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Role of External Auditor and Audit Procedures

1. The external auditor can rely on the work of the internal auditor subject to certain conditions being met. One of this relates to the internal auditor reporting to the audit committee rather than to management.

(i) Please explain as to why this is an important condition to be met
(ii) Provide three benefits of the audit committee in enhancing governance.

2. In carrying out the audit of audit of Tom Ltd, you have evaluated the controls risks as high and that the existence of both inventory, accounts receivable, and accounts payable is at risk.

Identify two audit procedures you could use to test:
(a) the existence assertion for inventory
(b) the existence assertion for accounts payable.
(c) the existence assertion for accounts receivable.

Solution Preview

1. The external auditor can rely on the work of the internal auditor subject to certain conditions being met. One of this relates to the internal auditor reporting to the audit committee rather than to management.

Required:
(i) Please explain as to why this is an important condition to be met

The internal audit function, if it reports to management, has the same problem that external auditors used to have prior to Sarbanes Oxley. That is, they can be fired/hassled/disciplined by management if they come up with an idea or oppose management's judgment on an issue. In order to be able to challenge management, you have to report to someone other than management. So, if internal audit reports to the audit committee of the board of directors rather than management, the external auditors have more comfort that the internal audit team has not be bullied about by an aggressive management team.

(ii) Provide three benefits of the audit committee in enhancing governance.

Corporate governance is a system policies and practices that determine how decisions are made and reviewed. An audit committee is an important part of this system because it can improve the reliability of reporting and reduce risk. The audit committee can enhance governance in many ways. For example, it can create a culture of ...

Solution Summary

Your tutorial is 652 words plus a reference and gives you three ways the audit committee enhances corporate governance, the reason that external auditors can't rely on internal auditors that report to management, and two audit tests for high risk inventory, accounts payable, and accounts receivable. The "key idea" is given for the audit steps.

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