Ch-9 Internal Audit & SA610 Learn with Fun

Test your Understanding

Service for about 25 years, Parteek, a post graduate in law
ATteT an mustrious career in Indian Audit &. Accounte in
he wants to take responsibilities
has taken voluntary retirement from goVormont corice Reing in fine spirits,
compensation packages, he applied for such
corporate sector as Chief internal auditor, On looking at attractive
on nim due to
position in a leading listed companv engaged in oil refining business. The Board of company is keen
his impressive credentials. Can he be appointed in this leading position of said companyr

a chartered aCCOuntdnt or d Cost accountant

As per Sec 138 of Companies Act. 2013 the internal auditor shall either be
as may be decided by the Board to conduct an
(Wnetner engaged in the practice or not), or such other professional
internal audit of the functions and activities of the company.
law pOSt graduate and
The Board can appoint any professional as may be decided by it. The applicant in question is a
has got the necessary experience
he has spent 25 years of his career in Indian Audit & Accounts Service, Therefore, he
competent and experienced
and skills required for the said vacancy, The Board would be in a position to appoint such a
person in the field of auditing as its Chief Internal auditor.

Z. CA Deva is internal auditor of a listed company, The company wants to make sure that it is in compliance with
its
SEBI requirements at all times and it is never on the wrong side of law, It asks its internal auditor to manage
compliance tracking system including directly corresponding with regulator in this regard. The profile and scope of
internal audit agreed at time of appointment included "compliance with laws and regulations." Can he perform
such type of activities in capacity of internal auditor of company?

Internal Auditor does not assume any responsibility to manage or operate the compliance framework or to take
compliance related decisions. It is not responsitbility of the lnternal Auditor to execute or resolve compliance related
risks (e.g, engaging directly with regulators, etc.).

Although internal audit function provides independent assurance to enhance governance (which includes compliance
with laws and regulations), it does not assume operational responsibility of its compliance framework. It is the
responsibility of the management. He is responsible for auditing the compliance framework and not managing it.
Similarly, he does not accept compliance related risks like directly engaging with regulator.

Past Exams/RTPs/MTPs & SM Questions

1. Internal auditor makes an appraisal of organization structure to ensure that it is in harmony with the objectives
of the entity, besides checking of financial transactions and operational activities of the entity- Elaborate.
(Nov-18 New)
Review of the Organisation Structure - The internal auditor should conduct an appraisal of the organisation structure
to ascertain whether it is in harmony with the objectives of the enterprise and whether the assignment of
responsibilities is in consonance therewith. For this purpose:
" He should review the manner in which the activities of the enterprise are grouped for managerial control. It is
also important to review whether responsibility and authority are in harmony with the grouping pattern.
The internal auditor should examine the organization chart find out whether the structure is simple and
economical and that no function enjoys an undue dominance over the others.
He should particularly see that the responsibilities of managerial staff at headquarters do not overlap with those
of chief executives at operating units. He should examine whether there is a satisfactory balance between
authority and responsibility of important executives.
" The internal auditor should examine the reasonableness of the span of control of each executive (the number of
sub-ordinates that an executive controls). He should examine whether there is a unity of command i.e., whether
each person reports only to one superior.
KESWANI
AUDIT QUESTION BANK BY CA SHUBHAM
 lntornal
| Audit &SA G10 Learn with Fun
h9
eesonslbllities cannot be avolded, the primary one should be specified and the specitic responsibility
fixed. This must be made known to all
to
cach
) senior concerned.
he-hould evaluate the process of managerial development in the enterprise. This Siis a vital aspect
in afast
fnslly,
, rOwing enterpris

been.appointed as an internal auditor of acompany RSM Ltd. The Managing Director Rakesh is worried
Yauhave attrition
hout
employee attrition in large number. Rakesh requests you to
analyse the causes for high employee
ateinhis company. What factors would you consider in such analysis? (MTP Oct-20)

factors to be considercd to analyse causes for high employee attrition rate are as under:
Stress & work life imbalance.
Wrong policies of the Management.
Senior Staff
ainbearable behaviour of
wSafetyfactors.
limited opportunities for promotion,
monetary benefits
vil Low
schemes.
Lack of labour welfare
personnel for the various levels of works?
Whether orgaization has properly qualified and experienced
ls ihe number of people employed at various work centres exXcessive or inadequate?
themselves abreast
training so that emplovees and workers keep
WDeas the organization provide facilities for staff
of current techniques and practices?

