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CA Intermediate · Auditing and Ethics · Nature, Objective and Scope of Audit

Orchid Pharma Ltd's auditor, CA Verma, discovers during the audit of a listed company that the audit is for a financial year where the company has an internal auditor and a robust internal control system. Verma plans to reduce substantive testing to nil and rely entirely on the internal auditor's reports, stating in his report that the work was done by the internal auditor. Which is the correct audit response?

This is not acceptable. The statutory auditor has sole responsibility for the audit opinion and cannot reduce it by relying on the internal auditor, nor transfer it by mentioning that reliance in the report. Some substantive procedures are still necessary for material balances and transactions even with strong internal controls.

  1. AAcceptable, since reliance on internal audit transfers responsibility to the internal auditor
  2. BAcceptable, if he discloses the reliance in the audit report to reduce his liability
  3. CNot acceptable, since the statutory auditor has sole responsibility for the opinion and cannot reduce it by using the work of others, and some substantive procedures are always neededCorrect
  4. DNot acceptable only because the company is listed

Explanation

SA 610 allows use of the internal auditor's work, but the external auditor remains solely responsible for the opinion, and references to such use in the report are not allowed unless required by law. Substantive procedures are required for material classes of transactions regardless of control reliance. Option B is wrong as disclosure does not reduce responsibility.

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