Chapter13:Considering Work
of Other Practitioners
Reported by Group 2:
Alforte, Ivan Leo Miguel R.
Claro, Arvey C.
Crebillo, Rustom S.
Hofilena, Bernaliza G.
Jose, Joven A.
Precilla, John Dave F.
Internal Audit Engagements –
Opening Balances
1. Unaudited
The audit period to which
2. Audited by a predecessor
successor expresses an opinion
auditor
Current Period Prior Period
Account Balances XX XX
Presentation and Disclosures XX XX
Internal Audit Engagements –
Opening Balances (Cont.d)
F/S is usually presented in comparative format. An initial audit
engagement is an engagement in which either:
The F/S for the prior period were not audited; or
The F/S for the prior period were audited by predecessor auditor
Opening Balances refer to those account balances that exist at the
beginning of the period, based upon the closing balances of the prior
period, including disclosure that existed at the beginning of the
period, such as contingencies and commitments.
In an initial audit, the successor auditor expresses an opinion that
pertains only to the current period F. However, the auditor should
consider prior period balances because they can affect current period
F/S.
Audit Procedures
If audit evidence indicates that the opening
balances contain misstatements that could never
materially affect the current period’s F/S,
additional procedures should be performed.
Auditor’s Opinion
The auditor’s opinion depends on the result of
initial audit performed relating to: (1) opening
balances, (2) consistency of accounting policies
and (3) modification to the predecessor auditor’s
opinion.
The Entity’s Use of a Service Organization
Many entitles outsource certain aspects of their
business ranging from a specific task o replacing
its entire business units or functions, such as the
tax compliance, payroll processing, etc.
Auditor’s Consideration of
Entity’s Use of a Service Org.
The user auditor’s considerations, when the entity
uses the services organization, are:
A. To obtain an understanding of the nature and
significance of the service provided by the service
organization and their effect on the user entity
internal control relevant to the audit, sufficient to
identify and assess the risk of material misstatement;
and
B. To design and perform audit responsive to those
risks.
Auditor’s Consideration of
Entity’s Use of a Service Org.
In relation, the following terms used are defined:
User Auditor refers to an auditor who audits the F/S of a user
entity.
User Entity is an entity that uses a service organization and
whose F/S are being audited
Service Organization is a third-party org. that provides services to
user entities that are part of those entities’ information systems
relevant to financial reporting.
Service Auditor is an auditor who, at the request of the service
organization, provides an assurance report on the controls of a
service organization.
Auditor’s Consideration of
Entity’s Use of a Service Org.
Service Auditor’s Reports
Type 1 report - report on the description and design of controls at
a service organization. This type of report is appropriate for Rap
purposes.
Type 2 report - report on the description, design and operating
effectiveness of controls at a service organization. This type of
report is appropriate for TOC and RAP purposes
Before relying on a type 1 or type 2 report, the user auditor shall be
satisfied as to:
A. The service auditor’s professional competence and independence;
and
B. The adequacy of standards under which the report was issued.
Risk Assessment
The user auditor shall obtain an understanding of
the nature and significance of the services and
their effect on the effectiveness of D&I of user
entity’s internal control relevant to audit to audit
sufficient to identify and assess ROMM.
Risk Response
Determine Where to Obtain Evidence
In responding to assessed risks, the user auditor shall:
-Determine whether sufficient appropriate audit
evidence concerning the relevant F/S assertions is
available from records held at the user entity and if
not,
-Perform FAP to obtain sufficient appropriate audit
evidence or use another auditor to perform those
procedures at the service organization on the user
auditor’s behalf
Risk Response
Perform Tests of Controls
When the user auditor’s risk assessment includes an
expectation that controls at the service organization are
operating effectively (i.e. control risk is assessed at
below maximum), the user auditor shall perform one or
more of the following procedures:
- Obtain a type 2 report , if available;
-Perform appropriate TOC at the service organization; or
-Use another auditor to perform TOC at the service
organization on user auditor’s behalf
Risk Response
Make Inquiries about Significant Items
The user auditor shall inquire of management of
user entity whether the service organization has
reported to user entity, or whether the user entity
is otherwise aware of, any fraud, NOCLAR or
uncorrected misstatements affecting the F/S of
user entity
CONCLUSION AND
REPORTING
When a type1 or type 2 service auditor’s report is
used, the auditor’s report on the user entity would
not make reference to such report unless required
by law.
Using the Work of Internal Auditors
Certain works (as long as adequate) of internal
auditors - e.g., review of controls that could
address ROMM - assists the external auditor.
However, before the external auditors uses the
work of internal auditors, certain considerations
must be performed to evaluate both the internal
auditors and their work.
