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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Auditing, Assurance and Professional Ethics

Case: Kaveri Textiles Ltd, a listed company, has an internal auditor who also prepares its monthly bank reconciliations and supervises the accounts team. The statutory auditor, CA Mehra, plans to use the internal audit work for his audit of trade receivables. Which step is MOST consistent with SA 610 on using the work of internal auditors?

The statutory auditor should first evaluate the internal audit function's objectivity, competence and systematic approach, and then test some of the work used. Sole responsibility for the opinion stays with the auditor, and reliance does not reduce it or get cited in the report.

  1. AUse the work without evaluation because the internal auditor is an employee of the company
  2. BEvaluate the internal audit function's objectivity, competence and systematic approach before using its work, and also test some of that workCorrect
  3. CRefer to the internal auditor in the audit report as the basis of the opinion
  4. DReduce his responsibility for the opinion by the extent of reliance placed on the internal audit

Explanation

Under SA 610, the external auditor must evaluate the internal audit function's objectivity, competence and whether it follows a systematic and disciplined approach, and must perform procedures on the work used. Here the internal auditor performs operational tasks such as bank reconciliations, which threatens objectivity. Using the work without evaluation is wrong because the auditor retains sole responsibility for the opinion.

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