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In-Depth Study Complete
HKSA 610 - Using the Work of Internal Auditors (Condensed)
๐ PDF โ HKICPA Handbook Vol III
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| Section | Key Concept | Brief Description |
|---|---|---|
| Introduction & Scope | Two distinct uses | Using work of internal audit function vs. using internal auditors for direct assistance |
| External Auditor's Sole Responsibility | Responsibility not reduced | External auditor retains full responsibility for audit opinion regardless of internal audit use |
| Evaluation Criteria | Three factors | Objectivity, Competence, Systematic and Disciplined Approach |
| When Work Cannot Be Used | Any factor inadequate | If any of the three factors is insufficient, work cannot be used |
| Nature and Extent of Use | More judgment/risk = less use | Higher judgment or risk areas require more direct external auditor work |
| Using Work of Internal Audit Function | Reperformance required | External auditor must reperform some of the internal audit work |
| Using Direct Assistance | Restrictions and agreements | Cannot involve significant judgments or higher risks; written agreements required |
| Documentation | Comprehensive records | Document evaluations, decisions, procedures, and agreements |
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Introduction and Scope
Two Distinct Areas
HKSA 610 (Revised 2013) deals with the external auditor's responsibilities when using the work of internal auditors:
- Using the work of the internal audit function in obtaining audit evidence
- Using internal auditors to provide direct assistance under the direction, supervision, and review of the external auditor
Effective Date: Audits of financial statements for periods ending on or after 15 December 2014.
When This Standard Does NOT Apply
- The entity does not have an internal audit function
- The responsibilities and activities of the internal audit function are not relevant to the audit
- Based on the auditor's preliminary understanding, the external auditor does not expect to use the work of the function
- The external auditor does not plan to use internal auditors to provide direct assistance
Important: Nothing in this HKSA requires the external auditor to use the work of the internal audit function. It remains the external auditor's decision in establishing the overall audit strategy.
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External Auditor's Sole Responsibility
Critical Rule: The external auditor has sole responsibility for the audit opinion expressed. This responsibility is not reduced by using the work of the internal audit function or internal auditors providing direct assistance.
Neither the internal audit function nor internal auditors are independent of the entity as required of the external auditor under HKSA 200.
Objectives
The objectives of the external auditor are:
- To determine whether the work of the internal audit function or direct assistance from internal auditors can be used, and if so, in which areas and to what extent
- If using the work of the internal audit function, to determine whether that work is adequate for purposes of the audit
- If using internal auditors to provide direct assistance, to appropriately direct, supervise, and review their work
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Key Definitions
| Term | Definition |
|---|---|
| Internal Audit Function | A function of an entity that performs assurance and consulting activities designed to evaluate and improve the effectiveness of the entity's governance, risk management, and internal control processes |
| Direct Assistance | The use of internal auditors to perform audit procedures under the direction, supervision, and review of the external auditor |
Note: Activities similar to internal audit may be conducted by functions with other titles or outsourced to third-party service providers. The nature of activities, objectivity, competence, and systematic approach determine applicability, not the title.
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Determining Whether the Work of the Internal Audit Function Can Be Used
Evaluation Criteria
The external auditor shall evaluate three factors:
| Factor | Key Considerations |
|---|---|
| (a) Objectivity | Organizational status, policies and procedures supporting freedom from bias, conflict of interest, or undue influence |
| (b) Competence | Knowledge and skills of the function as a whole; technical training; professional designations; industry knowledge |
| (c) Systematic and Disciplined Approach | Documented procedures; risk assessments; work programs; quality control policies |
When the Work CANNOT Be Used: The external auditor shall not use the work of the internal audit function if:
(a) The function's organizational status and relevant policies and procedures do not adequately support the objectivity of internal auditors
(b) The function lacks sufficient competence
(c) The function does not apply a systematic and disciplined approach, including quality control
(a) The function's organizational status and relevant policies and procedures do not adequately support the objectivity of internal auditors
(b) The function lacks sufficient competence
(c) The function does not apply a systematic and disciplined approach, including quality control
Key Principle: Objectivity and competence may be viewed as a continuum. Strong objectivity cannot compensate for lack of competence, and high competence cannot compensate for inadequate objectivity.
