Issues relevant to deciding whether the firm can use the work performed by the internal auditors:

Objectivity

• The chief internal auditor is a newly qualified chartered accountant, so he will be bound by ethical guidance which requires him to carry out his work with independence and objectivity. He should also be expected to have briefed his assistant on the importance of an objective approach.
• The internal audit function will have greater independence if the chief internal auditor reports directly to the board.
• The scope of the internal audit function should be unrestricted. If put upon enquiry, the internal auditors should be able to conduct non-routine investigations.
• It is more likely that reliance can be placed on the internal audit work if findings are reported directly to the board and management make a positive response to those findings.

Technical competence and due professional care

• Although the function has accounting experience its experience of internal auditing and the snacks industry may be limited. The audit firm will need to assess the effectiveness of the internal audit function via discussion and a review of working papers.
• The internal audit work should be properly planned, reviewed, supervised and recorded. In particular, the substantive procedures on the cash sales system should adequately cover the different locations. Working papers should set out audit objectives, tests performed, results and conclusions. The work of the assistant should show evidence of monitoring and review.

Effective communication

• It is more likely that reliance can be placed on the internal audit work if the function is allowed to communicate freely with the external auditors. There should be regular meetings between the two and one should notify the other of any significant matters discovered which might affect the other’s work.

(3 points @ 2 marks each = 6 marks)