guidance2 in relation to the assessment of the effectiveness of the external audit response to requests from audit committees for practical guidance on how to. The working relationship between internal audit and external audit explained. audit and its relationship with the external audit. By the. result of the .. communications to be direct responses to the audit. committee's.
The working relationship between external audit and internal audit
Both need to be independent, objective, properly resourced and work according to their respective international standards. Regulators must take these differences into account when creating policy related to governance and internal audit.
What do we want? The role and value of internal audit should be better recognised within the UK Code of Corporate Governance and guidance issued under it by the Financial Reporting Council FRCwith regard to publicly listed private sector organisations.
Regulators rightly recognise that the role of internal audit in supporting the work of external audit needs to be strictly controlled in order to ensure quality and objectivity.
But they also need to recognise that internal audit work has a much broader remit, covering risk and governance as well as internal financial control, and that this wider work can also require internal audit to make judgements about the work of external audit.
Additional points Audit committees have a vital role to play in supporting internal audit quality.
Internal vs. external audit | Technical Resources | ICAS
The International Standards for internal audit [ 1 ] require internal audit functions to develop and maintain a quality assurance and improvement program that covers all aspects of the internal audit activity. The quality assurance and improvement program must include both internal and external assessments.
External assessments must be conducted at least once every five years by a qualified, independent assessor or assessment team from outside the organisation. Working with internal audit also creates an environment in which the external auditor can be informed of significant matters that may affect its work.
But where this occurs it is vital that internal audit does not simply become a tick in the external audit box, or that internal audit is distracted from its core roles.
External audit must also assure itself on the objectivity and quality of the internal audit function. We believe this practice is detrimental to the work of both auditors and reduces the assurance that the audit committee obtains from either source. It is also a false economy.
Internal auditors are likely to be fully qualified whereas the staff they would replace on the external audit can often be student accountants. The potential breadth and scope of the internal audit function should mean that it has a significant role to play in supporting improvements in corporate governance and overseeing the management of risk.
Audit Committees need to recognise that the value of internal audit goes beyond financial control. Similarly regulators should give greater recognition to the assurance that they can take from the work of a professional internal audit function.
It is vital to the quality of their work that they focus on this customer group.
Internal auditors, in contrast, provide assurance within the governance boundary, to the audit committee, the board in general and to senior management. Purpose of the assurance The external audit opinion, and the work that the external auditor performs in order to provide it, exist to add verification, credibility and reliability to reports from the company to its shareholders.
Internal auditors provide members of the board and senior management with assurance that they can use to fulfil their own duties to the company and its shareholders. Coverage or nature of work External audit provides an opinion on financial statements and the related disclosures, on other forms of reporting from the company to shareholders as well as on financial reporting risks and their management.
Identifying and assessing the risks of material misstatement through understanding of the entity and its environment, states in paragraph Is there an internal audit charter? What is the size of the internal audit section? Qualifications and continuous professional development of the internal audit staff. Reporting structure to management.
Details about the audit committee, if one exists.
Annual audit plan and performance against that plan. The external auditor will also want to read copies of the reports issued during that financial year and meet with the Chief Internal Auditor, or equivalent. Involve making significant judgements in the audit Relate to higher assessed risks of material misstatement where the judgement required in performing the relevant audit procedures or evaluating the audit evidence gathered is more than limited. 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.
Relate to decisions the external auditor makes in accordance with the ISA UK regarding the internal audit function and the use of its work or direct assistance. Advantages of coordination and collaboration between external and internal audit Close communication and planning ensures that audit resources can be directed towards the area of most need i.
Position paper: Internal audit's relationship with external audit
This means that internal audit can plan their work to minimise duplication with external audit testing and to provide assurance over those systems and controls on which external audit may wish to place reliance, subject to appropriate review procedures being applied.
The audit teams can plan the timing of their work to minimise disruption and interference with key members of staff. The audit team can share intelligence on key events, changes and plans that may impact on the risk profile of the organisation and therefore, on their work.HOW DO INTERNAL AUDITORS AND EXTERNAL AUDITORS DIFFER AND HOW SHOULD THEY RELATE?