by the External auditor in the evaluation

of the Internal Audit
important aspects to be considered
1 State the
Function. [SM])

considered in this context are:

The important aspects to be
internal audit
- Whether internal audit is undertaken by an outside agency or by an
a. Organisational Status management. In an ideal situation, his
department within the entity itself, the internal auditor reports to the
responsibility
management and free of any other oberating
reports to the highest level of the nature and depth of coverage of the
assignment
Function - The external auditor should ascertain
b. Scope of
for management
which the internal auditor discharges work is performed by persons
Competence - The external auditor should ascertain that internal audit
C. Technical
training and proficiency.
having adequate technical audit work appears to be properly
auditor should ascertain whether internal
d. Due Professional Care- The external
documented.
planned, supervised, reviewed and
internal auditors for
independent directors sought information regarding the appointment of
4. One of the Financial Information are
Companies in accordance with the Companies Act, 2013 of which certain
Tollowing Group
given below: year
Figures are in crore and correspond to the previous
Loan from Bank Public Deposits
Equity Share Capital Turnover
Name Nature
and PFI
50 24
190
AADI Ltd Listed 100
190 50 24
AJIT Ltd Unlisted Public 60
190 50
Nemi Ltd Unlisted Pvt 60
the appointment of internal
evaluate the requirements of the Companies Act, 2013 regarding
Tou are required to
May-22]
nuators for the Group Companies. Discuss. (RTP
73
ASHU RIAM KESVANJ
 Ch-9 Internal Audit & SA 610
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Applicability of Provisions of Internal Audit: Ac nor section 138 of the Companies ACt,O15, Tolowing class of
companies (prescribed in Rule 13 of Companies (Accounts) Rules, 2014) shall be required to appoint an internal
auditor or a firm of internal auditors, namely:
(A) every listed
company:
(B) every unlisted public company having
paid up share capital of fifty crore rupees or more during the preceding financial year; or
2. turnover of two hundred crore rupees or more during the preceding financlal year, or
outstaning loans or borrowings from banks or public financial institutions exceeding one hundred crore rupeer
or more at any point of time during the preceding financial year; or
4.
outstanding deposits of twenty five crore rupees or more at any point of time during the preceding financial year
and

(C) every private

company having
(1) turnover of two hundred crore rupees or more during the preceding financial year; or
(2) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees
or more at any point of time during the
preceding financial year.

in the grven case, AADI Ltd. is a listed company. As per section 138 of the Companies Act, 2013, every listed company
IS required to appoint an internal auditor or a firm of internal auditors. Thus, in view of the above, AADI Ltd. is required
to appoint an internal auditor.

Further, AIT Ltd. is unlisted public company. The company is having 60 crore as equity share capital which is
exceeding the prescribed limit of rupees fifty crore as per section 138. Thus, AJIT Ltd. is required to appoint an internal
auditor as per section 138 of the Companies Act, 2013.

NEMI Ltd. is unlisted private company and having * 60 crore as equity share capital, 190 crore as turnover and{ 50
crore loan from Bank and PF1. In view of provisions of section 138 of the Companies Act, 2013 discussed above, all the
limits are below the prescribed limit for a private company. Therefore, NEMILtd. is not required to appoint an internal
auditor

It can be concluded that AADI Ltd. and AIT Ltd. is required to appoint the internal auditor as per the provisions of the
Companies Act, 2013 whereas NEMI Ltd. is not required to do the same.

5. The XYZ Ltd has to appoint Mr. Aas Chief Internal Auditor to lead the internal audit function for the Company.
The Managing Director of the Company has asked the HR head to define the reporting structure of the Chief Internal
Auditor, so that he can discharge his duties objectively? Suggest the ideal reporting structure of the Chief Internal
Auditor that HR head may propose to the Managing Director? (SM)
HR Head need to evaluate multiple options and identify most suitable option in light of relevant provisions, guidance
and overall governance of organization. HR head also need to evaluate different option for his administrative reporting
and various options for functional reporting of Chief Internal Auditor.

The possible options to be considered and evaluated include BOD, Audit Committee, MD, CEO or CFO.

