There are similarities in the areas of operation of the internal auditor and the statutory auditor, especially regarding accounting matters. Both of them have a common interest in ensuring that an effective system of internal control exists and that the accounting system is adequate to generate true and fair financial statement. Accordingly, the nature of work carried out both is similar as regards examination of the system of internal control, testing and checking of accounting books, records and statements and verification of assets and liabilities. Both of them examine the same set of accounting documents and carry out similar physical and other verification checks.
Despite these similarities, there are certain fundamental differences in the status responsibility, approach and the scope of operations of an internal auditor and a statutory auditor. The internal auditor is a representative of the management. The nature and scope of his operations are determined the management, and may, therefore, differ from one organization to another according to the needs and perceptions of different managements. The rights and duties of the statutory auditor, on the other hand, are defined the statute. Thus, the internal auditor’s approach is to report on matters vital from the point of view of management, whereas the statutory auditor is primarily concerned with the truth and fairness of financial statements presented to the shareholders.
NSA 610, Using the work of an Internal Auditor, also recognizes that “the role of the internal audit function within an entity is determined management and its prime objective differs from that of the external auditor who is appointed to report independently on financial information. Nevertheless, some of the means of achieving their respective objectives are often similar and thus much of the work of the internal auditor may be useful to the external auditor in determining the nature, timing and extent of his procedures.”
Since the internal audit function is a part of the overall internal control system, the statutory auditor should evaluate its effectiveness. The evaluation of the internal audit function assists the statutory auditor in determining the nature, timing and extent of his other audit procedures. Thus, if an auditor finds the internal audit is adequate and effective in certain areas, he may limit the related substantive procedures.
In evaluation the effectiveness of the internal audit function, the statutory auditor should consider the organizational status of the internal auditor, the scope of his function, his technical competence and the level of professional care exercised in conducting internal audit. If the internal auditor reports to the highest level of management and is free of any operating responsibility, the statutory auditor can place greater reliance on his work. The statutory auditor should also review whether any constraints or restrictions have been placed on the work of the internal auditor the management. In particular, the internal auditor should be free to communicate fully with the statutory auditor. The statutory auditor should also ascertain the nature and depth of coverage of internal audit. He should review the effectiveness of the system of follow up of internal audit. The statutory auditor should also review whether or not the internal audit work is being performed persons possessing adequate technical training and proficiency. Finally, he should ascertain whether the internal audit work appears to be properly planned, supervised, reviewed and documented.
It would be helpful if the statutory auditor ascertains the tentative plan of internal audit for the year and discusses the same with the internal auditor to determine areas where he considers that he could use the work of the internal auditor. The degree of reliance that a statutory auditor can place on the work done the internal auditor is a matter of individual judgment in a given set of circumstances. As NSA 610 states, “the report of the external auditor is his sole responsibility and that responsibility is not any means reduced because of the reliance he places on the internal auditor’s work”. Further, the responsibility of the internal auditor is towards the management and he can be of specific assistance to the statutory auditor only if the management so wishes. However, both the statutory auditor and the internal auditor can, mutual consultations, arrange their audit programmes in such a manner that unnecessary duplication of work is avoided.