work Of the Internal Auditor”

Part II -- Requirements of Relevant Standards & Laws
STEP-1
➢ Before relying on work of internal auditor evaluate:
• Competence : Qualification/Training/Knowledge of the internal auditor/Objectivity:
Status of the I.A within the organisation/access of TCWG/Systematic &Disciplined
Approach: Audit was properly planned, directed & reviewed or not.

Using the Work of Internal Auditor: As per SA 610 “Using the Work of Internal Auditors”,
while determining whether the work of the internal auditors is likely to be adequate for the
purpose of the audit, the external auditor shall evaluate-
• the objectivity of the internal audit function;
• technical competence of the internal auditors;
• whether the work of the internal auditors is likely to be carried out with due
professional care; and
• whether there is likely to be effective communication between the internal
auditors and the external auditor.

QNO Which work of Internal Auditor can be used New Course – (SM23)
103.150 TITANIUM CNO-- SA610.100

CA. Keshavraj is conducting statutory audit of a listed company “Live with Nature Limited”. The company
is engaged in producing environment-friendly niche products for new-born babies. There is also a well-
functioning internal audit department in the company. On perusal of internal audit reports, he finds that
not only verification of inventories was attended by internal auditor at regular intervals during the year,
workings were also made in respect of inventory valuation as at year end.

He has also attended inventory count at end of financial year and no prima facie adverse inferences were
drawn by him. However, on going through inventory reports, he gathers that inventories are being held
for considerably long period before being sold. The internal audit reports have not taken this aspect into
consideration. Should he choose to rely upon inventory valuation work performed by internal auditor?
Answer For a particular account balance, class of transaction or disclosure, the higher an assessed risk of material
misstatement at the assertion level, the more judgment is often involved in planning and performing the
audit procedures and evaluating the results thereof. In such circumstances, the external auditor will need to
perform more procedures directly and accordingly, make less use of the work of the internal audit function
in obtaining sufficient appropriate audit evidence. Furthermore, as explained in SA 200, the higher the
assessed risks of material misstatement, the more persuasive the audit evidence required by the external
auditor will need to be, and, therefore, the external auditor will need to perform more of the work directly.

In the given situation, inventories are being held for considerably long period before being sold. As company
is dealing in niche products for new-born babies, there is a risk of inventory obsolescence due to changes in
customer preferences. It carries a significant risk of material misstatement and requires more judgment on
part of statutory auditor in planning and performing procedures.
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