AUDIT OUESTION BANK BY CA SHUBHAM KESWANI 76

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Ch-9 Internal Audit & SA 610
As per Sec 138 of the Conpanles Act 2013, Internal auditor shall elther be a chartered accountant or a cost accoUnto
the Board to conduct an
(whether engaged in the practice or not), or such other orofesional as mav be decided by
Internal audit of the functions and activities of the company.

As per the revlsed definition of the term "lnternal Audit' as per para 3 of the ICAl's Framework Governing nteran
Audits, "Internal audit provides Independent assurance on the effectiveness of internal controls and risk management
processes to enhance governance and achleve organisational objectives",

internal Auditor shall be free from any undue intluences which orce him to devlate from truth. This independence
shall be not only in mind but also In appearance. Also, internal auditor shall resist any undue pressure or inteeee
in establishing the scope of the assignments or the manner in which these are conducted and reported, in case these
deviate from set objectives.

As per requirement of above provision, Chlef lnternal Auditor need to be independent of the operational activities
and report to Audit Committee /Board of Directors to eniov hls true status of independent auditor.

He may administratively report to CEO or Managing Director for his administrative reporting purpose or any other
eimilar authority till the time it is approved by Board of Directors and it does not impact his independence to be able
to perform his duties and report to audit committee / Board of Director independently.

6. The XYZ Ltd is has appointed Mr. Ato conduct their internal audit for new financial year. The Audit committee
reauested Mr. Ato present their Internal Audit plan for next financial year? What approach would Mr. Afollow to
prepare the internal audit plan for next year? (SMI

The internal auditor should, in consultation with those charged with governance, including the audit committee,
develop and document a plan for each internal audit engagement to help him conduct the engagement in an efficient
and timely manner.

Internal audit plan should be developed in such a manner that all the business processes covering both financial as
well as operational activities are reviewed by internal audit function within a defined time cycle
Also, ensuring that appropriate consideration is made and adequate balance is ensured to the following:
Risk underlying the business process
Value that the internal audit can provide to the organization
Effort involved in conducting the internal audit for a particular business process
Risk Appetite of the organization
Coverage of all auditable areas within the defined time range

7. The XYZ Ltd is has appointed Mr. Ato conduct their internal audit for new financial year. The Audit committee
requested Mr. to present detailed report on their finding and areas where immediate action is needed to mitigate
critical risks? What should be the content of internal audit report to address this requirement of the Audit
Committee? [SM)

As per Standard on lnternal Audit (SIA) 370 Reporting Results, reporting of internal audit results is generally
undertaken in two stages:
At the end of a particular audit asslgnment, an "Internal Audit Report" covering a specific area, function or part
of the entity is prepared by the internal Auditor highlighting key observations arising from those assignments.
This report is generally issued with details of the manner In which the assignment was conducted and the key

AUDIT QUESTION BANK BY CA SHUBHAM KESWANI 277

 Ch-9 Internal Audit & SA 610 Learn with Fun
findings from the audit procedures iindertaon Thie ronot is issucd to the auditee, with copies shared with local
and executive management, as agreed during the planning phase.
On a periodic basis, at the close of a nlan noriod a comprehensive report of all the internal audit activitie,
covering the entity and the plan period is prepared by the Chief Internal Auditor (or the Engagenent Partner, in
case of external service provider), Such renorting is normally done on a quarterly basis and subrnitted to the
highest governing authority responsible for internal audits, generally the Audit Comrnittee. Sorne part of the
aforementioned Internal Audit Rcports mav form part of the periodic (e.g. Quarterly) report shared with the
Audit Committee.

Accordingly, a typical internal audit report should include thc following:

Audit Scope performed
Audit period Covered
Executive Summary
Summary of the critical findings
Detailed audit findings with elaboration on business impact and root cause of such issues
Rating of the highlighted issues (E.g High / Medium /Low) in accordance to the rating criteria approved by Audit
Committee

Audit recommendation to improve control environment and address the highlightcd finding
Response received from the responsible functional authority containing action plan and target tinelir.c, for
action.

