7. Emerald Ltd (Emerald) The external auditors of Emerald are hoping to place reliance on the work of internal audit. As part of the audit planning process the external audit manager has met with Emerald's Head of Internal Audit. During this meeting she learned that Emerald have been facing significant cost pressures recently and due to the need to make cost savings two of the internal audit managers have recently been made redundant. This means that the internal audit team now contains only two audit managers, both of whom only qualified six months ago. The remainder of the team are trainees (five in total) four of whom were recently appointed to internal audit from elsewhere within the organisation as an alternative to being made redundant. The cost pressures faced by Emerald have resulted in redundancies in other areas too and as a result of this all staff within internal audit are now splitting their time 50:50 between internal audit and the finance department. During the meeting the Head of Internal Audit also disclosed that he is concerned that the work of the trainees may not be being thoroughly reviewed and that he fears that Emerald will soon look to outsource internal audit to a private, profit-making firm in an attempt to make further cost savings. Required: a) Explain what impact the factors outlined above would have on external audit's ability to place reliance on the work of internal audit. Your answer should include reference to the requirements of ISA 610 and a clear conclusion as to whether external audit could place reliance upon the work of Emerald's internal audit. (12 marks) b) c) Explain the benefits of external audit being able to place reliance on the work of internal audit. (2 marks) Explain the advantages (other than cost savings) and disadvantages to Emerald of outsourcing their internal audit function (6 marks) (Total marks available for Question 7: 20 marks)