During the statutory audit of KPK Manufacturing Ltd., the engagement partner noted that the company has a well-established and effective internal…

As per SA 610, “Using the Work of Internal Auditors”, the external auditor may use the work of the internal audit function to modify the nature, timing, or extent of audit procedures to be performed. However, the external auditor has sole responsibility for the audit opinion expressed, and that responsibility is not reduced by the external auditor’s use of the work of the internal audit function. The external auditor should evaluate the internal audit function and its work to determine its adequacy for the purposes of the audit. The external auditor should not use the internal audit function to provide direct assistance if the internal audit function’s organizational status and relevant policies and procedures do not support the objectivity of the internal auditors, or if the internal audit function lacks sufficient competence. The external auditor should also not use the work of the internal audit function in areas that involve significant judgment or where the risk of material misstatement is high. The external auditor must always remain solely responsible for the audit opinion. Work performed by Internal Audit Function Can the External Auditor Use the Work? Tested the operating effectiveness of internal controls over the purchase and payment cycle. Yes Observed the year end physical inventory count at various warehouses. Yes Determined the materiality for the audit of the financial statements. No Verified compliance with applicable environmental and labour regulations. Yes Evaluated the appropriateness of management's assumptions used in estimating the provision for pending litigation No Reviewed the financial information of a small overseas subsidiary that is not a significant component of the group. Yes Decided the nature, timing and extent of substantive audit procedures to be performed for revenue recognition and drafted the proposed audit opinion on the financial statements. No Analysis of Assignments: Testing of the operating effectiveness of internal controls over the purchase and payment cycle: This work can be used by the external auditor, provided the internal audit function is assessed as competent and objective. This involves testing controls, which is a routine task that can be relied upon after proper evaluation. Observed the year-end physical inventory count at various warehouses: This work can be used. Internal auditors often perform observations of inventory counts, and their findings can be leveraged by the external auditor, subject to evaluation of their objectivity and competence. Determined the materiality for the audit of the financial statements: This work cannot be used. Determining materiality is a matter of significant professional judgment and is solely the responsibility of the external auditor. Verified compliance with applicable environmental and labour regulations: This work can be used. Compliance testing is often performed by internal audit, and their findings can be useful to the external auditor, provided the internal audit function is deemed reliable. Evaluated the appropriateness of management's assumptions used in estimating the provision for pending litigation: This work cannot be used. Evaluating management's assumptions, especially for complex estimates like provisions for litigation, involves significant professional judgment and is a high-risk area. The external auditor must perform their own evaluation. Reviewed the financial information of a small overseas subsidiary that is not a significant component of the group: This work can be used. For non-significant components, the external auditor may rely on the work of internal audit, especially if the risk of material misstatement is low and the internal audit function is effective. This is also consistent with SA 600 requirements for group audits. Decided the nature, timing and extent of substantive audit procedures to be performed for revenue recognition and drafted the proposed audit opinion on the financial statements: This work cannot be used. Deciding audit procedures and drafting the audit opinion are core responsibilities of the external auditor and involve significant professional judgment. These cannot be delegated to or relied upon from internal audit. Conclusion: Accordingly, the engagement partner's proposal to rely extensively on all the work of the internal audit function is not appropriate. The external auditor must independently perform and conclude on areas involving significant professional judgment and remain solely responsible for expressing the audit opinion.