Having decided in principle that the external auditor intends to rely upon the work of the internal auditor, it is desirable that the external auditor ascertains the internal auditor’s tentative plan for the year and discusses it with him at as early a stage as possible to determine areas where he considers that he could rely upon the internal auditor’s work. Where internal audit work is to be a factor in determining the nature, timing and extent of the external auditor’s procedures, it is desirable to plan in advance the timing of such work, the extent of audit coverage, test levels and proposed methods of sample selection, documentation of the work performed, and review and reporting procedures. Coordination with the internal auditor is usually more effective when meetings are held at appropriate intervals during the year. It is desirable that the external auditor is advised of, and has access to, relevant internal audit reports and in addition is kept informed, along with management, of any significant matter that comes to the internal auditor’s attention and which he believes may affect the work of the external auditor. Similarly, the external auditor should ordinarily inform the internal auditor of any significant matters which may affect his work.
Where, following the general evaluation the external auditor intends to rely upon specific internal audit work as a basis for modifying the nature, timing and extent of his procedures, he should review the internal auditor’s work, taking into account the following factors :

  1.  The scope of work and related audit programmes are adequate for the external auditor’s purpose.
  2.  The work was properly planned and the work of assistants was properly supervised, reviewed and documented.
  3. Sufficient appropriate evidence was obtained to afford a reasonable basis for the conclusions reached.
  4.  Conclusions reached are appropriate in the circumstances and any reports prepared are consistent with the results of the work performed.
  5.  Any exceptions or unusual matters disclosed by the internal auditor’s procedures have been properly resolved. The external auditor should document his conclusions in respect of the specific work which he has reviewed.

The external auditor should also test the work of the internal auditor on which he intends to rely. The nature, timing and extent of the external auditor’s tests will depend upon his judgement as to the materiality of the area concerned to the financial statements taken as a whole and the results of his evaluation of the internal audit function and of the specific internal audit work. His tests may include
examination of items already examined by the internal auditor, examination of other similar items, and observation of the internal auditor’s procedures.

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