SUGGESTED SOLUTION TO EXERCISE 11.8 Page 1 of 3 pages a) 1. To be in a position to make use of, or rely upon, the work of an internal auditor, we (the external auditors) must be satisfied that the internal auditor (department) has the necessary competence and objectivity to satisfy the external auditor's requirements. The same will apply in deciding whether an internal auditor can provide direct assistance on the external audit. 2. We also need to be satisfied that the internal audit function follows a systematic and disciplined approach to its work. 3. An assessment of the internal audit department (Simon Brown) suggests strongly that this is not the case. Objectivity: Organisational status 3.1The internal audit "department" is unlikely to be taken seriously as an independent body with influence over the control and governance of the company. * the "department" consists of a single individual who was formally an administration clerk in the creditors section. To get other departments to take him seriously in an important function such as internal audit, will be difficult. * Simon Brown reports to Krishen Vather the financial manager and not to the Board or audit committee. From our perspective as external auditors, he is in no way independent of the main focus of our audit. * furthermore it is intended that he also assists with operational functions when staff are absent. This again directly affects his independence and objectivity as an internal auditor. He is too close to the operational staff and in fact may be involved in activities which we as external auditors will be auditing. In effect he has conflicting responsibilities as an internal auditor. Objectivity: Scope of function and undue influence of others 3.2Simon Brown will in all likelihood have very limited power in deciding what assessments, evaluations or investigations he should conduct. * Krishen Vather is likely to instruct him on exactly what he does and when he does it, including filling operational gaps as and when required. * with no training in auditing, Simon Brown is unlikely to understand the importance of being independent or how and when to exercise professional judgement. He will rely heavily on Krishen Vather's judgement. * reporting to Krishen Vather also means that anything adverse which Simon Brown does find, and which should be reported to the Board, can be blocked by Krishen Vather if he so wishes, e.g. anything which may reflect negatively on himself (Krishen Vather). Competence
3.3Simon Brown does not have the necessary technical skill and competence for us to rely on his work. * he has no formal training or theoretical training in auditing and * has no experience as an auditor of any kind * although regarded as competent (and enthusiastic) with regard to his creditors responsibilities, this is no substitute for auditing knowledge and the capability to carry out and understand routine or sophisticated audit techniques * it is also highly unlikely that Simon Brown has the necessary knowledge of the financial reporting standards to fulfil a