8. The XYZ Ltd is has appointed Mr. A to conduct their internal audit for new financial year. The Audit cornmittee
requested Mr. A to present their analysis on the implementation of recommendation of previous audit report and
highlight critical areas which need immediate attention of Audit Committee? What should be the steps followed by
internal auditor to address this requirement of Audit Committee? [SMJ

As per SIA 390 Monitoring and Reporting of Prior Audit Issues, the Chief Internal Auditor is responsible for
continuously monitoring the closure of prior audit issues through tinmely implementation of action plans included in
past audits. This shall be done with a formal monitoring process, elements of which are pre-agreed with management
and those charged with governance. The responsibility to implement the action plans remains with the management.
In monitoring and reporting of prior audit issues, responsibility of Internal Auditor is usually in form of an "Action
Taken Report (ATR) of previous audits".

To address the requirement of Audit Committee in the given situation, Internal Auditor should assess the action taken
against the previous audit findings and report a summary of the action taken by the management.
Typical Action Taken Report may include the following:
Reference to the previous audit reporting containing the reported issues
Implementation Action agreed by the management along with target implementation date
Status of action taken by management. The same may be classified under Implemented / Not Implemented
Residual risk and rating for any unimplemented action
Audit findings not implemented for long period of time
Any critical audit finding that require immediate action for action or implementation

9. CA. Sanjana has recently joined as Chief Internal Auditor of Up Scale Limited, a listed
company. Her subordinate
staff in internal audit department brings to her knowledge many prior audit issues
highlighted in the previous

AUDIT QUESTION BANK BY CA SHUBHAM KESWANI 275

 Ch-9 Internal Audit & SA610 Learn with Fun
findings from the audit procedures undertaken. This report is issued to the auditee, with copies shared with local
and executive management, as agreed during the planning phase.
On a periodic basis, at the close of a plan period, a comprehensive report of all the internal audit activities
covering the entity and the plan period is prepared by the Chief tInternal Auditor (or the Engagement Partner, in
case of external service provider). Such reporting is normally done on a quarterly basis and submitted to the
highest governing authority responsible for internal audits, generally the Audit Committee. Some part of the
aforementioned Internal Audit Reports may form part of the periodic (e.g. Quarterly) report shared with the
Audit Committee.

Accordingly, a typical internal audit report should include the following:

Audit Scope performed
Audit period Covered
Executive Summary
Summary of the critical findings
Detailed audit findings with elaboration on business impact and root cause of Such issues
Rating of the highlighted issues (E.g High / Medium / Low) in accordance to the rating criteria approved by Audit
Committee
Audit recommendation to improve control environment and address the highlighted finding
Response received from the responsible functional authority containing action plan and target timelines for
action.

8. The XYZ Ltd is has appointed Mr. A to conduct their internal audit for new
financial year. The Audit committee
requested Mr. A to present their analysis on the implementation of recommendation of previous audit report and
highlight critical areas which need immediate attention of Audit Committee? What should be the steps
internal auditor to address this requirement of Audit
followed by
Committee? (SM]

As per SIA 390 Monitoring and Reporting of Prior Audit Issues, the Chief Internal Auditor is
continuously monitoring the closure of prior audit issues through timely responsible for
past audits. This shall be done with a formal monitoring
implementation of action plans included in
process, elements of which are pre-agreed with manaeement
and those charged with governance. The
responsibility implement the action plans remains with the management.
to

monitoring and reporting of prior audit issues, responsibility of

In
Internal Auditor is usually in form of an "Action
Taken Report (ATR) of previous audits".

To address the requirement of Audit

Committee the given situation, Internal Auditor should assess the
in
against the previous audit findings and report a action taken
summary of the action taken by the
manapement.
Typical Action Taken Report may include the following:
Reference to the previous audit reporting containing the reported issues
Implementation Action agreed by the
Status of action taken by management.management along with target
The same may be implementation date
classified under Implemented /Not
Residual risk and rating for any
unimplemented action Implemented
Audit findings not implemented for long period of
time
Any critical audit finding that
require immediate action for action or
9. CA,
implementation
Sanjana has recently joined as Chief
Internal Auditor of Up
ctaff in internal audit
department brings to her knowledge manyScale Limited, a listed company. Her
prior audit subordinate
issues highlighted in the previous
AUDIT QUESTION BANK BY CA SHUBHAM KESWANI
 Ch-9 Internal Audit & SA 610
The internal auditor should review the methods of establishing operating standards and Learn with
norms. He
Fun
Carerully examine the assumptions made while setting the standards to ensure that
necessary.
tney are appropriate should.
Where there is a wide divergence between actual performance and the corresponding Standards, reasone
be considered.

