HK Electronics Company Limited (“HKE”) is a Hong Kong listed company that manufactures electronic components for computers and mobile phones. It has several factories in the Mainland China while its main office is based in Hong Kong. The Chief Internal Auditor, Peter Wong, has been working as an external auditor for over 10 years. While he has not audited on HKE’s financial statements before, his previous audit clients are in the same industry as HKE. There are five staff in the internal audit team. They all have professional qualification in accounting. Sometimes Peter also hires interns who are university students to help with the workload. When interns are hired, Peter will ensure that they are properly supervised and monitored for their tasks. The internal audit team always performs adequate testing before reporting their findings and recommendations in detailed documentation. The internal audit team reports directly to the Audit Committee.

Required:

(a) Evaluate the effectiveness of the internal audit function. (10 marks)

(b) Discuss some testing scopes of the internal audit team. (4 marks)

(c) Consider and explain if the external auditor should use the following internal audit team’s work:

(i) Testing of operating effectiveness of internal controls, (2 marks) (ii) Review of the management’s impairment assessment on goodwill, (2 marks)

(iii) Review of operating efficiency of the Mainland Chinese factories. (2 marks)

[Total for Question 3: 20 marks]