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

Sagar Pharma Ltd has an internal audit function. In auditing the valuation of a complex derivative liability and the going concern assessment, CA Tanvi plans to rely mainly on internal audit's work and reduce her own direct testing. What is the appropriate conclusion under SA 610 (Revised)?

Reliance mainly on internal audit is not appropriate. Under SA 610 (Revised), the more judgment an area needs, the more procedures the external auditor must do directly. Complex estimates and going concern are significant judgments, and the auditor alone bears responsibility for the opinion.

  1. AAcceptable, provided internal audit staff are competent and objective, since the work can replace the auditor's own testing entirely
  2. BNot appropriate, because the greater the judgment needed, the more procedures the external auditor must perform directly, and internal audit work alone will not provide sufficient appropriate evidenceCorrect
  3. CAcceptable, because significant judgments may be delegated to the internal audit function if documented
  4. DAppropriate only for the going concern assessment but not for the derivative valuation

Explanation

SA 610 (Revised) states that the greater the judgment needed in planning and performing procedures and evaluating evidence, the more procedures the auditor must perform directly. Significant judgments include evaluating significant accounting estimates and the going concern assumption, and the auditor has sole responsibility for the opinion. Both areas here are judgmental, so option D is wrong too.

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