AS a part of evaluating resources utilisation. identifying the facilities which are

under-utilized is an important fune.
of the internal auditor.

In the gIven situation, the following observations have been noted by the Internal Audit Team that:
The company has provided a huge hall as a gvm facility to
employees, which is operating only 1-2 days a weel
The rest of the days, it remains unutilized, Moreover, the company has taken a sitting cum waiting lounge for tl
customers
There iS a huge amount lying in bank accounts on which the management is not able to make deCisions regardine
investing. This results
in a loss of interest
There is a downtime of one hour for
resources and computers in the company.

Moreover, Mr. X, the Manager of the company, has denied the internal auditors from reporting the said observations
All the above-mentioned issues fall under the purview of the Internal Audit function, i.e., Review of
Utilization of
Resources.

The auditor must highlight the weaknesses observed and give suggestions for improvement ot the same.

Accordingly, opinion of Mr. X, the manager of the company Dreams Pvt. Ltd. that above matters are not related to
internal audit and therefore, should not be commented upon, is not tenable.

SA 610: Using the Work of Internal Auditor

1. CA. Amboj, a practicing CA has been appointed as internal auditor of Textile Ltd. He conducted physical
verification of inventory at year-end and handed over report of verification to CA. Kishore, statutory auditor of
Company, for his view and reporting. Can CA. Kishore rely on such report?
(MTP Oct-18 + ICAI SM)

As per SA 610 "Using the Work of Internal Auditors", while determining whether work of internal auditors can be
used for purpose of audit, the external auditor shall evaluate
a The extent to which internal audit furnction's organizational status and relevant policies and procedures support
objectivity of internal auditors;
b) The level of competence of internal audit function; and
) Whether lA function applies a systematic and disciplined approach, including quality control.
Further, external auditor shall not use the work of Internal Audit function if external auditor determines that:
(a) The function's organizational status and relevant policies and procedures do not adequately support objectivity
of internal auditors;
(b) The function lacks sufficient competence; or

(c) The function does not apply a systematic and disciplined approach, including quality control.
In instant case, CA. Kishore should ascertain internal auditor's scope of verification, area of coverage and method of
verification. He should review report on physical verification taking into consideration these factors. If possible, he
should also test check few items and he can also observe procedures performed by internal auditors.

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Ch-9 Internal Audit & SA 610 Learn with Fun

If statutory auditor is Satistied about approprlateness of verification he can rely on report but if he finds thd
verification is not in order, he has to decide otherwise. The final responsibility to
express opinion on ma
statement remains with the statutory auditor.

2. Moon Ltd. of which you are Statutory Auditor, have internal audit being
conducted by outside agency. Stae
factors that weigh considerations in opting to make use of direct assistance of internal auditors
for purpose of
statutory audit. (May 18 New)

As per SA 610 Using the work of Internal Auditor in determining nature and extent of
work that may be assIgned tO
internal auditors and the nature, timing and extent of direction
sunevision and review that is appropriate in te
circumstances, external auditor shall consider
(1) The amount of judgment involved in:
(i) Planning and performing relevant audit procedures; and
(iö) Evaluating audit evidence gathered;

(2) The assessed risk of material misstatement: and

(3) The external auditor's evaluation of existence and significance of threats to obiectivity and level of competence
of internal auditors who will be providing such assistance.

If using internal auditors to provide direct assistance is not prohibited by law or regulation, and external auditor plans
to use internal auditors to provide direct assistance on audit, external auditor shall evaluate existence and significance
of threats to objectivity and the level of competence of the internal auditors who will be providing such assistance.

The external auditor's evaluation of existence and significance of threats to internal auditors' objectivity shall include
inquiry of internal auditors regarding interests and relationships that may create athreat to their objectivity.
3. Mr. Sheetal is appointed as statutory auditor of Mahi Ltd. Mahi Ltd is required to appoint an internal auditor as
per statutory provisions given in Companies Act, 2013 and appointed Mr. Kunthu as internal auditor. The
external auditor Mr. Sheetal asked internal auditor to provide direct assistance to him regarding evaluating the
sufficiency of tests performed and the adequacy of disclosures in the financial statements and other matters
affecting the auditor's report. Discuss whether Mr. Sheetal, statutory auditor, can ask direct assistance from Mr.
Kunthu, internal auditor as stated above in view of relevant Standard on Auditing. (MTP Apr21)

As per SA 610 "Using the Work of Internal Auditor", EA shall not use internal auditors to provide direct assistance to
perform procedures that Involve making significant judgments in the audit.
Since external auditor has sole responsibility for the audit opinion expressed, external auditor needs to make the
significant judgments in the audit engagement.