Determining Likely Adequacy of Work of Internal Auditor
The external auditor shall evaluate:
The objectivity of the internal audit function
The technical competence of the internal auditors
Whether the work of the internal auditors is
likely to be carried out with due professional care
Whether there is likely to be effective
communication between the internal auditors and
the external auditors
Determining Effect of Reliance
on the Work of Internal Auditor
The external auditor shall consider:
The nature and scope of work of internal auditors
The assessed ROMM at the assertion level
The degree of subjectivity involved
Performing Procedures to Determine Adequacy the Work of
Internal Auditor
The external auditor shall evaluate whether:
The work was performed by internal auditors having
adequate technical training and proficiency
The work was properly supervised, reviewed and
documented
Adequate audit evidence has been obtained to enable the
internal auditors to draw reasonable conclusions
Conclusions reached are appropriate in the circumstances
and any reports are consistent with the results of the work
Any exceptions or unusual matters disclosed by the
internal auditors at properly resolved
Using the Work of Internal Auditors and Documentation
If the external auditor uses specific work of the
internal auditor, the external auditor shall include
in the documentation the conclusions reached
regarding the evaluation of the adequacy of the
work of the internal auditors, and the audit
procedures performed by the external auditor on
that work
Reporting
The external auditor has sole responsibility for
the audit opinion expressed, and that
responsibility is not reduced by the external
auditor’s yse of the work of the internal auditors
Using the Work of an Auditor’s Report
An expert (or specialist) refers to a person or firm
possessing special skill, knowledge, and experience in a
particular field other than accounting and auditing.
PSA 620 classifies experts into the following two
categories:
Auditor’s Expert - An expert whose work is used by
auditor to assist the auditor in obtaining sufficient
appropriate audit evidence.
Management’s Expert - An expert whose work is used
(engaged or employed) by the entity to assist the entity in
preparing the F/S.
Determining Nature, Timing and Extent of Procedures
The auditor shall consider:
The Nature of the matter
The ROMM
The significance of expert’s work
The auditor’s knowledge and experience with
work of the expert
Whether that expert is subject to auditor’s quality
control.
Determining Competence, Capability, and Objectivity of Auditor’s
Expert
Determining competence and capability includes
professional evaluating education, experience,
sufficiency of personnel and systems, and
reputation in the field in which the auditor is
seeking audit evidence.
Evaluating objectivity includes inquiry regarding
interests and relationships that may create a threat
to that expert’s objectivity.
Evaluating the Adequacy of Expert’s Work and Any Further Work
In evaluating adequacy of an expert’s work, the auditor shall consider the:
Relevance and reasonableness of findings and consistency with other
evidence
Relevance and reasonableness of assumptions and methods
Relevance, completeness, and accuracy of source data
If the work of the auditor’s expert is not adequate, the auditor shall:
Agree with the expert on the nature and extent of further work
Perform additional audit procedures
If the results of the expert’s work are unsatisfactory or inconsistent with the
other evidence, the auditor should resolve this matter. This may involve
discussions with the entity and expert, applying additional audit procedures,
possibly engaging another expert, or modifying the auditor’s report
Auditor’s Report
The auditor’s report should not refer to the work
of an expert. Such a reference might be
misunderstood to be a modification of the
auditor’s opinion or a division of responsibility.
The auditor maintains sole responsibility for the
audit opinion expressed.
Audits of Group F/S
Group F/S refers to that include the financial
information of more than one component
A component is an entity or business activity for
which group or component management prepares
financial information that should be included in
the group F/S
Using the Work of Component
Auditors
The group auditor shall obtain an understanding of:
-Whether the component auditor understands and will
comply with relevant ethical requirements and in,
particular, is independent
-The component auditor’s professional competence
-Whether the group engagement team will be involved
in the work of the component auditor
-Whether the component auditor operates in a regulatory
environment that actively overseas auditors
Perform Procedures on
Component
The amount and nature of work required of the
group auditor relating to component depends
whether the component is a significant
component; a significant component is
component (i) that is of individual financial
significance to the group or (ii) that is likely to
include significant ROMM of the group F/S
Perform Procedures on
Consolidation Process
The group auditor shall perform FAP o the
consolidation process to respond to the assessed
ROMM of the group F/S arising from the
consolidation process
Communicate Group Audit
Requirements to Component Auditor
The group auditor shall communicate its
requirements to the component auditor on a
timely basis.
This communication shall set out the work to be
performed, the use to be made of that work, and
the form and content of the component auditor’s
communication with the group auditor
Communicate Group Audit
Requirements to Component Auditor
This would include:
The Confirmation that the component auditor will
cooperate
Relevant, ethical and independence requirements;
Component materiality
Identified significant ROMM of group F/S relevant to
component auditor
A list of related parties prepared by group
management, and the timely communication of
previously unidentified related parties
Report on Group F/S
The auditor’s report on the group F/S shall not
refer to a component auditor, unless required by
law or regulation.
If such reference is made, the auditor’s report
should indicate that the reference does not
diminish the group auditor.
Complete Audit Documentation
The group auditor shall document:
-An analysis, indicating the those significant and
the type of work on components
The nature, timing and extent of the group
auditor’s involvement in the work of component
auditors
Written communication between the group
auditor and component auditor