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Determining the Nature and Extent of Work to Use
Factors Influencing Use
The external auditor shall plan to use less of the work of the internal audit function and perform more work directly when:
| Factor | Explanation |
|---|---|
| (a) More judgment involved | In planning, performing audit procedures, and evaluating evidence |
| (b) Higher assessed risk of material misstatement | Especially significant risks |
| (c) Less support for objectivity | Weaker organizational status and policies |
| (d) Lower competence level | Less skilled internal audit function |
Examples of Work That Can Be Used
- Testing operating effectiveness of controls
- Substantive procedures involving limited judgment
- Observations of inventory counts
- Tracing transactions through the information system
- Testing compliance with regulatory requirements
- Audits or reviews of financial information of non-significant subsidiaries
Significant Judgments Reserved for External Auditor: The external auditor must make all significant judgments, including:
- Assessing risks of material misstatement
- Evaluating sufficiency of tests performed
- Evaluating appropriateness of management's use of going concern assumption
- Evaluating significant accounting estimates
- Evaluating adequacy of disclosures in financial statements
- Assessing risks of material misstatement
- Evaluating sufficiency of tests performed
- Evaluating appropriateness of management's use of going concern assumption
- Evaluating significant accounting estimates
- Evaluating adequacy of disclosures in financial statements
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Using the Work of the Internal Audit Function
Discussion and Coordination
The external auditor shall discuss the planned use of work with the internal audit function, addressing:
- Timing of work
- Nature of work performed
- Extent of audit coverage
- Materiality levels
- Methods of item selection and sample sizes
- Documentation requirements
- Review and reporting procedures
Procedures to Determine Adequacy
The external auditor shall perform sufficient audit procedures on the body of work as a whole, including evaluating whether:
- The work had been properly planned, performed, supervised, reviewed, and documented
- Sufficient appropriate evidence had been obtained to enable reasonable conclusions
- Conclusions reached are appropriate and reports are consistent with results
Mandatory Requirement: The procedures shall include reperformance of some of the work.
Reperformance: Involves the external auditor's independent execution of procedures to validate conclusions reached by the internal audit function. This may be accomplished by examining items already examined by the internal audit function, OR examining sufficient other similar items not actually examined by the internal audit function.
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Using Internal Auditors for Direct Assistance
Evaluation Before Use
If using internal auditors for direct assistance is not prohibited, the external auditor shall evaluate:
- Existence and significance of threats to objectivity (including inquiry about interests and relationships)
- Level of competence of the internal auditors
When Direct Assistance CANNOT Be Used: The external auditor shall not use an internal auditor to provide direct assistance if:
(a) There are significant threats to the objectivity of the internal auditor
(b) The internal auditor lacks sufficient competence to perform the proposed work
(a) There are significant threats to the objectivity of the internal auditor
(b) The internal auditor lacks sufficient competence to perform the proposed work
Work That CANNOT Be Assigned
The external auditor shall not use internal auditors to provide direct assistance to perform procedures that:
- Involve making significant judgments in the audit
- Relate to higher assessed risks of material misstatement where judgment required is more than limited
- Relate to work with which internal auditors have been involved and which has been or will be reported to management or those charged with governance
- Relate to decisions the external auditor makes regarding the internal audit function and use of its work or direct assistance
Written Agreements Required
Prior to using internal auditors for direct assistance, the external auditor shall obtain:
- Written agreement from an authorized representative of the entity that:
- Internal auditors will follow the external auditor's instructions
- The entity will not intervene in the work
- Written agreement from the internal auditors that:
- They will keep confidential specific matters as instructed
- They will inform the external auditor of any threat to their objectivity
Direction, Supervision, and Review: The external auditor shall direct, supervise, and review work performed by internal auditors. Review procedures shall include the external auditor checking back to underlying audit evidence for some of the work.
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Documentation Requirements
When Using Work of Internal Audit Function
The audit documentation shall include:
| Item | Description |
|---|---|
| (a) | Evaluation of objectivity, competence, and systematic and disciplined approach |
| (b) | Nature and extent of work used and basis for that decision |
| (c) | Audit procedures performed to evaluate adequacy of work used |
When Using Direct Assistance
The audit documentation shall include:
| Item | Description |
|---|---|
| (a) | Evaluation of threats to objectivity and level of competence of internal auditors used |
| (b) | Basis for decision regarding nature and extent of work performed |
| (c) | Who reviewed the work, date and extent of review |
| (d) | Written agreements obtained from entity representative and internal auditors |
| (e) | Working papers prepared by internal auditors providing direct assistance |
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