Significant judgments include the following:

Assessing the risks of material misstatement;
" Evaluating the sufficiency of tests performed;
Evaluating the appropriateness of management's use of the going concern assumption;
Evaluating significant accounting estimates; and
Evaluating adequacy of disclosures in F.S., and other matters affecting the auditor's report.

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Ch-9 Internal Audit & SA 610
In view of above, Mr. Sheetal cannot ask direct assistance fromn internal auditors
regarding evaluating sufficiency of
tests performed and adequacy of disclosures in F.S. and other matters affecting auditor s report.
receivables in past yeare
4. OPQ Ltd is in software consultancy business. The company had large balance of accounts
which have been assessed as area of high risk. For vear ended 31 March 2019, in respect of valuation of accounts
and provision
receivable, statutory auditor was assigned with checking of accuracy of aging of accounts recelvables
on ageing, to internal auditor providing direct assistance to him, Comment. (MTP Oct-19
+ Nov-22)
based

As per SA 610 Using the Work of Internal Auditor. external auditor (Statutory Auditor) shall not use internal auditors
to provide direct assistance to perform procedures that:

i. Involve making significant judgments in the audit;

ii. Relate to higher assessed risks of material misstatement where judgment required in pertorming the relevant
audit procedures or evaluating the audit evidence gathered is more than limited;
ii. Relate to work with which internal auditors have been involved and which has already been, or will be, reported
to management or TCWG by Internal Audit function; or
iv. Relate to decisions external auditor makes in accordance with this SA regarding the internal audit tunction and
use of its work or direct assistance.

In given case where valuation of accounts receivable is assessed as an area of higher risk, statutory auditor could
assign the checking of accuracy of the aging to internal auditor providing direct assistance.

However, because evaluation of adequacy of provision based on the aging would involve more than limited
judgment, it would not be appropriate to assign that latter procedure to an internal auditor providing direct
assistance.

5. Mr. Anand is appointed as statutory auditor of XYZ Ltd. XYZ Ltd is required to appoint internal auditor as per
statutory provisions given in the Companies Act, 2013 and appointed Mr. Bhola as its internal auditor. The external
auditor Mr. Anand asked internal auditor to provide direct assistance him regarding evaluating significant
accounting estimates by the management and assessing the risk of material misstatements.
a) Discuss whether Mr. Anand, statutory auditor, can ask direct assistance from Mr. Bhola, internal auditor as
stated above in view of Standards on Auditing.
b) Will your answer be different, if Mr. Anand ask direct assistance from Mr. Bhola, internal auditor with respect
to external confirmation requests and evaluation of the results of external confirmation procedures?
(RTP May-20)
Direct Assistance from Internal Auditor: As per SA 610 "Using the Work of Internal Auditor", the external
auditor
shall not use internal auditors to provide direct assistance to perform procedures that Involve making significant
judgments in the audit.

Since the external auditor has sole responsibility for the audit
opinion expressed, the external auditor needs to make
the significant judgments in the audit engagement.

Significant judgments include the following:

Assessing the risks of material misstatement;
Evaluating the sufficiency of tests performed;
Evaluating the appropriateness of management's use of the going concern assumption:
Evaluating significant accounting estimates,; and
Evaluating the adequacy of disclosures in the financial statements, and
report.
other matters affecting the auditors

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Ch-9 Internal Audit & SA 610

In view of above, Mr. Anand cannot ask direct assistance from internal auditors regarding evaluating SIgNine
accounting estimates and assessing the risk of material misstatements.

(b) Direct Assistance from Internal Auditor in case of External Confirmation Procedures: SA 610 "Using the Work or
internal Auditor", provide relevant guidance in determining the nature and extent of work that may be assigned to
internal auditors. In determining the nature of work that may be assigned to internal auditors, the external auditor is
careful to limit such work to those areas that would be appropriate to be assigned.

