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ACCA Strategic Professional · Advanced Audit and Assurance (International) · Using the work of others

Harlow Co's internal audit function reports to the finance director, who also decides the internal auditors' remuneration. The internal audit manager recently led the design of a new receivables control system and now plans to test its operation. The external auditor, Verity & Co, is assessing objectivity. What is the most appropriate conclusion?

Objectivity is threatened by self-review, because the manager is testing a system they designed, and by the reporting line to the finance director. Verity should limit reliance on this work and perform more procedures itself. Merely informing the audit committee or referencing the work in the report does not resolve the problem.

  1. AObjectivity is unaffected because internal auditors are employees and therefore always objective
  2. BObjectivity is threatened by the self-review and reporting-line issues, so Verity should reduce reliance on this work or perform more of its own proceduresCorrect
  3. CVerity may rely fully on the work provided the audit committee is informed
  4. DVerity should disclose the internal auditors' work in the audit report to protect itself

Explanation

Evaluating objectivity involves the organisational status of the function, its reporting lines and policies that safeguard against threats. Testing a system that the same person designed is a self-review threat, and reporting to the finance director weakens independence. Verity should therefore reduce planned use of the work and do more itself. Informing the audit committee does not remove the threat, and referring to the work in the report is prohibited.

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