Toby Ltd (Toby)

The external auditors of Toby are hoping to place reliance upon the work of internal audit. As part of the audit planning process the external audit manager has met with Tobys Head of Internal Audit. During the meeting she learned that two of the internal audit managers have recently been made redundant and four other experienced members of staff have resigned. The internal team now contains of only one internal audit manager, who was promoted to this role three months ago upon qualification. The remainder of the team are trainees (six in total) all of whom were recently appointed. Toby used to have a policy that all new recruits to internal audit must come from outside the company but due to a lack of applications, this policy has been abandoned and all six trainees were internal appointments. The Head of Internal Audit revealed that due to the previous recruitment policy there was no need for a policy preventing internal auditors auditing a function they previously worked in but that he intends to implement a cooling off period of two years to protect the objectivity of the function. Furthermore due to the lack of staff, he is concerned that the work done by the trainees is not being thoroughly reviewed.

Internal audit at Toby currently report to the Chief Executive but the Head of Internal Audit is keen to explore the possibility of other reporting lines.

Required:

a) Explain what impact the factors outlined above would have on external audits ability to place reliance on the work of internal audit. Your answer should include reference to the requirements of ISA 610 Using the Work of Internal Auditors and a clear conclusion as to whether external audit could place reliance upon the work of Tobys internal audit.

b) Placing reliance on the work of internal audit is an example of external audit relying on the work of others. Provide two specific examples of circumstances where external audit may wish to rely on the work of experts.

c) It usually considered more difficult for internal auditors to maintain their independence and objectivity than external audit. Briefly explain two reasons for this.

d) Briefly describe one advantage and one disadvantage of internal audit reporting to each of the following:

The Chief Executive

The Finance Director

The Audit Committee