CASE STUDY 1

Hollibarn Ltd has expanded rapidly through acquisitions of smaller entities in the last two years.You are the external audit manager for Hollibarn Ltd.The Directors have been concerned about their duties and responsibilities in respect of the rapid growth of the company.Last year the external auditor suggested the establishment of an independent audit committee and an internal audit department.

Hollibarn Ltd set up an internal audit department upon the advice of the external auditor. The internal auditor reports directly to the Group Finance Director.To date no independent audit committee has been established.The Directors were uncertain how to proceed with the establishment of an audit committee, as none of them had heard of one before.

During the first year of its operations, the internal audit department has been mainly involved in documenting the current systems in place, suggesting improvements to managers to the existing systems and standardising systems whenever possible.In addition over the past year several site visits have taken place to various branches to determine that the adherence to existing systems procedures are being complied with.The internal auditor has kept a detailed record of all the work that has been carried out.The internal auditor is a member of the Institute of Internal Auditors.

As external auditor, you are considering how much reliance can be placed on any of the work carried out by the internal auditor for your forthcoming audit of Hollibarn Ltd.Upon checking last year's audit file, you see that the control risk for Hollibarn Ltd was high, and that a large amount of substantive testing was required to gain sufficient audit assurance, due to the lack of a coherent set of internal control policies for the group as a whole.

REQUIRED:

a)Explain FIVE (5) objectives of the internal audit function.

(10 marks)

b)Discuss FIVE (5) areas the external auditor is able to rely on the internal auditor's work in the case above.

(10 marks)

c)As an external auditor, state and explain FIVE (5) impacts of the internal audit department on the control environment of Hollibarn Ltd as a whole.