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CA Final · Advanced Auditing, Assurance and Professional Ethics · Audit Planning, Strategy and Execution

Narmada Infra Ltd has an internal audit function whose work is relevant to the audit. The external auditor, CA Prakash, is auditing a significant accounting estimate on impairment of a large plant, which involves high management judgment. The internal audit function has tested the estimate and gives a clean report. What is the most appropriate approach under SA 610 (Revised)?

He should perform more procedures directly. Under SA 610 (Revised), the greater the judgment involved, the more the external auditor must do himself, because internal audit work alone will not provide sufficient appropriate evidence, and evaluating significant accounting estimates is his own significant judgment.

  1. ARely wholly on the internal audit work since the function is competent and objective
  2. BPerform more procedures directly, because greater judgment means that using internal audit work alone will not give sufficient appropriate evidenceCorrect
  3. CDelegate the evaluation of the significant estimate to the internal auditors since he retains the opinion
  4. DReduce the audit work to enquiries of the internal audit head

Explanation

SA 610 (Revised) states that the greater the judgment needed in planning and performing procedures and evaluating evidence, the more procedures the external auditor must perform directly. Evaluating significant accounting estimates is a significant judgment that rests with the external auditor, so wholesale reliance or delegation is wrong.

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