Further, in accordance with SA 505, "External Confirmation" the external auditor is required to maintain control over
asternal confirmation requests and evaluate the results of external confirmation procedures, it would not be
anpropriate to assign these responsibilities to internal auditore
uoweyer. internal auditors may assist in assembling information necessary for the external auditor to resolve
exceptions in confirmation responses.
6 Smart Ltd is a manufacturing unit and you are External Auditor of the company. Internal auditors are also
anneinted as per the provisions of the Companies Act, 2013. As an external auditor you want to use the internal
auditors to provide direct assistance for the purposes of audit. State the circumstances where the internal auditors
cannot be used to provide direct assistance. What would you include in the audit documentation? (July-21 Old)

In the given case of Smart Ltd, a marnufacturing unit, an external auditor shall not use internal auditors to provide
direct assistance as per SA 610, Using the work of Internal Auditor, to perform procedures that: (Same as Q4]

Eurther. if theexternal auditor uses internal auditors to provide direct assistance on the audit, the external auditor
documentation:
shall include in the audit
1. The evaluation of the existence and significance of threats to the objectivity of the internal auditors, and the
level of competence of the internal auditors used to provide direct assistance;
2 The basis for the decision regarding the nature and extent of the work performed by the internal auditors;
3 Who reviewed the work performed and the date and extent of that review in accordance with SA 230, Audit
Documentation;
4. The written agreements obtained from an authorized representative of the entity and the internal auditors; and
5. The working papers prepared by the internal auditors who provided direct assistance on the audit engagement.

7. Up Down Limited is in doldrums since last two years. The demand for its products has declined drastically. The
statutory auditor is of the view that situation has put into question going concern assumption of the company. Its
internal auditor has helped management in devising a strategy to deal with such risks and come out of the situation.
The plan includes venturing into different product lines using same plant with minor modifications. Further, internal
auditor has also prepared estimates of revenue generation along with cash flows. Can statutory auditor place total
reliance on work performed by internal auditor in this regard? (SM]

" The greater the judgment needed to be exercised in planning and performing the audit procedures and evaluating
the audit evidence, the external auditor will need to perform more procedures directly because using the work
of the internal audit function alone will not provide the external auditor with sufficient appropriate audit evidence.
" The appropriate use of going concern assumption requires significant judgment on part of statutory auditor.
" Therefore, statutory auditor cannot place total reliance on internal auditor's work in this regard and he should
perform more procedures directly.

8. CA. Keshavraj is conducting statutory audit of a listed company "Live with Nature Limited". There is also a well
functioning internal audit department in the company. On perusal of internal audit reports, he finds that not only
verification of inventories was attended by internal auditor at regular intervals during the year, workings were also
AUDIT QUESTION BANK BY CA SHUBHAM KESWAN!
Ch-9 Internal Audit & SA 610 Learn with Fun
made in respect of inventory valuation as at vear end, He has also attended inventory count at end of financial ves.
and no prima facie adverse inferences were drawn by him, However, on going through inventory reports, he gathe..
that inventories are being held for considerably long period before being sold. The internal audit reports have nes
taken this aspect into consideration. Should he choose to rely upon inventory valuation work performed by internal
auditor?

For a particular account balance, class of transaction or disclosure, the higher an assessed risk of materia
misstatement at the assertion level, the more judgment is often involved in planning and pertorming the audi,
procedures and evaluating the results thereof. In such circumstances, the external auditor will need to perform more
procedures directly and accordingly. make less use of the work of the internal audit function in obtaining sufficient
appropriate audit evidence. Furthermore, as explained in SA 200, the higher the assessed risks of material
misstatement, the more persuasive the audit evidence required by the external auditor will need to be, and, therefore
the external auditor will need to perform more of the work directly.

In the given situation, inventories are being held for considerably long period before being sold. As company is dealing
in niche products for new-born babies, there is a risk of inventory obsolescence due to changes in customer
preferences. It carries a significant risk of material misstatement and requires more judgment on part of statutory
auditor in planning and performing procedures.

In such circumstances, statutory auditor needs to perform procedures directly like comparing net realizable value of
products with costs to verify completeness of provisions., recomputing of provisions for obsolete stocks etc.

Therefore, in the given situation, he should perform procedures directly in accordance with SA 610.

AUDIT ÌUESTION BANK BY CA SHUBHAM KESWANI